Download chad: poverty reduction support credit

CHAD: Institutional Reform Support Credit
Project Information Document
29176
May 24, 2004
Report No:
Project Name:
Region:
Sector:
Project ID
Implementing Agency:
Date prepared:
Appraisal date:
Projected Board Date
PIDXXX
Republic of Chad, Institutional Reform Support Credit
Africa
Multisectoral
P083711
Cellule Economique
Ministry of Plan, Development and Cooperation
N’Djamena, Chad
Tel. 235 52 61 81
May 18, 2004
April 4-15 2004
September 16, 2004
Country Background
1.
Following nearly three decades of civil war, the government of Chad has maintained relative
peace and stability since 1993. Since 1994, the authorities have established a solid macroeconomic track
record. Real GDP growth averaged 3.5 percent per year in 1994-2000. According to current estimates and
projections, GDP continued to grow at a strong sustained pace (9.9 percent) in 2002 and 2003, driven by
oil-related investments and their spillover effects. Construction of the Chad-Cameroon pipeline was
completed earlier than planned, one year ahead of schedule. Oil production began in July 2003 . On
October 3, 2003, Chad made its first sale of crude oil to world markets, marking the beginning of the
project’s export phase. Chad started to collect oil revenues in late November 2003. Consistently with the
Petroleum Revenue Management Law adopted by the Chadian National Assembly in December 1998,
these revenues have been deposited in an offshore escrow account at Citibank, London, and should be
transferred to Chad as soon as the conventions governing bank accounts are signed with the Central Bank
and selected commercial banks.
2.
The beginning of oil production and exports is expected to boost economic growth, with real GDP
growth rate reaching 37.8 percent in 2004 and 13.2 percent in 2005. After 2006, GDP growth is expected
to fall below 2 percent per year, due to the projected decline in oil production from the Doba fields. It is
nevertheless anticipated that the growth in the non-oil sector will remained sustained, with non-oil GDP
growth averaging 5.4 percent per year. As the construction phase of the pipeline project advanced, some
macroeconomic risks emerged. Inflation, measured by the change in the CPI, accelerated in 2002,
reaching 5.2 percent on average. Jointly with the appreciation of the euro against the dollar, this evolution
resulted in a significant appreciation of the real exchange rate. These risks have nevertheless been
monitored carefully and addressed. A sharp decline in inflation has been observed in 2003. Current
estimates indicate that the consumer price index (based on prices in N’Djamena) would have overall
declined by 1 percent during the year.
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3.
Fiscal policy has been broadly consistent with macroeconomic objectives. Government revenue
performance, although still relatively weak, has improved continuously over the past years, although
ongoing efforts need to be vigorously pursued to improve tax collection and customs operations. With the
beginning of oil production and exports, macroeconomic imbalances are expected to be significantly
reduced. The overall fiscal deficit excluding grants would decline from 10.8 percent in 2003 to 8.6
percent in 2004 and about 6.5 percent in 2005-2006. The current account deficit (40.9 percent of GDP in
2003) would be sharply reduced to 13.5 percent of GDP in 2004, 7.6 percent in 2005 and 7.3 percent in
2006.
4.
The authorities finalized the full PRSP in June 2003, and the document was discussed at the Bank
and Fund Boards in November 2003. Chad’s HIPC Decision Point Document was approved by the Bank
and Fund Boards in May 2001. In December 2001 and in March 2003, the Bank Board approved the
Fourth and Fifth Structural Adjustment Credits, respectively. Over the past three years, assisted by SAC
IV, SAC V, and the IMF Poverty Reduction and Growth Facility (PRGF), Chad has made considerable
progress in the implementation of its structural reform agenda. However, the pace has been slower than
expected in several areas, notably the cotton sector reform and the civil service reform. The fifth review
under the program supported by the PRGF was completed in July 2003. Considering that there was not
enough time for measures to be taken to present a sufficiently strong case, the IMF did not complete the
sixth review before the PRGF expires on January 6, 2004, which in effect withheld a disbursement of
SDR 5.2 million. Article IV Discussions took place at the IMF Board on March 19, 2004, and it is
expected that an IMF mission will take place in June 2004 to launch negotiations on a new PRGF
arrangement.
5.
