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PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB5532 Togo: Third Economic Recovery and Governance Grant Operation Name (ERGG 3) AFRICA Region General Public Administration Sector (50%); Agricultural Sector Extension And Research (20%); Mining and Other Extractive (20%); General Energy Sector (10%) P117282 Project ID GOVERNMENT OF TOGO Borrower(s) MINISTRY OF ECONOMY AND FINANCE Implementing Agency March 8, 2010 Date PID Prepared March 24, 2010 Date of Appraisal Authorization May 27, 2010 Date of Board Approval 1. Country and Sector Background Togo is a small-sized country in West Africa with a population of 6.5 million as of 2009, whose main economic potentials are mining, agriculture and re-exporting. Togo’s highest export earning sector is clinker/cement, produced from two limestone companies. Togo’s next important exports are phosphate and cotton, processed and marketed by public enterprises. Togo produces other cash crops, mainly coffee and cocoa, and has a considerable agricultural potential due to favorable climatic conditions in large parts of the country. As a small country, Togo’s successful development lies also in its ability to capitalize on greater integration with its neighbors, notably by further developing its deep water port (the only one in the region) as a shipping hub, through private investments. Furthermore, Togo is a member of the West African Economic and Monetary Union (WAEMU) and of the Economic Community of West African States (ECOWAS). 2. Operation Objectives The main objective of the ERGG-3 is to support government-owned reforms to improve governance, transparency and efficiency in public financial management as well as advance structural reforms aimed at strengthening governance and transparency in the key sectors of the economy (phosphates, cotton and energy). Specifically, the ERGG-3 focuses on continuing and deepening policy reforms initiated by the Government under the ERGG and ERGG-2 to strengthen budget preparation, execution, controls and public procurement. It would also contribute to further advance structural reforms aimed at strengthening governance and transparency in the key sectors of the economy (phosphates, cotton, and energy sectors). It directly supports the first ISN pillar and provides financial support to the Government in the challenging context of an exceptional unfavorable global economic environment and Togo’s annual debt service to IDA expected to remain considerable until attainment of the HIPC completion point. The proposed reforms are essential to the Government’s ability to use the public resources freed up by debt reduction efficiently and effectively to support the country’s economic and social recovery. 3. Rationale for Bank Involvement Togo’s economy was severely affected by a series of exogenous and domestic shocks, notably the surge in global food and fuel prices and heavy flooding in the summer of 2008 that affected key transport infrastructure and damaged agricultural output, and the 2009 global economic slowdown. Togo has been among the most adversely affected economies by the 2008 global price shocks, reflecting the high fuel imports of Togo’s transport, industry, and power sectors. While Togo is nearly self-sufficient in food production, surging food prices created social tensions in the first half of 2008 and severely eroded real incomes, particularly for urban dwellers. In addition, the flooding destroyed critical infrastructure including Togo’s main traffic artery from the Port of Lomé to the landlocked countries in the north, paralyzing Togo’s vital trade and transport sector and disrupting exports of goods and services. Floods also reduced cotton production. The global recession in 2009 contributed to further delay the economic recovery. In spite of the implementation of countercyclical fiscal policies, real GDP growth is estimated at 2.5 percent in 2009, whereas earlier projections pointed to a 4 percent rate of GDP growth. The impact of the global economic slowdown is estimated to have been particularly strong on FDI and re-exports. Re-exports declined from 25 percent of GDP in 2007 to 14 percent in 2009 (also as a result of the deterioration in infrastructure caused by flooding) while FDI fell from an average of 3 percent of GDP during the period 2004-07 to 0.8 percent of GDP in 2009. In spite of the difficult context, the authorities have maintained prudent macroeconomic policies and continued the implementation of an ambitious reform agenda. 4. Financing Source: BORROWER/RECIPIENT International Development Association (IDA) Total ($m.) 0 16.3 16.3 5. Institutional and Implementation Arrangements The Ministry of Economy and Finance will be responsible for overall implementation of the proposed ERGG-3. Day-to-day monitoring of the program will be the responsibility of the Comité de Suivi des Programmes et Réformes, an existing high-level team within the Ministry, headed by the Secretary General. This arrangement is justified by the strength and continuity of this team within the Ministry of Economy and Finance and their involvement in the ongoing policy reform dialogue, including with other development partners. The main technical responsibility for implementation of the public financial management reforms will stay with the Budget and Treasury Departments, whose representatives are part of the Public Finance Steering Committee (Comité de pilotage des finances publiques) created in 2005. The sector reforms will be implemented by the respective technical departments in the sector ministries, under the oversight of the ministers in charge of agriculture (cotton sector), mining (phosphates) and infrastructure (electricity), and the overall coordination of the Ministry of Economy and Finance. 6. Benefits and Risks In IDA’s assessment, the potential benefits of the proposed operation outweigh the residual risks and warrant IDA’s assistance for implementing critical reforms and policy actions in a coordinated fashion with other donors, while supporting risk mitigation actions to maximize the sustainability of the reform agenda. 7. Poverty and Social Impacts and Environment Aspects Togo remains one of the world's poorest countries, ranking 159 out of 182 countries in the 2009 UNDP Human Development Report. An estimated 62 percent of Togo’s population lived below the poverty line in 2006,1 with the rural areas accounting for the majority of the poor (74 percent versus 37 percent in urban areas), and Togo’s social indicators are weak. The measures supported by the proposed ERGG-3 are expected to have significant positive distributional effects with a positive impact on poverty reduction. Specifically, expected benefits include: (i) strengthening of public expenditure management, which would enhance efficiency, transparency and accountability in public resources use; (ii) improving governance in the cotton sector through measures to improve the accounting system and the representation of producers in the Board of the company; (iii) enhancing governance in the phosphate sector by improving transparency and accountability of the sector’s financial contribution to the economy and public finances; and (iii) contributing to improve the financial situation of CEET and thus reducing the drain on the state budget thus freeing up resources that can be directed to poverty reduction expenditures. While the ERGG-3 does not have a special focus on rural poverty, it supports measures that will be particularly beneficial to the rural poor. For example, the improvement in governance in the cotton sector is expected to further increase confidence of farmers in the sector and thereby facilitate a rebound in cotton production and improve the livelihood of a large sector of the population (about 300,000) which relies on this cash crop as a dominant source of earnings. Furthermore, the ERGG-3 would also help fund the provision of basic public services during 2010 with a high beneficial impact on the poor, in complement to implementation of the Togo Community Development Project (approved in FY08) and the additional financing (approved in FY10) under the Global Food Crisis Response Program. The reforms supported by the proposed development policy grant are part of a broader program of actions to promote the recovery of key sectors, notably cotton, phosphates and energy, in addition to strengthening public financial management systems. These reforms, dealing mainly with economic governance and institutional issues, are not likely to have significant negative impacts on the country’s environment and natural resources. This applies also with respect to the actions in the three real sectors as no direct or indirect effects are expected on the environment. 1 QUIBB 2006. 8. Contact point Name: Title: Tel: Fax: Email: Maria Manuela Do Rosario Francisco Sr. Country Economist (202) 473-8209 (202) 473-8136 [email protected] 9. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop