Senegal - Agricultural Sector Adjustment Credit Project

Document of The World Bank FOR OMFFCIAL USE ONLY Report No. P-6610-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 29 MILLION (US$45 MILLION EQUIVALENT) TO THE REPUBLIC OF SENEGAL FOR AN AGRICULTURAL SECTOR ADJUSTMENT CREDIT MAY 11, 1995 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT (as of May 1995) Currency Unit = CFA franc (CFAF) US$ 1.00 = CFAF 491 CFAF 1 million = US$ 2,037 SYSTEM OF WEIGHTS AND MEASURE: METRIC Metric U.S. Equivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi.) 1 square kilometer (km2) 0.39 square mile (sq. mi.) 1 hectare (ha) = 2.47 acres (a) 1 metric ton (t) = 2,205 pounds (lb.) 1 kilogram (kg) = 2.2046 pounds (lb.) FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS AG-SECAL Agricultural Sector Adjustment Credit BOAD Banque Ouest-Africaine de Developpement (West African Development Bank) CAS Country Assistance Strategy CFD Caisse Fran,aise de Developpement CNCAS Caisse Nationale de Cr6dit Agricole du Senegal CONSERE Conseil National Superieur d l'Environnement et de Ressource Naturelles (National Environmental Council) CPSP Caisse de P&equation et de Stabilisation des Prix (Price Stabilization Agency) CSS Compagnie Sucriere Senegalaise (Senegal Sugar Company) ERC Economic Recovery Credit ESAF Enhanced Structural Adjustment Facility FGPA Groundnut Price Stabilization Fund GOS Government of Senegal IM Initiating Memorandum ISRA Institut Senegalais de Recherches Agricoles (Senegalese Agricultural Research Institute) LADP Letter of Agricultural Development Policy (Lettre de Politique de Developpement Agricole) MDR Ministere du Developpement Rural (Ministry of Rural Development) NEAP National Environmental Action Plan NPA New Agricultural Policy PDRG Project for the Development of the Left Bank of the Senegal River PFP Policy Framework Paper PSAC Private Sector Adjustment and Competitiveness Credit SAED Societe d'Amenagement et d'Exploitation des Terres du Delta du Fleuve Senegal (Senegal River Valley Development Agency) SAF Structural Adjustment Facility SAL Structural Adjustment Loan SENELEC Senegal Electricity Company SODEFITEX Societe pour le D6veloppement des Fibres Textiles (Cotton Development Agency) SODESP Soci6t6 pour le Developpement de l'Elevage de la Zone Sylvo-pastorale (Sylvo-pastoral Livestock Authority) SONACOS Societe Nationale de Commercialisation des Oleagineux (Groundnut Oil Company) SONAGRAINES Societe Nationale des Graines UNACOIS National Union of Senegalese Traders and Industrialists URIC Unite Rizerie et Commercialisation (former unit of SAED responsible for rice processing and marketing) WAEMU West African Economic and Monetary Union 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.  !  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL AGRICULTURAL SECTOR ADJUSTMENT CREDIT Table of Contents Credit and Program Summary .....................................................................i PART I. THE MACRO-ECONOMIC FRAMEWORK AND RECENT DEVELOPMENTS .......2 A. IDA Assistance Strategy ....................................................................5 PART II. THE AGRICULTURAL SECTOR .....................................................................8 A. The Agricultural Sector's Role in the Economy .....................................................................8 B. The Government's Medium-term Agricultural Sector Strategy .............................................. 11 PART III. THE PROPOSED CREDIT ..................................................................... 12 A. The Policy Reform Program .................................................................. 13 B. Credit Features .................................................................. 24 C. Agreements Reached and Conditionality ........................................... ........................ 24 D. Credit Benefits and Risks .................................................................. 30 E. Recommendation ................................................................... 31 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.  ANNEXES Annex I: Policy Agenda Matrix ....................................... 32 Annex II: Letter of Agricultural Sector Development Policy ....................................... 35 Annex III: Agricultural Sector Characteristics ....................................... 74 Annex IV: Main Issues on Rural Savings and Credit, Institutional Development and Livestock Sector .................................. 85 Annex V: Poverty and Social Development Indicators .................................. 88 Annex VI: Key Economic Indicators .................................. 90 Annex VII: Key Exposure Indicators .................................. 92 Annex VIII: Status of Bank Group Operations .93 Annex IX: Relations with the International Monetary Fund .97 Annex X: Timetable of Key Processing Events .98 This operation was prepared by a team comprising Cadman Atta Mills (Senior Economist and Task Manager, AFlMI), Katrine Saito (Senior Economist and Task Manager, AF5AE), Mohamed Ben-Senia (Consultant, AF5AE), Hovsep Melkonian (LOAAF) and Philippe Benoit (LEGAF). Serge Michailov (AF4DR) and Adrian Otten (AF5AE) were the Peer Reviewers. Catherine Doody provided secretarial support. Jean-Louis Sarbib and Randolph Harris are respectively the Department Director and the Managing Division Chief for the operation. Fransois Laporte is the Lead Economist.  REPUBLIC OF SENEGAL AGRICULTURAL SECTOR ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Senegal Beneficiaries: The Government of Senegal and the private sector Amount: IDA Credit: SDR 29 million (US$45 million equivalent) Terms: IDA Credit : Standard with 40-year maturity Program Description: The overall objective of the proposed credit is to support the Government's program to resume structural adjustment in agriculture following the January 1994 devaluation. The credit will support a program of policy reforms needed to establish an environment conducive to supply- response and self-sustained growth of the agricultural sector. The measures included in the reform program are an essential part of the reforms agreed upon with the Bank and the IMF in August 1994, in the context of the PFP for the period 1994-1997. The reform program aims at : (i) liberalizing the domestic marketing and pricing of rice at both producer and consumer levels and privatizing the processing of rice, thereby eliminating subsidies in local rice production; (ii) reforming the agricultural trade regime. The liberalization of the external trade in those agricultural products still under Government control (i.e. rice, vegetable oils, groundnut oil seeds, sugar, and wheat flour) is being undertaken by: eliminating all prior authorizations for the import and export of these crops, determining appropriate protective tariffs for these commodities, and (in the case of cotton and groundnuts) linking domestic producer prices to world prices; (iii) privatizing the production, processing and marketing of agricultural products in those subsectors still dominated by parastatals, namely groundnuts and rice; and (iv) preparing a three-year rolling investment program for the agricultural sector which respects clear sectoral priorities established in consultation with donors. Benefits: The expected benefits of the credit would be to: (i) create an environment favorable to sustainable agricultural development that would promote economic growth through increased supply response; (ii) help the Government, through balance of payments support, maintain appropriate macro-economic equilibrium; and (iii) contribute to the improvement of living conditions by eliminating policies that have been detrimental to the poor, mainly through the abolition of monopolies and the completion of trade liberalization.  ii Risks: Many of the reforms included in the proposed program have long been on the agenda in Senegal. While it is impossible to guarantee that what has not been done in the past will be done this time, the Region's assessment is that the recent implementation of long delayed measures and the appointment of a national unity Government make the remaining risks well worth taking. First, compared to the past, the political context is different and the Government's commitment to reforms is much stronger, as evidenced by many difficult measures already taken by the Government. Among these, the most notable are the re-negotiation of the sugar convention with the CSS; the introduction of private sector imports of broken rice and the total liberalization of the domestic rice sector; the endorsement of the National Assembly to privatize SONACOS and the significant steps already taken by the Government to that end. Second, the reform program to be supported by the credit is heavily front-loaded. The Government has appointed a transitional administration to manage SONACOS and assist with its privatization as a condition of Board presentation. Three developments have significantly reduced the risk of backtracking on this reform program. First is the intense debate which has taken place in Senegal on austerity measures proposed by the Government. The public has become more aware of the costs of monopolies and there is political pressure from below to put an end to such practices. Second, the changes in prices resulting from the devaluation have fundamentally altered Senegal's economic prospects. However, doubts remain on the depth of commitment of the civil servants to a program destined to significantly curtail their power and authority. Third, the reform program has the endorsement of all the donors active in providing assistance to Senegal's agricultural sector. The proposed reforms also have internal constituencies : (i) they are supported within the administration by a new generation of forward-looking technicians; and (ii) they emanate from the private sector which is organizing itself to obtain a policy environment more conducive to the development of its activities. Rate of Return: Not Applicable Poverty Category: Not Applicable Appraisal Report: Not Applicable Estimated Disbursements: - US$25 million equivalent would be disbursed upon credit effectiveness; - US$20 million equivalent would be disbursed upon satisfaction of the conditions for release of the second tranche.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR AN AGRICULTURAL SECTOR ADJUSTMENT PROGRAM 1. I submit for your approval the following report and recommendation on a proposed development credit to the Republic of Senegal for SDR 29 million, the equivalent of US$45 million. The credit is to support the country's structural adjustment efforts with particular focus on the development of the agricultural sector. The credit is to be disbursed in two tranches of US$25 million and US$20 million each. It would be on standard IDA terms, with a maturity of 40 years, in support of an Agricultural Sector Adjustment Program (AG-SECAL). A Country Assistance Strategy (CAS) was discussed by the Board on February 16, 1995. 2. The program is the result of a long period of intermittent dialogue with the Government and close collaboration with other donors. The dialogue with the Government intensified when Senegal, along with the African members of the Franc Zone, devalued its currency in January 1994, opening a window of opportunity to rekindle a long stagnant economy. The devaluation also eliminated a number of rent-creating distortions, thus significantly altering the political economy of reform in Senegal. The Government is taking advantage of these changes to resume structural adjustment after a long period of interruption. 3. The AG-SECAL would address the most urgent obstacles to economic growth in the agricultural sector and, along with the recently approved Private Sector Adjustment and Competitiveness Credit (PSAC), would support specific policy and regulatory reforms agreed under the Policy Framework Paper (PFP), and aimed at alleviating constraints that still impede the development of the private sector. Three other donors -- USAID, the French Government and the European Union -- have agreed to contribute approximately US$90 million to the adjustment program. Government, IDA and the above three donors have worked closely together to define the scope of the adjustment program and a consensus on its content has been reached. Two joint donor pre-appraisal missions took place in August 1994 and in January 1995. The Agricultural Adjustment Program is reflected in the Government's "Lettre de Politique de Developpement Agricole" (LPDA) dated April 1995 (see Annex II).  2 PART I. THE MACRO-ECONOMIC FRAMEWORK AND RECENT DEVELOPMENTS 4. Past Economic Performance. At independence in 1960, Senegal inherited a relatively well developed economy. Performance was satisfactory until 1966, while Senegal benefited from guaranteed prices for its main agricultural export crops, but deteriorated significantly between 1967 and 1974 when this advantage was lost. Between 1974 and 1978, a fortuitous combination of good rainfall and high world prices for groundnuts and phosphates led to an export boom and excessive public spending. A succession of droughts together with a substantial deterioration in terms of trade and increasing structural inefficiencies between 1978 and 1981 reversed Senegal's fortunes again and led the country to launch a series of adjustment programs starting with an I[DA Structural Adjustment Loan (SAL I) in 1980. However, this credit was canceled before second tranche release because of failure to implement agreed reforms in agriculture. henegal's aeonwithannualrrainfall darying from 120s wam dinsnornth and adusminth efouth. laggead despuaites fine Wraifank atruconidrable andscoa agriustmreni uet crdto, ecurreantby pe ads oSF seareadgeughts, and phsuppoab oatue utltral raorc ndw t bisaerlaiitd tgenced. iotle structural adjuswmen ~tookplace inigtihe forstihlftiofand o980salhoreuigh, drnthaweperio, ithase mv~acroeconomic siuton teestaizeda tipeo Afriscal and aurgenerll pleaoant deficatse.e signiicantly reduesd.t aborsubtatl cha0e toure afer195 andeposs%o ah contrw laovrnfrne.t wthamoe faia, krm hcommaitment to beonom erice enrform tade prgeslbralizding traego and thecontroling minterlrides, simplifying tshetaxl str~uctureay,r rofomen inbthc entenpise. sereamliingtae incoewstmentinctedntive 5.8Senegal'sD geconomic pverfoermance duringeranuman the 1f8saiscappoeinting aonddutmenudto effortse laggedg despit five Worl Bank stutua anGetDaPdutmn.rdis sady stutua adjstentr tooke pacheveinthe firsnt haluofthied. 