Bolivia - Economic Management Strengthening Operation

Document of The World Bank FOR OFCIAL USE ONLY Report No. P-4947-Bo MEMORANDUM4 AND RECOMMENDATION OF THE PRESIDENT OP THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7.14 NILLION TO THE REPUBLIC OF BOLIVIA FOR AN ECONOMIC MANAGEMENT STRENGTHENING OPERATION November 30, 1988 This document b8s a restricted diiuidon and may be ued by recipients only In the perfonrmne of their offiecl duties. Its eontets may not otherwise be dbdild witbout World Bank authoratlon.  CURRENCY AND EQUIVALENT UNITS Currency Unit: Boliviano (es) Exchange Rate Effective June 1, 1988 US$1.00 Bes 2.30 Bs 1.00 = US$ 0.435 ABBREVIATIONS IBRD - International Bank for Reconstruction and Development IDA - International Development Association IDB - InterAmerican Development Bank INE - Instituto Nacional de Estadisticas (National Institute of Statistics) MPC - Ministerio de Planeamiento y Coordinacion PCU - Project Coordinating Unit PPMO - Public Financial Management Operation PSM - Public Sector Management RDC - Regional Development Corporation SISIN - Sistema de Informacion y Segulmiento de la Inversion SDR. - Special Drawing light UNZIP - United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OFCLCIAL USE ONLY REPUBLIC OF BOLIVIA ECONOMIC MANAGEMENT STRENGTHENING OPERATION CREDIT AND PROJECT SUMMARY Borrower: Republic of Bolivia Beneficiary: Ministry of Planning and Coordination Amount: SDR 7.14 million (US$9.7 million equivalent) Terms: Standard, with 40 years maturity OnlendinR Terms: Not applicable Financing Plan: Local Foreign Total ------- (US$ million) ---- IDB .3 .5 .8 Government of Switzerland 2.1 .4 2.5 Government of Italy .8 1.6 2.4 Government of Bolivia 1.2 - 1.2 IDA 5.3 4.4 9.7 Total 9.7 6.9 16.6 Economic Rate of Return: Not applicable Staff ARpraisal Report: Report No. 7474-BO Map: IBRD No. 16591 This document has a restricted distribution and may be used by recipients only in tne per. rmance of their official duties. Its contents may not otherwise be disclosed without World Bnk auth-rization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR AN ECONOMIC MANAGEMENT STRENGTHENING OPERATION 1. The following memorandum and recommendation on a proposed development credit to the Republic of Bolivia for SDR 7.14 million (US$9.7 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and would help finance an economic management strengthening operation. The project would be cofinanced by IDB for US$0.775 million, the Government of Switzerland for SWF 4 million (US$2.5 million equivalent), and possibly by the Government of Italy for US$2.4 million equivalent. 2. Background. After the growth years of the 1970's, the Bolivian economy suffered a steep and rapid decline in the early 1980's. In the 12-month period leading to the 1985 change of government, Bolivia ran an inflation rate of almost 24,000S, and other economic indicators were equally alarming. The poor economic performance of the early 1980's was caused by deep-seated structural problems, including an expansion of the public sector and its declining effectiveness. Frequent change of governments exacerbated uncertainties about the overall economic policy framework. Public sector management was weak, leading to massive exodus of civil servants and uncontrolled recurrent expenditures, poor selection of investment projects, and dismal implementation performance. 3. To deal with the desperate economic situation, the Paz Estensorro government took swift and decisive action upon assuming office in August, 1985. Its New Economic Policy, embodied in Supreme Decree No. 21060, achieved remarkable success in ending hyperinflation, drastically reducing the budget deficit, restoring a competitive exchange rate, and establishing the macroeconomic stability essential for long-term growth. Notwithstanding these impressive achievements, the government must overcome a legacy of mismanagement as it tries to further ameliorate social conditions, lower the size and increase the efficiency of the public sector, and reorient production. The continued weakness of economic management and severe shortage of qualified managers and analysts are major constraints. 4. Rationale for IDA Involvement. The basic aim of the IDA count:ry program strategy for Bolivia is to assist the Government in implementing its short and medium-term program for increasing productivity and employment. Two related objectives are to (a) raise public investment levels; and (b) rebuild the public institutions for economic management so that the direction and momentum of policy change achieved thus far are sustained. The proposed project would directly support these aims and objectives. While other donors are also involved in limited aspects of public sector management reform, IDA has taken a lead role in this area, througY che ongoing Public Financial Management Operation (PFMO,Cr.1809-BO) which seeks to improve basic financial management systems--accounting, cash management, budget programming--and to broaden the tax base. The proposed Economic Management Strengthening Operation focuses on complementary economic management and public service reform issues. Both the  -2- Government of Bolivia and the donor community are looking to IDA to continue coordination of reforms in these areas. 5. Prolect Objectives. The proposed project's long-term goal is to support the rebuilding of the Government's capacity to manage the economy efficiently. Its more immediate objectives are to (a) improve public investment programming and implementation; (b) strengthen core policy-making and management processes; (c) increase tax revenues; (d) raise public sector productivity by supporting Government's efforts to rationalize salaries and attract and retain skilled manpower; (e) provide the analytical framework for regional management and planning; and (f) improve the Government's data base for economic planning and management. 