In the course of program preparation and implementation, the governance dialogue with the
Government of Chad has evolved considerably, resulting in a frank and shared assessment of the major
issues. As a consequence of this improved dialogue, considerable achievements were made under SAC IV
and SAC V, notably the adoption of a National Governance Strategy, the organization of a national
participatory Roundtable on the Justice sector, the publication of several major audit reports, and the full
implementation of the Petroleum Revenue Oversight Committee. The authorities of Chad have also made
significant progress in establishing sound modalities for managing oil revenues. Despite these
achievements, governance problems remain important and deep-rooted as witnessed by the persistence of
major issues in public procurement, highlighted in the reports published by the Chamber of Accounts and
the General Finance Inspection Directorate of the Ministry of Economy and Finance. A revised
procurement code was adopted in October 2003 by the Council of Ministers and signed by the Head of
State in December 2003. Implementation decrees are under preparation and should be finalized by
September 2004.
6.
As regards budget preparation and monitoring of execution, significant achievements have been
made with the support of SAC IV, SAC V, and the Management of the Petroleum Economy project
(GEEP), notably the introduction of a Medium Term Expenditure Framework (MTEF) and the
preparation of program budgets in key ministries for poverty reduction, the identification of capacity
requirements in the area of budget management and the launching of recruitment and training of key staff
in the newly created Financial and Administrative Directorates, the publication, albeit still with delays, of
a monthly table on budget execution, the computerization of the expenditure circuit, the completion of a
public expenditure tracking survey in the health and education sectors, and the strengthening of the
Chamber of Accounts of the Supreme Court and the General Finance Inspection Directorate.
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7.
Since the adoption of the new civil service status law in December 2001, implementation of the
civil service reform program has been slow. With the support of SAC IV, SAC V, and the GEEP project,
the civil service reform agency (CESRAP) has prepared implementation decrees and legal texts, and
launched their review by a joint government-unions Civil Service Committee for consensus building
purposes. Steps have also been taken towards the harmonization of the civil service and payroll files,
which however, have been hampered by the fact that the civil service census of 2000, in the absence of a
well-defined process to regularly update the data, has rapidly become outdated. An organizational audit of
nine pilot ministries was completed in September 2003, and recommendations have set the stage for
moving forward with the reform program.
8.
In the cotton sector, the Government strategy of 2000 consists of a process of institutional
changes to enhance farmers’ bargaining power and increase farmers’ incomes by (i) strengthening the role
of farmers’ associations; and (ii) disengaging the state from cotton production and reviewing the industrial
structure of the cotton sector. Chad has decided to pay particular attention to consensus building among
all stakeholders all along the reform path. Under SAC IV and V, progress has been achieved, although the
persistent financial difficulties of the state-owned company Cotontchad have contributed to delaying the
reform process, which is now expected to be completed in 2005. Producers’ representatives were elected
in the 5,000 cotton producing villages. The state has also withdrawn from price-setting in the sector, and
the producers’ prices are henceforth determined by a Comité paritaire in which the producers’
organizations and Cotontchad are represented equally. The Oil and Soap Factory, which was legally
separated from Cotontchad in early 2002, was privatized in June 2003. In addition, a comprehensive study
has allowed to identify various scenarios for the reform strategy, as well as the necessary accompanying
measures, and a Poverty and Social Impact Analysis (PSIA) of the reform is nearing completion.
Objectives and description
9.
Chad’s draft PRSP lays out a strategy focusing on five strategic axes and sixteen national
objectives. Consistently with the goals set out in the PRSP and the Country Assistance Strategy which
was presented to the Board on December 11, 2003, the proposed Credit would assist Chad in
implementing two PRSP strategic objectives: (i) improving governance; and (iii) ensuring strong and
sustained growth, especially in the rural sector. In that context, it would help the authorities to complete
the implementation of the medium-term reform program set forth in SAC IV and SAC V, in order to help
complete the transition to the oil era. The medium-term program of reforms for improved governance,
focuses on: (i) enhanced transparency, accountability and adherence to the rule of law; (ii) more
transparent, accountable and efficient use of public resources for poverty reduction through the reform of
(a) budget preparation, execution, monitoring and reporting, (b) public procurement ; and (iii) more
efficient and accountable civil service. The medium-term program of reforms supported by the IRSC for
sustainable growth in rural areas includes measures aimed at contributing to a profound reform of the
cotton sector. In each of these reform areas, particular attention is given to empowering the institutions
(Chamber of Account, General Finance Inspection, Petroleum Revenue Oversight Committee, National
Assembly, etc.) that provide the checks and balances for the efficient management of resources for
poverty reduction, as well as in civil society, including farmers’ associations.