8 aThouh dureiaiongo that period, thre marecoomcliuationsiegbrng sabiizd asothetfisgcaltre and currentiaccoun defctsrwereasignioficantlym reduced. Moreavsubstantialrvchanges occurredCF aftra1985 as ah ponew gh$thovernment wihamrevfirme cometmaen tobecaiztonpomicirefor madte prorslierailizng trcadge randteontroln mecorst prices,o simplifyng threitax srctur,pefitormad,ing publicsenteris, stareamligniengo the inetenthinenrties i devalationecssr in neighorintn ompeghtaing countries an aecondetinuingdteriorat.Ion ofdithen therm of tradeaggravated......the o ...a..tio of. th.. Afac.oth.onttatteGoenm..evre the trade liberalization policies. With the prevailing exhage"... . rate,ms etr olo withstand foreign competition and, in the absence~... of ' a .. relgme ntfheexhagerae,i becme ecesar toresrt o ightarff ate asa scon bst nstumet. n aditon,th  3 Government became increasingly preoccupied with domestic political concerns while high levels of aid (more than twice the Sub-Saharan average in 1989) allowed authorities to postpone necessary adjustments. As a result, overall growth was low: during 1986-1992, real GDP growth was only 3.1 % per annum, barely exceeding the annual population growth. 7. Recent Economic Performance. In 1992 and 1993, the fiscal and balance of payments positions deteriorated and external payments arrears accumulatedl. The economy experienced sharp contractions in key sectors, notably fishing, phosphates, groundnuts, and food processing. The inability of firms to compete implied a shrinking tax base which led the Government to increase its reliance on exceptional revenue measures, such as heavy taxation of petroleum imports, and on last minute juggling and various ad-hoc measures (e.g., payment of tax arrears by certain enterprises in return for offsetting payments of non-budgeted export subsidies). This, in turn, had an adverse impact on production costs and forced more firms to close or join the informal economy. 8. Changing Course. To halt this deterioration, in August 1993 the authorities adopted internal adjustment measures, including a cut in public sector wages and an increase in import duties and the price of petroleum products. Although these measures reduced the imbalances, the real exchange rate overvaluation had become so large that they came too late to restore competitiveness to the economy. Growth prospects remained poor. Nevertheless, the authorities' decision to impose strict measures had a profound impact on Senegalese society by forcing a debate on economic development issues, which had, until then, been virtually nonexistent. In January 1994, the Government of Senegal, in close consultation with other CFA zone member countries, decided to strengthen its adjustment strategy by changing the parity of the CFA franc from 50 CFAF/FF to 100 CFAF/FF. In addition, the Senegalese Government took a series of key macroeconomic and structural measures to regain and consolidate competitiveness. These measures included : (i) increases in key producer prices (groundnuts, cotton); (ii) a substantial program of social measures to alleviate the effects of the devaluation on the vulnerable groups; (iii) prudent demand management policies to reduce absorption by the public sector and limit wage increases; (iv) reduction and simplification of tariffs and domestic taxation; and (v) protection of social expenditures. IDA supported the implementation of these measures through the Economic Recovery Credit (ERC) approved by the Board in March 1994. 9. Response of the Economy. Over 1994 as a whole, inflation remained below the 40% target, resulting in a real depreciation of over 30% in foreign currency terms -- sufficient to permit renewed economic growth provided that accompanying structural reforms are implemented. There are already indications of an economic recovery in several sectors where the devaluation has had a particularly favorable impact. Comparing the first half of 1994 with that of 1993, increases in production of industrial products ranged from 14% to 32% and tourist arrivals grew by 30%. 10. The Government's Medium-term Development Strategy. To guarantee the success of the devaluation and reach its development objectives, the Government realizes that the parity change IThe fiscal balance (excluding grants) declined from a 0.2% surplus in 1991 to a 3.9% deficit in 1993 and the current account balance, excluding official transfers, deteriorated from a 8.7% to a 9.9% deficit over the same period.  4 must be accompanied with measures designed to pass the benefits of the devaluation on to rural producers, reduce Government expenditure and limit wage increases, address the political and social dimensions, and accelerate the structural reforms necessary to stimulate a supply response, including reforms supporting the private sector. 11. The Government's 1994-96 adjustment program as described in the Sixth Policy Framework Paper (PFP) of July 1994 has five main objectives: (i) achieving a real GDP growth rate of 4.7 % in 1995 and 4.8% in 1996; (ii) increasing the investment-to-GDP ratio from 14.1% in 1993 to 16.7% in 1996 and improving the efficiency of public investment; (iii) achieving primary surpluses in the Government's budget (budget deficits on a commitment basis excluding grants to be reduced from 4.5% of GDP in 1994 to 1.7% in 1996); and (iv) containing the external current account deficit, excluding official transfers, to 9.8% of GDP in 1994, and reduce it to 7.3% in 1996. The Government strategy also includes measures to improve public sector management comprising : (i) adopting a three-year public investment program taking into account the devaluation of the CFAF; (ii) reducing the wage bill through an audit of the civil service; and (iii) continuing the Government's divestiture program by privatizing 12 of the 40 remaining public enterprises over the period covered by the PFP (3 to be privatized by June 30, 1995). As a first step immediately after the devaluation, the Government: (i) established a maximum 45% limit on import tariffs including the 5% stamp duty; (ii) reduced the number of Value Added Tax (VAT) rates from five to three, with a maximum rate of 20%; (iii) increased energy and utilities prices to reflect more their current economic costs of production; and (iv) passed through the benefits of the devaluation to agricultural producers. The Government also announced its determination to accelerate structural reforms necessary to bolster the supply-response through long delayed reforms to liberalize external trade, the labor market, and the agricultural sector. 12. Senegal's outstanding external debt totaled about US$3.7 billion in 1993, or 64.7% of GDP. Debt outstanding as a percentage of GDP has naturally increased as a result of the devaluation and is projected to be 73.3% in 1996. However, debt service as a share of exports is expected to decrease from 21.5% in 1993 to 18.8% in 1996. In 1993, 60.8% of Senegal's total debt disbursed and outstanding was concessional. Senegal's strategy is to contract new debt exclusively on concessional terms and the ratio of concessional to total debt is expected to be exceed 75% by the end of the decade. The country recently benefited from a generous Paris Club rescheduling in addition to receiving extensive debt relief from France. Senegal is also eligible for the Fifth Dimension financing from IDA reflows. A commercial debt buyback operation is under preparation. 13. External financing requirements before adjustment support and debt relief are estimated at US$247 million for 1995-96. These requirements will be met by projected adjustment support of US$217 million and debt relief of US$8 million. The need for exceptional balance of payments support is projected to be eliminated after 1997, at which time remaining balance of payments and fiscal gaps will be met by debt relief  S A. IDA ASSISTANCE STRATEGY 14. IDA assistance strategy in Senegal is spelled out in the Country Assistance Strategy (CAS), which was discussed by the Board together with the Private Sector Adjustment and Competitiveness Credit (PSAC) on February 16, 1995. The proposed operation is a key component of the CAS and an essential element in ensuring that the economy derives the full benefits of the CFAF devaluation. It has been prepared in a way that reflects the importance the CAS attaches to strengthening the quality of our policy dialogue with various partners of Senegalese society, such as Government officials, entrepreneurs, farmers' organizations and NGO's. 15. As described in the CAS, the main objective of the Bank is to help Senegal achieve sustainable growth with equity and targeted poverty reduction. In the long-term, growth is likely to emerge from export activities in agriculture and industry and from tourism and other services. With Senegal's ocean access, agreeable climate and favorable location vis-a-vis Europe and the USA, its traditional function as a regional service and tourist center would be expanded. Ocean fisheries have potential and there is scope for light industries. The country would also benefit from regional integration as, with the signing of the treaty transforming the West African Monetary Union into an economic and monetary union (WAEMU), the potential for intra- regional trade in a market of nearly 60 million people has greatly increased. However, all this assumes that there will be continued improvement in the competitiveness of the economy and that the business climate will become and remain conducive to private investment. Agriculture is likely to remain an important sector in terms of employment and it is there that the supply response to the devaluation is expected first. Initial data on supply response to the devaluation confirms a positive supply response from agriculture (para. 9). 16. The Instruments to Implement Bank Stratg. Structural reform in agriculture is expected to expand the production of traditional export and food crops and non-traditional and high value crops in the short- and medium-term. The promotion of agriculture and improvement of the incentive structure for private sector activities (supported by the PSAC) go hand in hand and will equally benefit from the Government's macroeconomic objectives and strategy presented in the Policy Framework Paper. The most important measures supported by the PSAC concern regulatory reform and the elimination of bottlenecks to supply response. These include: reduction in transport costs and liberalization of labor legislation; elimination of monopolies and price controls resulting from Conventions Sp&iales and prior authorizations. Other sectors which are directly relevant to competitiveness are the financial and energy sectors. The banking system is relatively healthy, due to comprehensive restructuring. In the absence of a restructuring of the electricity company (SENELEC), the energy sector will remain inefficient. Recently, the Government has requested the Bank to re-launch discussions on the Energy II project which would address this issue. 17. The proposed Agricultural Sector Adjustment Credit (AG-SECAL) is the Bank's instrument for agricultural reform to stimulate supply responses to the devaluation and to revitalize the sector's long-term incentive system. The reform program is described in detail in the Policy Reform section (paras. 39-75). In further support of the agricultural sector, aspects not  6 covered by the AG-SECAL are included in other ongoing operations or others under consideration. These include the Agricultural Services Project (Cr. 2108-SE), the Agricultural Research Project (Cr. 2107-SE), a proposed Agricultural Services and Professional Organizations Project (FY97) focusing on agricultural research, extension and veterinary services, and a possible Senegal Valley Development Project, which would establish an economically justified as well as financially and environmentally sustainable integrated development of the water resources in the Senegal River Valley. Concerning the environment, the Government is developing a National Environmental Action Plan with assistance from the Bank, based on a CESP which was discussed and agreed with the Government (Report No.13292-SE). 18. Lessons Learned. As mentioned earlier, Senegal's performance under the last adjustment operation (SAL IV) supported by the Bank was disappointing and the third tranche was canceled. A Bank analysis of the implementation of past adjustment programs indicates that two major factors are responsible for their relative lack of success. First, in the past, the availability of quick-disbursing budgetary assistance has had the undesirable effect of focusing government attention primarily on the accessibility of such funds, often to the detriment of long-term development issues. Consequently, the government's ownership of the reform programs might have been overestimated. Second, although the design of the previous adjustment programs improved over time, the implementation of the reforms had some serious sequencing shortcomings because of the difficulty in implementing key measures. In particular, liberalizing external trade before eliminating such key constraints to enterprise competitiveness, such as the over-valued exchange rate, labor rigidities, and high cost of production, was not sustainable. 19. The design of the proposed credit takes into account the lessons learned from past adjustment operations in Senegal. First, particular attention has been given to the ownership issue. During preparation and appraisal, efforts were made to develop the consensus necessary to successfully implement fundamental changes. As noted earlier, this program has had a long gestation period but the program did not go forward due to the lack of consensus between Government and donors, and the deteriorating macroeconomic situation. The nature of the dialogue improved significantly after the currency devaluation in January 1994, thereby creating an excellent opportunity to restore economic growth as well as to eliminate a number of rent- creating distortions. In this way, the political economy of Senegal has been significantly changed. 20. Status of Bank Group Operations. As of Jan. 31, 1995, the Bank Group had approved 103 operations for total commitments of about US$ 1.3 billion consisting of 71 IDA credits, 20 Bank loans, and 12 IFC operations. To date, 59 IDA credits and the 20 IBRD loans have been fully disbursed. Of the remaining, two are a hybrid adjustment/investment operation (Transport SECAL) and a supplemental credit (Fifth Dimension through the Emergency Recovery Credit). The rest are divided between agriculture (three), infrastructure (two), human resources development (two), industry (one), and a technical assistance project. Since the devaluation, an Economic Recovery Credit was approved in March 1994 and the Private Sector Adjustment and Competitiveness Credit (PSAC) was approved in February 1995. Among the operations supported by IFC, three were in the financial sector, four in industry, one in services, two in agriculture, and two in fish processing. IFC's current loan and equity investment portfolio is composed of five operations: ICS (phosphoric acid and fertilizers), which was restructured in  7 1987 and whose financial position is now improved; African Seafood (fish processing), which is in receivership; Africamer (fish processing), which is facing cash flow problems; a leasing company; and an agribusiness project. These projects did not perform well because of a combination of external and policy problems, but their performance is expected to improve after the devaluation and the improvement of the environment for private sector activities. 