6. Project Description. Major project activities include: (a) improvements in the formulation and execution of the Public Investment Program, through establishment of budgeting, information and monitoring systems, provision of specialized technical assistance, training, and support for priority pre-investment studies; (b) expansion of the Financing and Disbursement Unit within the Ministry of Planning and Coordination (MPC) to better monitor disbursements of donor-financed programs; (c) expansion of the public investment information system (SISIN) to include line ministries and regional development corporations; (d) formulation of a sector strategy for the Ministry of Agriculture and strengthening of its public investment programming and implementation capabilities; (e) support for studies on the financial, fiscal and institutional implications of the Government's decentralization program and development of a decentralization strategy, and for related training, equipment and technical assistance to strengthen national, regional, and local governments; (f) continued strengthening of tax administration (begun under PFMO) to include the Customs Directorate and Regions; (g) creation of a Public Sector Management (PSM) Strengthening Program to attract and retain qualified senior civil servants, including technical assistance to analyze salary policy, and subsequent studies of conditions and terms of service for civil servants as a first step in civil service reform; and (h) support to the National Statistics Institute (INE) for the implementation of a living standards measurement survey and extension of the national accounting system to include disaggregated data on a regional basis. The proposed Credit will also provide funds to refinance a PPF advance. MPC has overall responsibility for project direction, management and administration. The Undersecretary for Public Investment has been named acting project director, a project coordinating unit (PCU) has been formed and a technical coordinator appointed. 7. Agreed Actions. During negotiations, agreement was reached on (a) cofinancing arrangements with IDB and the Swiss Government; (b) the first year work program; (c) the declining scale for IDA participation in the financing of incremental salaries; (d) guidelines and criteria for the use of pre-investment studies funds; and (e) arrangements with IDB and Government on implementation of the SISIN. The Government and IDA agreed on the following conditions of effectiveness: (a) appointment of a permanent project director and formal establishment of the PCU; and (b) signing of an administrative services agreement with a local procurement agent acceptable to IDA. In addition, assurances have been received that the Government will: (a) establish by January 15, 1989 a working group composed of MPC, sector ministry staff and regional development corporations (chaired by MPC) to ensure close collaboration on the strategy formulation and implementation of the sector studies of the regional  -3- planning component: (b) appoint by Harch 15, 1989 a director for the PSM Strenghtening Program and a project trainir,g coordinator; and (c) complete a project training plan by June 15, 1989. The Government and IDA have also agreed that no disbursements would be made for expenditures for (a) implementation activities under the Regional Planning component until the Government has issued a Supreme Decree stating its overall decentralization program strategy; (b) the PSM Program Secretariat until it has been formally established by the Government; and (c) contracts entered into after December 31 of each year until there has been review and approval by IDA of the project's work program ter the following year. 8. Benefits. The project benefits would come from better public investment programming and implementation, especially important given the magnitude of the undisbursed pipeline for investments and from increased budgetary revenues due to better tax administration. Overall efficiency of the ministries and agencies dealing with economic and public sector management would increase because of improved working conditions, higher salaries and training opportunities, permitting the Government to attract and keep qualified, motivated civil servants. 9. Risks. There are two main risks associated with the project: (a) the broad country risk that the Government, during and following the 1989 presidential elections, cannot or will not sustain its macro-economic program; and (b) the Government's limited capability to manage complex projects will not be adequate. The first risk is mitigated by the fact that project activities address fundamental weaknesses in economic management and entail such basic improvements that the project already enjoys broad-based multi-partisan support. Regarding the second risk, the management services contract between the Government and the UNDP's Project Services office--whereby the UNDP is responsible for the project's administration--will lessen the day-to-day responsibilities of the PCV, thus allowing it to concentrate on substantive issues. In addition, the project will be implemented by annual work programs which permit flexibility and encourage discussion between Government and IDA in order to reach a consensus on priority needs for the coming year. Finally, the PSM Strengthening Program is an innovative and potentially controversial scheme, and entails difficult issues, notably, the depoliticization of the public service. The potential problems have been discussed with government officials from the present government and from other political parties, with unanimous support for the Program. Covenants relating to the PSM Strengthening Program include the establishment of a Program Secretariat to manage the Program and to ensure consistent application, transparency, and monitoring of the rationalized salary scheme, employment conditions, and criteria for selection into the civil service. 10. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. November 30, 1988  -4- Schedule A BOLTVIA ECONOMIC MANAGEMEN% STRENGTHENING OPERATION ESTIMATED COSTS AND FINANCING PLAN Z of Foreign Estimated Costs: Local Foreign Total Exchange --