10.
The reform program supported by this credit in 2004-2005 will also be supported by a new
Poverty Reduction and Growth Facility Program (PRGF), on which discussions are expected to
commence in June 2004. The program is also tuned to the proposed outcome-oriented completion point
triggers set out in the HPIC Decision Point Document. Finally, this support will complement and enhance
the impact of other Bank interventions, especially the Petroleum Development and Pipeline Project, and
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its associated petroleum revenue management program, the Management of the Petroleum Economy
Project and additional financing that could be mobilized to continue supporting capacity-building
activities, the capacity-building program of the World Bank Institute, and the Agricultural Services and
Producers’ Organizations Project, as well as ongoing and future operations in the health, education, and
transport sectors, and a planned community development project.
11.
Like its predecessors, the proposed Credit focuses on improving governance and strengthening
public resource management with a view to establishing the financial safeguards for further program
lending and sound management of government revenues in the oil era.
Environmental aspects
12.
The implementation of the reform program is not expected to have any negative environmental
impact. As regards the privatization of the oil and soap factory and the ginning activities of Cotontchad
(scheduled for 2005), an environmental impact assessment of Cotontchad’s nine ginning factories has
been completed. Upon its validation by the authorities and its finalization, an environmental guidance
book will be prepared in early 2005 and the authorities will launch the recommendations of the audit.
Benefits and risks
13.
Benefits. Successful implementation of the reform program will (i) result in better governance
including, stricter adherence to the rule of law and more transparent and accountable use of public
resources; (ii) improve the Government’s efficiency and poverty reduction focus in delivering services in
the priority sectors for poverty reduction, including health, education, basic infrastructure, justice and
rural development; and (iii) increase farmers’ bargaining power in the cotton sector, improve their access
to inputs and management services, and enhance their productivity.
14.
Risks. There are substantial risks to the proposed operation.
15.
First, consistent implementation of the proposed agenda will depend on continued strengthening of
the commitment to improved governance and sound oil revenue management. The risk of a weakening of
this commitment will however be mitigated by continuing a close dialogue with the authorities, and
promoting the role of civil society in checks and balances on the use of oil revenues.
16.
Second, the implementation of the government’s programs and related budgets could be hampered
by the resurgence of instability at the North, East and South borders of the country. Chad is facing a
difficult humanitarian and political situation in the Eastern part of the country, where about 110,000
refugees from Sudan have settled in camps, fleeing the combats between the Sudanese army and rebel
groups in the Darfour since February 2003. While these risks cannot be directly influenced by the Bank,
the situation is not likely to worsen in the near future. A renewable 45-day cease fire agreement was
signed on April 8, 2004 between the Sudanese Government and the rebel movement (Mouvement pour la
justice et l'égalité and Mouvement de libération du Soudan) in Chad in April 2004.
17.
Third, successful achievement of the proposed program will require careful attention to consensus
building and management of expectations of the population, which are high, following the beginning of
oil production and the completion of the PRSP. Civil and social tensions could increase further notably
following the current controversy around the constitutional amendment that will permit unlimited
presidential term’s renewal and will allow President’s Deby to seek a third presidential mandate. Ensuring
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that oil revenues are translated into visible results on the ground will be key in maintaining social
stability.
18.
Fourth, the cotton sector reform program, which affects about 350,000 poor farm families, is
inherently complex as it is being implemented in an environment of hardly functional rural markets. To
mitigate the risks involved, it will be important to monitor the poverty impact of the reform program
notably through the continuation of the Poverty and Social Impact Analysis, and to focus on required
accompanying institutional, financial, technical and social measures, including infrastructures.
19.
Fifth, macroeconomic instability and/or a unexpected decline in oil prices could significantly
affect program implementation, although these risks will be mitigated by the sterilization and
stabilization mechanisms for oil revenues established in July 2003 and cautious macroeconomic
management.
Contact Point:
The Infoshop
The World Bank
1818 H Street NW
Washington DC, 20433
Telephone: (202) 458 5454
Fax: (202) 522 1500
Team Leader:
Christine Richaud
Telephone (202) 458 7937
Fax: (202) 473 8466
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