21. Status of IMF-Senegal Relations. As of January 31, 1995 Senegal's outstanding use of Fund resources amounted to the equivalent of SDR 205.4 million (172.8% of quota). If the full amount under the ESAF arrangements were drawn, Senegal's use of Fund resources, taking into account scheduled repurchases and repayments, would increase to SDR 241.2 million (202.9% of quota) by end-June 1997.  8 PART II. THE AGRICULTURAL SECTOR A. THE AGRICULTURAL SECTOR'S ROLE IN THE ECONOMY 22. The Agricultural Sector Background. In contrast to most African countries, the agricultural sector (including forestry, livestock and fishery) accounts for a modest share of GDP (20%). Agriculture is, however, the main occupation of 60% of the population. It also accounts for a large portion of foreign exchange earnings, with groundnut export earnings ranking third to fish exports and tourism earnings. Although declining in relative importance, groundnuts account for about 60% of farm cash income. 23. Sector Characteristics. Arable land in Senegal is estimated at 3.7 million hectares of which an average of 2.3 million hectares is cultivated annually. Rain-fed agriculture predominates with production under irrigation accounting for about 4% of cultivated area. On average, export crops (principally groundnuts and cotton) account for about 50% of cultivated area with food crops (millet, rice, sorghum, and maize) comprising the rest. There are, however, marked annual variations in areas under export and food crop production. In particular, in years following droughts (e.g. 1985/86), the area under food crops increased significantly, reaching as high as 66% of cultivated area. Pastoral production has traditionally been significant, accounting on average for 35% of the agricultural value added. Rangeland is estimated at 12 million hectares, but its productivity (in terms of biomass production) is extremely variable and lowest in the low rainfall north where pastoral activities are also the most important. Overgrazing of rangeland is a serious threat while the availability of water resources is the main obstacle to the development and intensification of the livestock subsector. 24. Recent Sector Performance. During the second half of the 1980s, total agricultural production registered a modest increase of 2.7% per annum. While this was better than the early 1980s, which was poor as a result of droughts, it was still barely enough to keep up with population growth. The modest performance of the agricultural sector has been accompanied by a sharp decline in traditional exports, especially groundnut oil and cake, and large deficits of parastatals involved in groundnut and cotton exports; degradation of soils due to the combined effect of drier than normal rainy seasons, soil erosion, salinization and acidification, deforestation, overgrazing and extensive cultural practices; high overall population and urbanization growth rates (2.9% and 4.3% respectively), coupled with a rural exodus especially of young men and women. Moreover, there are indications that progress made in the late 1970s in the use of inputs and improved technology is being reversed. For example, fertilizer use dropped from 75,000 tons in 1980 to 25,000 tons in 1990 in part because of the abolition of subsidies which coincided with a decline in cashcrop prices2. There is a perceptible trend towards more labor-intensive production 2 There is increasing evidence that farmers' use of purchased inputs declined not due solely to an increase in input prices but as a result of the combined effect of input price increases and product price declines. In particular, in the Sahel, research evidence suggests that farmers turn to extensive methods of cultivation whenever purchased input costs become greater than 30% of expected output prices.  9 methods. Annex III describes the main agricultural subsectors and Table 1 of Annex m summarizes key agricultural statistics. 25. Prospects for Agricultural Development. Since the recent parity change and the significant increases in the international prices of cotton and vegetable oils, the prospects for Senegal's main export and import substitution crops have markedly improved. Regarding the traditional rain-fed export crops of groundnuts and cotton, over the long-term Senegal appears to have a comparative advantage in cotton production. Indicators of production incentives and efficiency3 calculated for cotton and groundnuts suggest that Senegal has lower domestic resource costs in cotton than in groundnut production. 26. Due to the parity change, prospects for the livestock subsector should also significantly improve over the short- and medium-term, especially for the exports of leather and hides. In the short-term, meat products will be better able to compete in the domestic market with cheap (and often highly subsidized) imports. In the medium to long-term, however, there are considerable physical and infrastructural constraints that sharply limit these prospects. These include the carrying capacity of grazing land, a commercial circuit for meat products which is largely undeveloped, and endemic diseases and parasites which frequently lead to significant losses of herds in the traditional and extensive livestock subsector. The prospects for traditional food crops, especially maize, have also considerably improved as a result of the devaluation. 27. Over the medium- to long-term, the best prospects for sustained agricultural growth are in the development of high value horticultural products primarily for export. Senegal has a strong potential for irrigation development (in the Senegal Valley as well as in the Casamance) which augurs well for a more determined move towards efficient, high value-added export agricultural production such as fruits and vegetables. 28. Past Sector Adjustment Performance. The main constraint to sustainable growth in Senegalese agriculture has been the heavy hand of the state in all aspects of agricultural production. The state has been omnipresent in input pricing and distribution, import of agricultural products and inputs, setting and administering the prices of virtually all agricultural commodities, and in the processing and marketing of agricultural products. 29. Past SALs have attempted to address this constraint. SAL I (FY81) included a number of policy reforms to begin liberalizing the agricultural sector. The Government, however, was not able to implement agreed reforms concerning fertilizer and seed distribution and the second tranche of the credit was canceled on June 30, 1983, after a long and difficult dialogue on agricultural policies. The thrust of SALs II and III consisted of revitalizing agriculture to increase and diversify agricultural production and exports. The strategy consisted of fostering private sector initiative through a change in incentive policies and a progressive withdrawal of the state from direct involvement in production activities; achieving greater efficiency of public investments; and reforming public agencies. Specifically, the Government's New Agricultural 3 See David Jones and Cindy Holleman, 1991. "Senegal's Structure of Protection and Comparative Advantage in Cereal and Export Crop Production" Agriculture Division, Sahel Department, Washington DC.: World Bank.  lo Policy (NPA) which was supported by SAL II, sought to liberalize most agricultural prices, increase cereals production and privatize internal marketing and import of cereals, expand production and streamline the marketing of groundnuts, decontrol the supply of agricultural inputs and reduce subsidies, redefine the role and functions of rural development agencies, and strengthen the investment planning and management capacity of the Ministry of Rural Development. 30. The record of achievement under SAL II was generally good. Significant progress was made on : (i) the development of cereals production through provision of adequate nominal protection for domestic cereals and the liberalization of internal marketing and pricing; (ii) liberalization of the groundnut sector with Government withdrawing from seed distribution and with the elimination of subsidies to cover oil milling fixed costs; (iii) the decontrol of fertilizer imports and the reduction of price subsidies; and (iv) the scaling back of the activities of rural development agencies and the revision of contractual agreements for the agencies responsible for irrigation (SAED) and cotton development (SODEFITEX). Under SAL III, the achievements of SAL II were consolidated and the reforms extended to include: (i) establishing a weekly price information system for the major cereals markets; (ii) reducing the farmgate prices of groundnuts in response to a sharp drop in international prices, rationalizing SONACOS operations to reduce costs and initiating an external management and financial audit of this oil milling parastatal; (iii) completely eliminating fertilizer subsidies in 1988/89 and totally decontrolling compound fertilizer imports; (iv) decontrolling meat prices and eliminating the monopoly on hide and skin trade; and (v) developing coherent policies on pricing and farm credit. SAL III also attempted to address a number of issues concerning the private sugar monopoly "Compagnie Sucriere Senegalaise" (CSS)4. 31. The SALs, however, were less successful in eliminating rents associated with import monopolies. No progress was made on the liberalization of rice imports. There were significant delays in the adoption of measures for SONACOS (also an importer of edible oils) under SAL III and the privatization of SONACOS, proposed under SAL IV, was not achieved. Regarding sugar, the Government was not prepared to address the issue of CSS monopoly and eliminate its excessive fiscal advantages. This was due to the significant rents conferred by the import monopolies and, as a result, the powerful interests, including political, that opposed these reforms. The devaluation of the CFAF has significantly changed the situation. Rents associated with the import of rice have vanished and, under the previous rice consumer pricing regime, the broken rice importing monopoly (CPSP) had serious difficulties covering its costs. SONACOS no longer earns huge margins on imports of vegetable oil; and since August 1993, 100% of CSS margins on the imports of sugar have been appropriated by Government. In addition, a powerful national private sector (such as the National Union of Senegalese Traders and Industrialists-- UNACOIS) has emerged and been very vocal in its opposition to past privileges granted to vested interests. 4 In the case of CSS: (i) direct subsidies from the Government (perequation) were eliminated in November 1987 as well as Government guarantee of CSS borrowings; (ii) the company adopted a restructuring plan, including targets for cost reduction; and (iii) a financial and operational audit of the company was performed by an independent auditor for the Government. A system to verify the nature and quantity of CSS's imports, which benefit from custom duty exemptions, was also established, but does not seem to have been maintained.  11 B. THE GOVERNMENT'S MEDIUM-TERM AGRICULTURAL SECTOR STRATEGY 32. Between 1991 and 1993, there was a hiatus in Bank and Government dialogue as the Government failed to undertake reforms agreed with the Bank, especially in the rice and groundnut subsectors. In the fall of 1993, Government reopened formal discussions on the AG- SECAL with the Bank and various other donors. These initial contacts culminated in a three-day "Journees de Reflexion" in December 1993, when the Minister of State for Agriculture, at his suggestion, led a high level Senegalese delegation to Washington to discuss Senegal's new strategy for agricultural development in the medium-term. At these discussions, the Senegalese authorities and the Bank concluded that : (i) the macroeconomic environment of Senegal (and especially the overvaluation of the CFAF) was not conducive to agricultural sector growth; (ii) the fundamental causes of the lack of competitiveness of the agricultural sector could be traced to Senegal's non-application of reform measures previously agreed with the donor community and the policy of administered prices; and (iii) the resulting decline in private investment and of donor assistance to the sector were detrimental to sectoral growth. 33. The Government, therefore, announced its intention to prepare a new sectoral strategy and program based on the need to: (i) create an environment conducive to agricultural investment; (ii) give support to new and innovative agricultural technology; (iii) develop rural infrastructure; (iv) give more attention to the management of natural resources; (v) leave decisions concerning production practices to producers and promote private sector initiatives; and (vi) focus the Government's role on the provision of production-supporting social infrastructure and services and improve efficiency of service delivery. 34. These general principles are fully reflected in the Letter of Agricultural Development Policy (LADP - Annex II) prepared by Government in August 1994, and updated in April 1995. The Government sets six main objectives for its medium-term agricultural development strategy: (i) a target agricultural growth rate of 4% per annum; (ii) improved food security through intensification of production; (iii) the creation of agricultural employment to increase rural purchasing power; (iv) improved management of natural resources guided by a National Environmental Action Plan (NEAP); (v) promotion of private investment; and (vi) improved efficiency in public resource management. 35. The LADP represents a consensus among the Government, donors and representatives of the private sector and is the result of discussions in March and April 1994, and a Donors' Round Table in May 1994. These talks involved representatives of various Government bodies and parastatals, producer organizations, NGOs and key private agro-processing industries. Involving as many Government and non-governmental actors as possible in the process of drawing up the proposed AG-SECAL has helped build ownership of the adjustment program. Several components, notably the liberalization of broken rice imports and the abolition of all import and export licenses for agricultural products, complement the recently-approved Private Sector Adjustment Credit. To ensure the successful implementation of the agricultural sector program, the Government has established an interministerial committee to monitor its implementation.  12 PART III. THE PROPOSED CREDIT 36. The overall objective of IDA's assistance to Senegal in the agricultural sector is to promote sustainable agricultural growth. To this end, the program supported by the AG-SECAL has four key elements: * First, liberalizing domestic marketing and pricing of all agricultural products, especially rice at both producer and consumer levels, and privatizing the processing of rice, thereby eliminating subsidies in local rice production. * Second, reforming the agricultural trade regime through liberalizing external trade in those agricultural products still under Government control. This reform would be done by eliminating all prior authorizations for the import and export of these crops (rice, vegetable oils, groundnut oil seeds, sugar, and wheat flour), determining appropriate protective tariffs for these key agricultural commodities, and (in the case of cotton and groundnuts) linking domestic producer prices to world prices. The overriding principles guiding the reform of the trade regime are to ensure adequate linkage between domestic and world market prices, reduce special tariff protection over time towards the (WAEMU) general tariff regime, and allow floor price support schemes which exclude Government and work in a way to minimize financial and economic costs. 3 Third, privatizing the production, processing and marketing of agricultural products in those subsectors still dominated by parastatals, namely groundnuts and rice (SONACOS, CPSP, and URIC). * Fourth, preparing a three-year rolling investment program for the agricultural sector which respects clear sectoral priorities established in consultation with donors. This investment program would be more intensely debated with Government and donors in the context of a planned integrated agricultural sector investment program. A three-year investment program for the agricultural sector has been prepared (and endorsed by IDA) for the years 1995-97. Updating the three-year investment program, which will be reviewed by IDA, is a critical element in strengthening the Government's management of the sector. Consequently, Government updating the three-year rolling investment program for the agricultural sector and its transmittal to IDA will be a condition of Second Tranche release. 37. Justification for the Credit. The economic justification for the AG-SECAL is based on the link between the removal of obstacles to economic activity in the agricultural sector, and growth in that sector. It is essential for Senegalese agriculture to take the greatest advantage of the opportunities presented by the devaluation. The financial justification is based on the overall financing requirements (para. 13), as estimated in the recent PFP and SPA documents, that are  13 necessary to maintain financial stability, pending a supply response to sustain economic growth. The measures to be taken are expected to contribute to public revenue, or at least to stopping accumulations of indebtedness that are ultimately a public charge. 38. Other Donor Assistance. Additional support for the adjustment program will be provided through parallel financing from USAID (US$ 31 million), the French Ministry of Cooperation and the Caisse Fran,aise de Developpement, and the European Union. Support by these donors will focus on providing the financial resources necessary to restructure key subsectors and enterprises, as well as for investments in key subsectors. A. THE POLICY REFORM PROGRAM 39. The Government's reform program in agriculture is driven by three crucial objectives. first, to liberalize prices and marketing of domestically-produced agricultural products and, thereby eliminate all market distortions. Second, on trade policies, the goal is to promote efficient import substitution by eliminating all quantitative restrictions and replacing them with protective tariffs. Moreover, the protective tariffs must not only be demonstrated to be necessary and not excessive (thereby protecting the interests of consumers), but must decline over time to ensure the eventual international competitiveness of the various subsectors. Third, concerning the role of the state and the place of agricultural parastatals, the objective is to disengage the state from commercial activities and promote a greater role for the private sector. Cereals Policy 40. Current Marketing and Pricing Policies. The main outstanding cereals problem area is the rice subsector5. The marketing and pricing of all cereals were liberalized under previous reform programs supported by SAL I and SAL II. Until 1993, public enterprises were responsible for collection, milling, and domestic transportation of locally grown rice (170,000 tons of paddy in 1993 or roughly 110,000 tons of rice). The Caisse de Perequation et de Stabilisation des Prix (CPSP) is responsible for import and domestic transportation of imported 35% -plus broken rice (350,000 tons on average per annum). 41. Pre-devaluation Government policy had two main objectives: to provide low-cost rice for consumers and to develop local irrigated rice production in the Senegal River Valley by providing high producer prices and subsidies. In consequence, the official paddy price bore no relation to official consumer prices of rice or intermediate costs. At official producer prices, the cost of local rice was very high, almost 40% above the pre-devaluation official consumer price. Prior to the 5 In the rice subsector, the import, marketing and pricing of high quality rice (30% to 0% broken rice) were liberalized in 1990 but the import, marketing, processing, and pricing of more than 35% broken rice (the preferred rice in Senegal) is still tightly controlled by the Government. In 1993, private firms were given the right to process local rice.  14 January 1994 devaluation, the price stabilization agency (CPSP), which had a total monopoly on broken rice imports, covered direct losses incurred by the sole industrial rice processing unit (URIC, a subsidiary of SAED) from a levy on imported rice. It could do this because the amount of local rice purchased (about 50,000 tons) was far less than the quantity of rice it imported (in excess of 300,000 tons). During the early 1990s, declining world prices and a constant consumer price allowed CPSP to collect windfall profits and cover an increasing subsidy to domestic rice production which was expanding. This financial situation proved unsustainable after the devaluation that doubled the cost of imported rice. Annex III describes current characteristics and the competitiveness of the subsector in detail. 42. Proposed Policy Changes. The Government has five objectives in reforming this sector: first, liberalize all imports, subject to an import levy that would provide partial stabilization of domestic prices and would link domestic to world prices; second, remove all controls on domestic trade; third, privatize rice milling; fourth, transfer most irrigation operation and maintenance costs to producers; and fifth, end price controls and public sector intervention in the paddy and rice markets. The LADP commits the Government to undertake all measures necessary to achieve these goals. Already, considerable progress has been made in liberalizing the domestic rice sector with the liberalization of domestic paddy prices and transfer of ownership of the Government- owned rice mill (URIC) to former URIC employees which was completed on June 30, 19946. Liberalization of the local paddy price is not expected to lead to increases in consumer rice prices much above the current price of CFAF 180 per kilo as private milling is significantly more efficient than the past SAED/CPSP process. 43. Under the AG-SECAL the Government decided to open all rice imports to the private sector starting in 1994 and to end CPSP involvement in rice imports. The Government further decided that wholesale and retail prices would be decontrolled, transportation subsidies eliminated, and all restrictions on internal trade in rice abolished. The withdrawal of CPSP from rice imports and commercialization is being undertaken over an eighteen-month period, ending February 19967. It began with domestic private operators acting as sub-contractors to CPSP for the import of 50,000 tons of broken rice in 1994 as part of an agreement concluded between the Government and the private sector8. 44. In the transition period, CPSP's role in the import of broken rice will be limited to : (i) negotiating umbrella agreements with rice exporting countries; and (ii) sub-contracting with private importers for procuring broken rice under the umbrella agreements. CPSP will, henceforth, abandon the procurement practices of contracting rice imports to pre-selected private 6 In June 1994, the Government eliminated adminstered prices for domestic paddy. In addition, the Government passed a decree removing prior authorization for the export of all cereals (including rice). 7 This seemingly long transition period was a compromise between an agreement that the Government had already signed with the USAID providing for a three-year transition period for the disappearance of CPSP and the wishes of other donors, including IDA, for a much shorter transition period. The Government has, however, informed IDA that it intends to liquidate CPSP well before February 1996. 8 The Government and the local private sector agreed that CPSP would reserve 50,000 tons of its annual imports of broken rice for local competitive bidding. The 50,000 tons were broken into much smaller lots (of about 5,000 tons) so as to put them within reach of local importers.  15 operators (marche gre a gre) in favor of an international competitive bidding procedure. An open and competitive procurement process has thus been established. At the end of the transition period. CPSP will no longer import or distribute broken rice. This will be a condition of Second Tranche release. 45. As stated in the LADP, the Government also intends to phase out CPSP's role in the distribution of imported rice in the local market over the eighteen-month transition period. Already, rice retailers are permitted to obtain their supplies directly from the port of Dakar and CPSP warehouses all over the provinces. In line with the LADP calendar. CPSP's warehouses were closed in all regions except Dakar in March 1995. In June 1995 CPSP's retail marketing facilities in Dakar will be closed. The Government has informed IDA that: (i) broken rice transport subsidies have been eliminated; (ii) retail margins have been liberalized; and (iii) administered wholesale prices for imported broken rice have been eliminated. Phasing out CPSP's role in the import and distribution of broken rice will be a condition for the release of the Second Tranche. Specifically, a condition of Second Tranche release is that all of CPSP's warehouses have been closed (including Dakar). Through the Government's elimination of: (i) any CPSP involvement in the imports and distribution of broken rice; and (ii) prior authorizations for private sector imports of rice, the rice subsector will be fully liberalized. Consequently, the full liberalization of broken rice imports is a condition for Second Tranche release. A protocol and a contract-plan would be concluded between Government and CPSP redefining the latter's new role. To this end, the Government commissioned a study (completed in December 1994) to determine CPSP's future role. The study recommended that CPSP's activities be limited to monitoring the rice subsector, importing broken rice only in case of emergency, and managing a security stock. To perform this task, the study recommended a staff of no more than 12 as compared to CPSP's current staff in excess of 700. The Government informed IDA in January 1995 that it accepts the recommendations of the study. 46. The Government has already abandoned administered prices for local paddy and local rice production will be protected by a normal import levy of 16%. To safeguard domestic paddy producers from any collapse in the international price, especially at the critical local paddy harvesting seasons, the Government proposes a surtax on imported broken rice, the level of which will be determined in November of each year and adjusted in May only if necessary. The normal tax and the surtax will at no time exceed a cumulative 46% of the average Dakar cif price over the two months preceding November or May. Annex III describes the proposed rice import levy in greater detail. As can be seen from this Annex, at current international prices, the total tariff would be 21%, and would reach 46% only when there is an extraordinary collapse in international prices. In addition, SAED will retain its role in maintenance and rehabilitation of major irrigation infrastructure, and in extension and technical assistance to the producers, and SAED's operating costs will be directly financed from the Government budget. A condition for Second Tranche release is the implementation of an import levy imposed on broken rice set at no more than a cumulative 46% of the average Dakar cif price over the relevant preceding two months.  16 The Groundnut Subsector 47. Current Situation and Government Policies. The Government tightly controls oilseed groundnut production from seed production and distribution, primary collection and transport of groundnuts, to the processing into edible oils. The main actors in the subsector are the 80% publicly-owned9 SONACOS involved in oil processing and the 99% SONACOS-owned subsidiary SONAGRAINES involved in seed distribution and primary collection. Producer prices are set by the Government and export of groundnut oil is a monopoly of SONACOS. Export of unprocessed groundnuts is formally prohibited. Until September 1994, imports of all vegetable oils by establishments other than SONACOS required prior authorization which, except for palm oil, was rarely granted. 48. The sector is currently confronted with a host of problems the most notable of which are: (i) marked variations in the levels of production linked with the agro-climatic situation and dramatically declining shares of produced groundnut oilseeds purchased by SONACOS10; (ii) declining yields per hectare linked to declining soil fertility, seed quality and the conditions for seed distribution; (iii) the over-capacity of the groundnut oil processing units (approximately 920,000 tons of milling capacity contrasted with average annual collection of 260,000 tons), and exceedingly high fixed costs of SONACOS; (iv) the reality of a parallel market in groundnuts (including "illegal" exports through the Gambia, direct consumption by producers and artisanal oil processing); (v) the absence of domestic producer price flexibility and its de-linking from world market prices; and (vi) sizable deficits in the groundnut oil processing subsector which were covered by SONACOS's margins on imported vegetable oils. 49. Proposed Policy Changes. Actions under the AG-SECAL in the groundnut sector are centered on one major structural measure: breaking the monopoly of SONACOS and its sale to the public. Attempts in SALs II and IV to introduce more transparency and accountability into the affairs of the two public enterprises, SONACOS and SONAGRAINES, were largely unsuccessful and a structural solution in the form of transfer to the private sector is needed. To this end, the Government has declared its intention in the LAPD to privatize SONACOS and SONAGRAINES and liberalize the marketing of groundnuts. The first phase of a study, financed by USAID and undertaken by Price Waterhouse, was delivered to the Government in May 1994. It found SONACOS privatizeable, particularly after the CFAF parity change. Its main recommendation was to split the enterprise in two parts, which has the advantage of not replacing a public monopoly with a private one. The study also recommends several reforms in the edible oils sub-sector as part of the privatization process. These recommendations have been accepted by Government. 50. To privatize SONACOS, the study makes three recommendations. First, that (i) negotiations on the status of employees released from units in Dakar, Diourbel and headquarters 9 Private investors hold the remaining shares among which the most important are Lesieur Afrique (7.14%), SODEC (5.71%), V. Q. Petersen (3.3 1%), and the Compagnie Senegalaise d'Arachide de Bouche (2.15%). 10 Of 679,000 tons produced in 1990/91, SONACOS purchases amounted to 260,000 tons. Comparable figures for 1991/92 and 1992/93 are 700,000 tons produced, 360,000 tons purchased and 550,000 tons produced, 160,000 tons purchased.  17 should continue; (ii) layoffs should be completed before the end of the privatization transaction; and (iii) the Government should meet with employees and managers to explain and discuss the privatization process. Such a meeting would reinforce the commitment to the privatization in front of a possibly hostile audience. Second, that claims resulting from the 1992 explosion at the Dakar processing plant should be resolved or the Government should indemnify the new owners from any damage awards or insurance claims arising from this incident. Third, that the obligations of buyer and seller should be clearly defined before the sale takes place. The study recommends that the new ownership structure should have access to significant financial resources, particularly credit facilities to purchase groundnuts. The "strategic investors" could include intemational operators with significant industry and market experience, particularly in the European Union. To prevent the sale of a privatized SONACOS to investors who lack the technical, marketing and managerial skills necessary to operate it successfully, the Government may place restrictions on the re-sale of shares. 51. In order to eliminate the monopoly of SONACOS and introduce competition in the sector, SONACOS will be split into two viable entities. In the LADP, the Government proposes to issue invitations to tender (appel d'offres) by September 1995 and has already transferred the privatization file to the Privatization Commission. The Government amended the Law on Privatization (Loi 87-23) in December 1994 to formally declare SONACOS privatizeable. The amendment of the law required an open debate in the National Assembly during which the Government reaffirmed its ownership of the reforms embodied in the LADP and, in particular, its determination to oversee an irreversible privatization of SONACOS. In January 1995, barely a month after the amendment of the Law on Privatization, the Government started the third and final phase of the privatization study. The main purpose of this phase is to prepare the dossiers for the invitation to tender and identify potential investors. The bringing of SONACOS to the point of sale is a condition of Second Tranche release. Specifically. this means that the Government has (i) carried out a valuation of the enterprise and prepared a prospectus or information memorandum for the enterprise: (ii) solicited, either directly or through advertisement(s) in appropriate newspa-pers. offers from the private sector for the sale of all the SONACOS shares held by the Borrower and other public sector entities: (iii) evaluated any offers received: (iv) selected a successful bidder(s) in accordance with procedures for award consistent with the LADP: and (v) invited the successful bidder(s) to enter into negotiations. 52. To ensure that the privatization of SONACOS will take place in the best possible circumstances, the Government is aware of the need to: (i) market the company as a well-run and managed going concern and (ii) ensure the active collaboration of SONACOS's management in the tasks required to bring SONACOS to the point of sale. These include the following: (i) preparation of bidding documents and evaluation criteria; (ii) preparation and distribution of a company prospectus; (iii) extensive contacts with potential investors in Senegal and abroad; (iv) planning and implementing an international and domestic marketing campaign; and (v) assisting the Government of Senegal in doing due-diligence reviewing, ranking bids, and negotiating final terms and legal documentation. To this end, the Government has appointed a transitional administration to manage SONACOS and to assist in its privatization.  18 53. Two important steps have already been taken by Government to liberalize the marketing of groundnuts. First, SONACOS has publicly announced its willingness to purchase groundnuts at the factory gate at an appropriate factory-gate price. Second, the Government has liberalized the importation (in September 1994) and price (in January 1995) of vegetable oil thereby ending the prior authorization for vegetable oil imports and liberalizing vegetable oil prices. 54. Determination of oilseed groundnuts producer floor prices. The announcement of producer floor prices prior to the planting season provides groundnut farmers helpful information on which to base production decisions. To this end, the Government has initiated a study to: (i) analyze in detail the past evolution of and prospects for international groundnut oil prices, (ii) make projections on domestic groundnut production taking into account the planned reforms in the sector, and (iii) propose a scheme and a formula for determining floor prices. The terms of reference for the study specify that the scheme should: (i) be entirely managed and financed by industry, (ii) be voluntary, and (iii) require only infrequent interventions to support the floor price. The Government has undertaken to abide by these three principles. 55. Actual prices will be announced weekly by the groundnut oil producer(s) and will be based on spot prices. Thus, the Government will no longer have a direct role in the determination of groundnut producer prices. Annex III provides the rationale for determining floor prices for groundnuts, a detailed description of the objectives of the proposed groundnut floor price support scheme. The Groundnut Price Stabilization Fund (FGPA) will be restructured and transformed into a Floor Price Support Fund which will be an industry-managed scheme (managed by the Comite national inter-professionnel de l'arachide) to support announced floor prices. Part of the STABEX funds of the European Union would be directly channeled to the floor price support fund. The fund would also be funded by contributions form oil millers. Once the fund reaches its maximum level of CFAF 6 billion, all contributions would cease. It is expected that the floor prices will be sufficiently low that FGPA support will be necessary only in very exceptional cases. 56. Under the AG-SECAL further competition will be introduced into the groundnut market by permitting the unrestricted export of unprocessed oilseed groundnuts, for which there is an active export market. In view of the current sizable excess capacity which exists in the groundnut oil industry, however, the timing of the liberalization of exports will await discussion with the new private sector owners of SONACOS. The Government, in its LADP, also intends to liberalize the confectionery groundnuts sector. Confectionery groundnut activities will be the sole province of private firms, with government actions limited to creating new seed varieties, encouraging expansion of production and creation of a "Groundnuts from Senegal" label. The Government has identified four regional production zones--Bassin Arachidier, Kolda, Tambacounda, Vallee du Fleuve Senegal--and within these zones, private firms will be free to operate subject to industry- established quality standards for confectionery groundnuts. The Cotton Subsector 57. Current Situation and Policies. Cotton is the second largest agricultural export crop after groundnuts. Compared to other countries in the sub-region (such as Mali and Burkina Faso),  19 cotton production was introduced much later (late 1960s), and is relatively undeveloped (average annual production of seedcotton of around 50,000 tons). There is, however, significant potential for increasing production especially in the South East. The slow development of cotton production in Senegal and the significant increase in output during the last three years (at a time of depressed groundnut prices) is testimony to the fact that cotton competes with groundnut production as an altemative source of cash incomeI1. The cotton subsector is dominated by SODEFITEX, the ginning parastatal (75% Government-owned, and 25% CFDT-owned -- the French cotton development company), which is also a de facto fiber export monopoly. Until now, the private sector has not shown any desire to enter into cotton ginning and fiber marketing despite the fact that there are no legal barriers to entry. 58. Like other countries in the sub-region, Senegal's cotton has been in a difficult financial situation, especially from 1990 up to the recent devaluation of the CFA franc, due to the precipitous drop in the world market prices for cotton fiber and the overvaluation of the CFA franc. But even prior to the collapse of international fiber prices, surplus years were rare for the subsector. SODEFITEX recorded substantial deficits from 1984 through the 1989/90 cotton campaign despite the fact that fiber prices were particularly high during this period (CFAF 525/kg in 1989/90, for example). The result was that before the onset of the cotton crisis in 1990/91, SODEFITEX had an accumulated deficit of over CFAF 9 billion. The reasons were varied: high costs of production partly explained by producer prices delinked from international prices; a broad rural development mandate assigned to SODEFITEX which required the company to play a public service role not directly related to cotton production; and the failure of Government and CPSP to meet their commitments for compensatory transfers to SODEFITEX. 59. On-Going Reforms. The quasi-permanent financial crisis in SODEFITEX led the Government to put in place an emergency adjustment program (lettre de mission) in 1987 with assistance from the French aid agencies and, particularly, the Caisse Fran,aise de Developpement (CFD). These reforms, supported by all donors but under CFD leadership, emphasized the following: improvements in technical performance and internal (SODEFITEX) economy measures; the linking of seedcotton prices to international fiber prices and the elimination of a direct Government role in the setting seedcotton prices; the demarcation of SODEFITEX costs between commercial activities and development (public service) activities in relation to financing and distribution of benefits; greater management autonomy relative to the state; and greater involvement of producer organizations in the management of all activities related to the subsector. Currently, producer organizations are well represented on the committee responsible for determining producer prices. A third lettre de mission covering a four-year period was signed on March 16, 1992 which provides the framework for AG-SECAL reforms (Annex III). 60. The devaluation ended the severe deficits of this sector. However, further cost cuts will be sought to enable SODEFITEX to maintain its international competitiveness. These will include further staff reductions, completion of the transfer of the SODEFITEX headquarters to the production zone, a program for refinancing or writing off SODEFITEX liabilities, and further reduction of production costs. These costs have already been reduced from 757 CFAF/kg in 11 With the exception of the last three years, groundnut prices have, historically, been set artificially high.  20 1986 to 449 CFAF/kg in 199312 under the Third Lettre de Mission. Prices paid to farmers are linked to prices obtained for ginned cotton on domestic and export markets and the Government no longer has a direct role in setting producer prices for seedcotton. The producer price13 is announced at the beginning of the cotton campaign and a fully (donor- and industry-) funded and tightly controlled floor price support fund provides a buffer between the farmer and the external market. 61. Proposed Reforms. The AG-SECAL will support the successful carrying out of the Third Lettre de Mission. In particular, concerning the third Lettre de Mission, the Government's strict application of the provisions for the setting of cotton fiber prices for local textile industries will be an important element in assessing the Government's performance in implementing its LADP. Moreover, under the AG-SECAL, the Government will prepare a medium-term Action Plan for further reforms in the sector. The Action Plan is expected to be finalized in time for the 1996/97 cotton campaign. 62. The Action Plan, like its predecessor Lettres de Mission will continue with improvements in technical performance and internal economy measures, and put even more emphasis on the involvement of producer organizations in the management of the subsector. The producer organizations will increasingly take over the major role in the primary collection, marketing, and transport of seedcotton. Donors are, however, in agreement that it would be premature to consider the privatization of SODEFITEX during the preparation of the Action Plan. However, during the preparation of the action plan, the possibility of offering the capital of SODEFITEX for sale to producer organizations and/or to private textile industrialists will be considered. The implementation of the third Lettre de Mission in accordance with its terms, and the preparation of a medium-term action plan for the cotton sector, acceptable to IDA. are conditions of the release of the Second Tranche. The Sugar Subsector 63. Current Situation. A private company, CSS, enjoyed a monopoly of production, import, distribution and various fiscal privileges in exchange for a commitment to develop an industry capable of supplying the entire local market, under a long-term convention with Government which runs to the year 2005 (see Annex III). SAL II recommended the review of existing special "conventions" with 12 enterprises, including CSS and that review led to the preparation of an operational and financial audit of CSS under SAL III. Imported sugar makes up the difference between domestic production and consumption. Until August 199314, margins on this product, which rose to 200 CFAF/kg before devaluation, were split, with 60% going to the Government and 40% to CSS. 12 Due to the January 1994 CFAF devaluation (affecting imported inputs), and the increase in producer prices for seedcotton, production costs increased by an estimated 40% in 1994 13 The "producer price" in cotton is composed of two parts: the floor price and a rebate (ristourne) based on the results of the previous year's campaign. This is feasible as the cotton sector is vertically integrated and there is only one company (SODEF1TEX) involved in ginning and the commercialization of cotton fiber. 14 August 1993 coincided with the launching of the (Sakho-Loum) "Plan dUrgence", when the Government, in agreement with the CSS, decided to retain 100% of the import margin to make up for significant budgetary shortfalls.  21 64. Proposed Reforms. CSS is now a technically efficient operation providing an "economic growth pole" in the Senegal River Valley. However, the CSS convention has overprotected the enterprise with the result that the domestic consumer price is still more than twice the world price of sugar. In the LADP, the Government proposes to liberalize the sugar subsector by eliminating all barriers to entry in the: (i) cultivation of sugar cane for the purpose of producing sugar, (ii) sugar processing and refining, (iii) imports of sugar, and (iv) marketing of sugar. 65. To these ends, the Government signed a new agreement with CSS in January 1995. This new agreement: (i) eliminates all monopoly privileges on sugar cane production, sugar imports, sugar processing and refining, and sugar distribution; (ii) eliminates prior authorizations for imports and replaces them with tariff protection as described in Annex III; (iii) eliminates all special fiscal and tax benefits15 accorded to CSS and changes the latter's status to that of a common law enterprise; and (iv) fully liberalizes prices and margins in the sugar market. As a result of the new agreement, it is expected that consumer prices will, at most, be the same in nominal terms in 1995 as in 1994 and will decline nominally by about 4% from 1995 to 1999. Tariff production accorded to CSS in this new agreement expires in five years and was provided to CSS to enable it to adjust to the elimination of its monopolistic situation. IDA expects that after this transitional period, these special measures of protection would no longer be necessary due to: (i) the new investment being undertaken by CSS to further reduce its costs of production; and (ii) the expected removal of subsidies on sugar production in Europe and the U.S. In real terms, the decline will be much larger, depending on the rate of inflation in Senegal. The liberalization of the sugar sector is an important part of the program and the continued adherence to policy reforms in the sector will be a critical consideration in assessing progress in implementing the LADP in connection with the release of the Second Tranche. The Fruits and Vegetables Subsectors 66. Current Situation. The fruit and vegetable subsectors of Senegal have high potential and increased exports of high value added crops would help orient the entire economy towards an export promotion stance. The devaluation has increased the financial profitability of production. However, because the sub-sectors are relatively small, further analysis is needed to better understand their export potential (see Annex III). 67. Current Government Policies. Government's determination to leave these subsectors strictly to private initiative and not to interfere in the pricing, import, and marketing of products was adhered to except for three products characterized as "produits de grande consommation" -- potatoes, onions, and bananas. Until recently, imports of these products were controlled (with prior authorizations) during six months from October through April when there is sufficient domestic production to meet demand. The rationale for these measures was to avoid domestic prices from being depressed through "dumping" by exporters outside of the West African Economic and Monetary Union (WAEMU). 15 The only exception is that for the next two years (1995-96) the reinvested profits of CSS are 100% tax exempt as opposed to the 50% provided for in the investment code.  22 68. During discussions preparing the AG-SECAL, the Government proposed to eliminate these prior authorizations and rely on protective tariffs (not to exceed 30%) on imports of potatoes, onions, and bananas originating from zones outside of the WAEMU. These actions have already been completed. Prior authorizations on potatoes and onions were removed in December 1994 (Decree 94-1426) and those on bananas were removed in January 1995 (Decree 94-1426). Input Policy. 69. Past Reforms. SAL I called for a reduction in input subsidies for all inputs except fertilizers, and testing input supply through village cooperatives. Fertilizer subsidies were limited under SAL II, and were phased out except for cotton under SAL III. Subsidies for cotton inputs were meant to be phased out with a slight delay, but this program of subsidy reductions was halted by Government in 1989. Import controls on compound fertilizers were phased out in 1989/90. Under SAL II, the public enterprise, SONAR, established in 1980 to handle input supplies, was liquidated. Chemical fertilizer use fell by 75 percent over the five years after the abolition of subsidies, which coincided with a decline in cash crop prices and the initiation of stricter credit recovery practices for input credits. 70. Proposed Reforms. Reduced fertilizer use is contributing to declining soil fertility especially in the groundnut basin. It is expected that the Government's withdrawal from input supply and complete liberalization of the sector will promote greater competition and reduce prices. Moreover, in the past, full liberalization of input markets has been constrained by limited access to credit. Therefore, complete privatization of the rural credit system is necessary and parastatals, such as SONAGRAINE (which is, in any case, to be privatized or liquidated), should no longer serve as intermediaries between the producers and the banking system for input credit. Furthermore, the Government proposes, in its LADP, to significantly reduce duties on imported inputs (or raw materials and intermediate inputs for local manufacture). The Government granted exemption from duties on imported agricultural inputs in August 1994. Elimination of all prior authorizations (not required for health. phytosanitary or environmental protection) for the import of agricultural inputs is a condition of Second Tranche release. Land Tenure and Natural Resource Management 71. Government policies in this area have four objectives: increasing local participation in natural resource management, improving security of land right ownership, strengthening capacity for managing natural resources and increasing agricultural production. The Government also seeks to give local communities more control over their natural resources, including training programs for rural councilors. 72. SAL III called for a review of existing land tenure regulations with a view to adjusting regulations to permit access to land by investors and establishing procedures to levy fees to cover part of the capital costs of developing irrigated land. This review was not completed. There has been little evolution in land tenure administration since the replacement of the French colonial tenure model in 1964. There is a consensus that the present system has major flaws and areas of  23 ambiguity, and that the establishment of clear uncontested user rights, while very difficult, is a potential source of illicit rents. Initiatives such as that of SAL III have foundered on inertia fostered by the complexity of the system, the vested interests in maintaining its ambiguity, and the lack of any clear focus of responsibility for making improvements. 73. Proposed Actions. Under the AG-SECAL (financed through a PPF) a major study of land tenure practices is being carried out. The aim of the study is to institutionalize a process of improving land tenure practice by identifying measures which can be put into operation in the short-term. Action research is being carried out by implementing pilot operations and evaluating their results to identify further measures of general applicability. To underline the importance that the Government attaches to sustainable natural resource management, a high level national environmental council (Conseil National Superieur de l'Environnement et des Ressources Naturelles or CONSERE) has been created. The environmental council is to elaborate a National Environmental Action Plan (NEAP) with the active participation of the population and with the donor community, particularly USAID. IDA will support the Government's natural resource management program as it evolves through operations such as the proposed Senegal Valley Development Project (FY 97) and Agricultural Services and Professional Organizations Project (FY 97). Other Agricultural Reforms 74. A three-year investment program was introduced in the mid-1980s under SAL II and III. It proved to be an effective instrument for dialogue with Government and donors. This is especially true of the agricultural sector. However, the process was interrupted in 1990 and has only recently been revived as a result of the dialogue with the World Bank and the IMF in the context of the PFP. The AG-SECAL supports the regular updating of this program, and further intensification of the dialogue between Government and donors. 75. Past SALs included a number of other actions which have not specifically been brought into the program of the proposed AG-SECAL, either because action is already underway, or because the analytical basis for further action is inadequate. A further consideration, based on the experience of other adjustment operations, is the need to keep adjustment actions focused on a manageable number of objectives. The areas not specifically brought into the program of the proposed AG-SECAL include rural savings and credit, institutional development (streamlining and improving the interventions-- including research and extension-- of Government ministries in the agricultural sector), and the livestock sector. Through the ongoing Agricultural Services Project (Cr. 2108-SE) and Agricultural Research II Project (Cr. 2107-SE), support is being given to both extension and research. SAL III supported actions in the livestock sector and further measures concerning veterinary services are being proposed in the forthcoming Agricultural Services and Professional Organizations Project. In addition, special efforts are underway to make the extension and research services more beneficial to female farmers drawing on the recommendations of a recently-completed sector study on Rural Women in the Sahel and Their Access to Agricultural Extension (Report No: 13532 AFR). Annex IV outlines past reform efforts and some of the current main policy issues in these areas.  24 B. CREDIT FEATURES 76. Credit Amount and Financing. It is proposed that IDA support this project with a credit of US$45 million. These quick disbursing funds will represent about 21% of adjustment financing and 18% of the external financing for the period 1995-96 (para. 13). The counterpart funds will assist Government in carrying out reforms which are expected to have a budgetary impact in excess of US$100 million. These costs include termination allowances of staff of parastatals to be privatized or restructured and eliminating the accumulated debts of SODEFITEX, SONACOS, CPSP, and SAED. 77. The other donors would provide a mixture of fast-disbursing aid, using mechanisms similar to those of the Bank group and financial restructuring funds tied to particular end uses. French aid agencies have indicated a willingness to provide at least US$20 million, and would concentrate in particular on funding the public service role of SAED. On the basis of the Lome IV agreements, the European Union is expected to provide about US$30 million, with emphasis on restructuring the rice and irrigation sectors. The Federal Republic of Germany, through the KfW, may provide between US$6 million and US$12 million of support to reforms under the AG- SECAL. Separately, USAID has already provided US$31 million in support of reforms in the domestic and imported rice sector. C. AGREEMENTS REACHED AND CONDITIONALITY 78. Joint donor missions in August 1994 and January 1995 reached agreement with Government on a number of significant reform measures, many of which have already been adopted during the preparation of the AG-SECAL. Specifically, the following measures have already been implemented: (a) The Government has set up an interministerial committee to monitor the implementation of the AG-SECAL (para. 35); (b) Government has prepared a three-year rolling investment program for the agricultural sector which has been submitted to donors for review (para. 36). (c) Rice. The domestic marketing and pricing of rice have been completely liberalized at both the producer and consumer levels. The Government-owned rice mill (URIC) has been transferred to the private sector (para. 42). In addition, imports have been decontrolled, subject to an import levy and prices have been liberalized de facto. Traders can buy imported rice directly from CPSP warehouses and the port of Dakar. A study defining a  25 new role and establishing staffing needs of a CPSP without a role in rice importing and marketing has been completed and the recommendations of the study accepted by Government. CPSP's procurement practice of negotiating private contracts with designated private operators for rice imports (marche gre a gre) has been terminated and an open and competitive procurement system has been set up (para. 44). Broken rice transport subsidies have been eliminated, retail margins have been liberalized and administered wholesale prices for imported broken rice have been eliminated (d) Groundnuts. Significant cost-reduction measures have been implemented in the groundnut sector, particularly in relation to the collection and delivery of groundnuts to factories. These activities have largely been transferred to cooperatives and the private sector. Preparatory studies have been undertaken on the restructuring of the groundnut subsector, including the industrial activities, revision of the protocol between Government and oil mills, and revision of the operation of the guarantee fund. The first two phases of a study defining the conditions of privatization of SONACOS, undertaken by Price Waterhouse with USAID financing, were completed in May 1994. These phases set out principles, main steps and calendar to be followed in order to bring SONACOS to the point of sale (para. 49). The privatization dossier has been transmitted to the Privatization Commission. The third and final phase of the SONACOS privatization study was begun in January 1995 (para. 51). In addition, the Law on Privatization has been amended to permit the privatization of SONACOS (para. 51). The Government has appointed a transitional administration to manage SONACOS and to assist in its privatization (para. 52). SONACOS has publicly announced its willingness to purchase groundnuts at the factory gate at an appropriate factory-gate price (para. 53) and, with assistance from the European Union, Government is defining a mechanism through which producer prices for groundnuts will be linked to world prices. In addition, all prior authorizations for the import of vegetable oils have been terminated (para. 53); (e) Sugar. A new agreement was negotiated between Government and CSS in November 1994 and signed by both parties in January 1995 (para. 65). (f) Fruits and Vegetables. Government has proposed a mechanism, acceptable to IDA, defining the modalities (other than through quantitative restrictions) for protecting the domestic production of potatoes, onions and bananas (para. 68). (g) Government has also established action plans and timetables for the major adjustment action, particularly the liberalization of rice imports, and the privatization of SONACOS. These actions, as well as the overall agricultural development strategy, are reflected in the Government's draft Letter of Agriculture Development Policy (Annex II) and the proposed Action Plan annexed to it. The policy matrix (Annex I) summarizes the main policy actions supported by the AG-SECAL.  26 Conditions for Tranche Release 79. There will be a select number of key time-bound conditions for tranche release. All other actions, including the implementation matrix, are incorporated in the Government's Letter of Agricultural Development Policy and annexed Matrix of Measures, satisfactory implementation of which will be a condition for any release of funds. A general condition of Board presentation and tranche release will be that the macroeconomic framework remains consistent with the objectives as defined in the PFP (para. 11), providing a safeguard in the event that a major economic decline calls into question the rationale of the program. Second Tranche Release conditions are as follows: (1) Rice : (i) full liberalization of the import of broken rice (para. 45); (ii) implementation of an import levy imposed on broken rice set at no more than 46% of the average Dakar c.i.f price over the relevant preceding two months (para. 46); and (iii) elimination of CPSP's role in the import and distribution of broken rice, and the closure of all of CPSP's warehouses and marketing facilities (para. 45); (2) Groundnuts : bringing SONACOS to the point of sale, namely: (i) valuation of the enterprise and preparation of a prospectus or information memorandum for the enterprise; (ii) solicitation, directly or through advertisement(s) in appropriate newspapers, of offers from the private sector for the sale of all the SONACOS shares held by the Borrower and other public sector entities; (iii) evaluation of any offers received; (iv) selection of a successful bidder(s) in accordance with procedures for award consistent with the LADP; and (v) invitation of the successful bidder(s) to enter into negotiations (para. 51); (3) Agricultural Inputs : elimination of all prior authorizations (except to the extent required for health, phytosanitary or environmental protection) for the import of agricultural inputs (para. 70); (4) Investment Program : Government updating the three-year rolling investment program for the agricultural sector which shall be transmitted to IDA (para. 36); and (5) Cotton : implementation of the third Lettre de Mission between Government and SODEFITEX in accordance with its terms, and the preparation of a medium term action plan satisfactory to IDA and meeting the objectives set forth in the LADP (para. 62). Disbursement and Procurement 80. The IDA adjustment component of US$45 million would be disbursed in two tranches. The first (US$25 million) upon effectiveness, is expected to be released in June 1995. The second  27 is expected approximately 18 months later, providing that conditions of tranche release have been met. 81. The adjustment credit would finance 100 percent of the c.i.f costs of eligible goods (excluding luxury consumer goods, defense items and goods intended for military use). On an exceptional basis, to allow for timely disbursements, no limitation is placed on petrol or food imports. Public and private sector imports would be eligible, except for: (a) a negative list; (b) imported goods already financed under bilateral or multilateral credits; and (c) contracts under US$5,000 equivalent. 82. Procurement procedures are designed to allow rapid use of the project proceeds and efficiency and accountability in the process. Under the adjustment credit, eligible imports by public agencies exceeding US$3 million and those made by the private sector exceeding US$3 million will be subject to Simplified International Competitive Bidding (ICB). Procurement by public agencies for contracts below the threshold will follow standard Government practices that have been acceptable in the past. Eligible general imports by the private sector, below the threshold, will be procured in accordance with normal commercial practices. Whenever possible, quotation from eligible suppliers from at least two countries will be sought. Single source purchasing will only be permitted for proprietary equipment or where compatibility with existing equipment requires standardization. All contracts above a threshold of US$10 million will be subject to the Bank's standard prior review procedures. Procurement documentation for contracts over US$3 million for imports by public agencies and US$3 million for imports by the private sector will be submitted together with withdrawal applications and other documents for payment purposes. Documentation for contracts under this threshold will be maintained for ex- post review by the Bank under the procedure for Statement of Expenditure (SOE) as explained in para. 84. This documentation includes: (i) a brief description of procurement procedures; (ii) an evaluation summary giving the number of bids received; (iii) a comparative statement of prices received; (iv) dates of contracts and payments; (v) a copy of the contract; (vi) a copy of the invoice; and (vii) any other documentation required by disbursements. A pre-shipment agency is in place and operating satisfactorily. All imports will be subject to pre-shipment inspection. 83. Disbursements. The adjustment credit will finance 100% of the cost imports. Public and private sector imports will be eligible except for those included in the negative list agreed on during negotiations and imported goods already financed under multi- or bi-lateral credits. Disbursement categories, credit amount and the share of expenditures to be financed by IDA would be as follows:  28 DISBURSEMENT CATEGORIES Category Amount of the % of Total Credit Allocated Expenditures (SDR Equivalent) Goods 28,650,000 100% of foreign expenditures Refunding of the Project Preparation Advance (PPF) 350,000 100% Total 29,000,000 84. The credit will be disbursed on the basis of fully documented applications for contracts in excess of US$3 million for imports by public agencies as well as by the private sector or on the basis of SOEs for expenditures below these amounts. The minimum amount of applications will be US$500,000. The Borrower will indicate on the statements of expenditures the nature and origin of the goods as well as the payment date, and will maintain all relevant supporting documentation (invoices, import certificates and evidence of payment) for review by supervision missions. In order to permit timely disbursements in the amount needed to keep the program on track, an amount of US$8 million of the credit would be eligible for retroactive financing of imports paid no earlier than February 15, 1995. The closing date for disbursements under this credit is June 30, 1997. Accounting and Auditing 85. The Ministry of Economy, Finance and Planning would maintain separate accounts related to the sectoral adjustment credit. These accounts would be audited annually by independent external auditors acceptable to IDA. The audits would: (i) verify that the conditions of the credit agreement have been respected; (ii) determine whether the accounts have been prepared and maintained in accordance with sound and generally accepted accounting principles and practices acceptable to IDA; and (iii) determine whether records maintained by the Ministry of Economy, Finance and Planning permit the identification of all receipts and payments under the sectoral adjustment credit. A certified copy of the accounts together with the audit reports would be submitted through the Ministry of Economy, Finance and Planning within six months after the end of each fiscal year.  29 Impact of the Program on Vulnerable Groups. 86. The impact of the 1994 devaluation of the CFAF combined with measures already undertaken by the Government under this project has been positive for the agricultural sector. For producers, the prices of groundnuts and cotton have been significantly increased which should, in turn have a positive impact on the real income of farm families. The impact on the real incomes of producers of coarse grains and rice has been more moderate: observed producer prices for paddy and the coarse grains increased, on average, by less than 30%. The impact on consumer prices, especially rice, was dampened immediately after the devaluation as the price increase for imported broken rice was limited administratively. The prices of all categories of rice are now liberalized but they have remained at about the same levels as the immediate post- devaluation administered prices. They are expected to stabilize at about 5% above current levels. 87. The increase in rice prices has had a negative impact on consumers and a switch from rice towards traditional cereals has been observed in many parts of Senegal. Moreover, since January 1994, an increase in malnutrition has been documented in urban areas. Many of the policy reforms supported by this project are expected to have a moderating impact on prices of agricultural commodities and minimize the likelihood of disruptive market failure. Among such measures, the following are expected to have the most far-reaching effects: (i) privatizing the production, processing, and marketing of agricultural products with special emphasis on the parastatals involved in the groundnuts and rice subsectors (SONACOS, CPSP and URIC) which, in the past, have proven inefficient producers; (ii) liberalizing the domestic production, distribution, and imports of sugar and putting in place a tariff structure which ensures declining consumer prices in nominal terms; and (iii) eliminating all prior authorizations for trade in agricultural commodities and inputs. Nevertheless, these measures will not be sufficient to address the impact of the devaluation and this program on the most vulnerable groups, especially in the urban areas. To ensure that population groups at risk of nutritional inadequacies are identified and targeted interventions are put in place, IDA will support a Community Nutrition Project (FY95) which will include a monitoring system to detect trends in malnutrition. Environmental Aspects 88. In conformity with IDA policies for adjustment operations, no environmental rating has been assigned. Under the AG-SECAL the Government proposes to prepare and implement a schema for and to adapt existing legislation to an integrated and participative natural resource management. The preparation of the schema and the adaptation of existing legislation for natural resource management are expected to be completed in December 1995.  30 Implementation Agency 89. The Ministry of Agriculture would have overall responsibility for project execution, and its recently established Agricultural Policy Unit would be strengthened through support from other donors (USAID in particular) and the proposed Agriculture Services and Professional Organizations Project (FY97) in order to carry out the long-term perspective study and to monitor and expedite project implementation. It will continue to work closely with the Ministry of Economy, Finance and Planning. A working group has been established consisting of a representative of the Ministry of Agriculture, the Ministry of Economy, Finance and Planning and the Presidency to act as a counterpart for supervision missions. D. CREDIT BENEFITS AND RISKS 90. Many of the reforms included in the proposed program have long been on the agenda in Senegal. While it is impossible to guarantee that what was not been done in the past will be done this time, the Region's assessment is that the events of the part few months, the implementation of measures long delayed and the recent appointment of a national unity Government make the remaining risks well worth taking. First, compared to the past, the political context is different and the Government's commitment to reform much stronger, as evidenced by many difficult measures already taken by the Government. Among these, the most notable are the re-negotiation of the sugar convention with the CSS; the introduction of private sector imports of broken rice and the total liberalization of the domestic rice sector; the endorsement of the National Assembly to privatize SONACOS and the significant steps already taken by the Government to that end, including the appointment of a transitional administration to manage SONACOS and to assist in its privatization. Second, the reform program to be supported by the credit is heavily front-loaded and all Board presentation conditions have been met. As regards the risk of backtracking, three developments have contributed to mitigate this risk. The first is the intense debate which took place in Senegal in the fall of 1993 around the austerity measures proposed by the Government. Public opinion has been educated on the costs of monopolies and there is political pressure from below to end such practices. Second, the changes in prices resulting from the devaluation have fundamentally altered Senegal's economic picture. However, doubts remain on the depth of commitment of the civil servants to a program destined to curtail significantly their power and authority. Third, the reform program has the endorsement of all the donors active in providing assistance to Senegal's agricultural sector. But the proposed reforms also have internal constituencies: (i) they are supported within the administration by a new generation of forward looking technicians; and (ii) they emanate from the private sector which is organizing itself to obtain a policy environment more conductive to the development of its activities.  31 E. RECOMMENDATION 91. I am satisfied that the credit will comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Richard H. Frank President ad interim Attachments Washington, D.C. May 11, 1995  SENEGAL: AGRICULTURAL SECTOR ADJUSTMEN CREDIT (1994-971 pOLICY AGENDA MATIX Policy Area Policy Objectives Actions Already Taken Actions to be Taken for Release of Second Tranche 1. Domestic marketing Liberalize prices and marketing of Satisfactory evidence that the prices and and pricing policies domestically produced agricultural processing of paddy have been products completely liberalized including: * abandonment of Government administered paddy prices, * transfer of ownership and full private operation of SAED mills, * end of CPSP operations in domestic rice, and end to all subsidies. * the elinination of transport subsidies and liberalization of retail margins of broken rice; and abandonment of administered wholesale prices for broken rice SONACOS publicly announcing its willingness to purchase groundnuts at the factory gate at an appropriate factory- gate price. Effective implementation of SONACOS's announced program of purchasing groundnuts at the factory gate at appropriate factory-gate prices 2. Public Agricultural Improve the efficiency of public Government has prepared a three-year Government updating the three-year rolling investment program for the Investment Program investment and public resource rolling investment program for the agricultural sector to be submitted to IDA (for its review). management. agricultural sector and submitted it to donors for review O H  Policy Area Policy Objectives Actions Already Taken Actions to be Taken for Release of Second Tranche 3. Trade Policies Promote efficient import Termination of CPSP's practice of Full liberalization of imported rice markets through: substitution by replacing negotiating procurement contracts with quantitative restrictions with designated private operators for the * full liberalization of the import of broken rice; protective tariffs imports of rice (marche gre ai gre) and * implementation of an import levy imposed on broken rice which the establishment of an open and will, at no time, exceed a cumulative 46% of the average Dakar cif competitive procurement system, price over the proceeding two months. acceptable to IDA. Abandonment of GOS administered consumer prices of imported rice. Definition of a system and level of tariff protection for imported broken and whole rice Li Elimination of prior authorizations for vegetable oil imports Elimination of prior authorizations for the imports of potatoes, onions and bananas originating from zones outside WAEMU and their replacement with protective tariffs which will not exceed 30% of the cif Dakar prices Elimination of all prior authorizations (except to the extent required for health, phytosanitary or environmental protections) for the import of agricultural inputs. 00 1.-h  Polcy Area Policy Objectives Actions Already Taken Actions to be Taken for the Release of the Second Tranche 4. Agricultural Parastatals. Disengage the state from Elimination of CPSP's role in the import and distribution of broken rice, commercial activities and promote and the closure of all of CPSP's wharehouses and marketing facilities. role of the private sector Initiate an irreversible privatization (i) Adoption of conclusions and The bringing of SONACOS to the point of sale. Specifically, this means process of SONACOS, through: recommendations of the phase II study on that the Government has : (i) carried out a valuation of the enterprise the privatization of SONACOS, and prepared a prospectus or information memorandum for the enterprise; (ii) solicited, directly or through advertisement(s) in (ii) Referral of the SONACOS file to the appropriate newspapers, offers from the private sector for the sale of all National Privatization Commission, the shares held by the Borrower and other public sector entities; (iii) evaluated any offers received; (iv) selected a successful bidder(s) in (iii) Finalization of the main steps and accordance with its procedures for award; and (v) invited the successful calendar (acceptable to IDA) to be bidder(s) to enter into good faith negotiations. followed in order to bring SONACOS to the point of sale, (iv) Amendment of the law to permit the > privatization of SONACOS, and (v) Starting of phase m of the SONACOS privatization study to prepare the dossiers needed for the invitation to tender. (vi) The appointment of a transitional administration to manage SONACOS and to assist in its privatization. The implementation of the third Lettre de Mission between Government and SODEFiTEX in accordance with its terms, and the preparation of a medium-term action plan, satisfactory to IDA and meeting the objectives set forth in the program. P0  35 Annex II (Page 1 of 39) REPUBLIC OF SENEGAL AGRICULTURAL SECTORAL ADJUSTMENT PROGRAM (ASAP) LETTER OF AGRICULTURAL SECTOR DEVELOPMENT POLICY (LADP) APRIL 1995  36 Annex II (Page 2 of 39) INTRODUCTION The Government of Senegal has prepared the present Letter of Agricultural Sector Development Policy (LADP) to define the main lines of its medium- and long-term agricultural development policy, consistent with the macroeconomic development strategy implemented in the new setting created by the change in the parity of the CFA franc in January 1994. To execute this policy it needs the assistance of the World Bank. The macroeconomic objectives adopted in the 1994-97 medium-term economic and financial policy framework paper cover, in particular: - achievement of a positive growth rate in 1994 and an annual rate of about 4.5-5.0 percent from 1995 onward, with a consequent 2-percent annual increase in per capita income which will be reflected in, in particular, an improvement in the living conditions of the most disadvantaged population groups; - from 1996 onward, restoration of the inflation rate (defined in GDP deflator terms) to its low level of 2-3 percent of the preceding years, following an inevitable rise, related to devaluation, projected at 35 percent in 1994 and 8 percent in 1995; - limitation of the external current account deficit (excluding grants) to 9.8 percent of GDP in 1994, followed by a phased reduction to 6.8 percent in 1997; - reduction of the overall budget deficit from the equivalent of 3.9 percent of GDP in 1993 to 1.7 percent in 1996, followed by a situation of equilibrium in 1997 and surpluses thereafter; - measures to promote human resource development and benefit the most disadvantaged population groups. Achievement of these broad objectives is based on more far-reaching liberalization in all sectors of the economy, continued withdrawal by government, rationalizing of public expenditure, and implementation of an investment policy in line with the foregoing guidelines.  37 Annex II (Page 3 of 39) L PLACE OF AGRICULTURE IN THE SENEGALESE ECONOMY The agriculture sector (farming, livestock, forest products) employs 60 percent of the population and is consolidating its place as one of the main driving forces of the Senegalese economy in terms of income, budget and trade balance. For the past two decades, however, the sector has been in a state of crisis. Under the combined effect of a number of factors, agricultural production growth has been unable to outstrip population growth. Over the 10-year period 1981-91 agriculture's growth in volume terms averaged 2.7 percent, more or less the same as that of the population. The shortcomings of agricultural policy and lack of competitiveness of the sector, combined with the fall in basic commnodity prices on the world market, helped to lower rural real incomes and generated trade balance and public finances deficits. The present LADP represents a framework for laying down new guidelines and objectives designed to coffect the disfunctionings noted in previous policies, seize the opportunities offered by the change in parity of the CFA franc and inject growth dynamism into the agricultural sector. IL AGRICULTURAL SECTOR OBJECTIVES The major objectives for the agricultural sector, taking into account the macroeconomic setting, are as folows: sustained agricultural growth of 4 percent a year; improved food security; growth of rural income and creation of jobs. These objectives will be pursued within a framework of better management of natural resources (soil, water, forests) and efficiency in public expenditure. In pursuit of these objectives and with a view to making agriculture more productive and more competitive, the Government undertakes to: (i) deregulate prices and domestic and extemal marketing of agricultural products and inputs; (ii) withdraw in favor of the private sector from all commercial activities in order to devote itself to public service functions such as policy formulation, agricultural research, extension, monitoring and evaluation, policing functions and natural disaster management; (iii) draw up and install a legislative framework that provides land-tenure security for agricultural operations;  38 Annex II (Page 4 of 39) (iv) promote an incentive structure favorable to private investment; (v) ensure the implementation and monitoring of agricultural investment and operating expenditure programs compatible with the available budget resources. 111m IMPLEMENTATION OF THE 1994-97 ASAP The package of measures and the implementation timetable are detailed in the matrix appended to this LADP. To execute this program, the Government intends to implement the following policies over the period 1994-97. 3.1 Domestic Trade and Prices Policy Since June 1994 the prices of agricultural products and inputs have no longer been administered (see table below) except in the cases of oil groundnuts and groundnut seed. For these two products, the producer price from 1995 onwards will be determined by economic agents involved in the subsectors, in relation to world prices. However, to protect the groundnut subsector in the event of a sharp fall in world prices, a study must be made of the introduction of a minimum floor price and the establishment of a fund to support this price. The guiding principles for this study are: the autonomy of the fund, which will be managed by inter-occupational organizations; replenishment of the fund basically from contributions from inter-occupational organizations. As regards consumer prices, the Government has already deregulated those of vegetable oils, rice and sugar. The deregulation of sugar prices was achieved via the elimination of the CSS monopoly as part of the agreement signed with that organization on November 30, 1994. In the case of cereal flour, the deregulation of imports and prices will occur in November 1995 in accordance with the termination of the agreement between the State and the millers on November 29, 1994. 3.2 External Trade Policy The Government undertakes to discontinue all forms of quantitative restriction, in accordance with the timetable given on page 6, by abolishing prior authorizations while at the same time setting up a system of tariff protection of agricultural products and inputs to combat unfair competition on the domestic market.  39 Annex II (Page 5 of 39) Quality control will be strengthened for plant health products in line with the stipulations of the foodstuffs code, with a view to protecting the environment and public health. The tariff protection system will conform to the international commitments entered into by the Government, for example under GATT and UEMOA. With the elimination of the prior authorization system, the system of protection to be implemented permits: for staple products (sugar, edible oils, tomato concentrate and cereal flour) a declining level of taxation over time in order to harmonize it with that applied to the industrial sector, and to conform to the system in effect within UEMOA to promote intra-regional trade. for horticultural products in current consumption (onions, potatoes, bananas), the objective is a level of protection that will stimulate national production and that of the subregion, in the context of a regional market. A protection surtax not exceeding 30% will be applied to these products. In the case of broken rice, the surtax will take the form of a levy adjusted twice a year, as necessary. However, given the social significance of broken rice, and the need to promote competition among local producers, the levy will not exceed 30%. The system of protection will be reviewed after 3 years to reflect productivity gains made by local producers. The following tables summarize the timetables for price deregulation and the abolition of prior import authorizations for all agricultural products and inputs.  40 Annex II (Page 6 of 39) PRICE DEREGULATION TIMETABLE AND DOMESTIC MARKETING MARGINS PRODUCER WHOLESALE RETAIL CONSUMER MECHANISMS PRODUCT PRICE PRICE MARGIN PRICES AND REFERENCES Whole and Feb 1990 Jan 1992 Jan 1992 Abolition of prior intermediate authorization scheme and rice price deregulation Imported Mar 1995 Mar 1995 Mar 1995 Price deregulation broken rice Local rice Jun 1994 Jun 1994 Jun 1994 Jun 1994 - Sale, URIC - Withdrawal, CPSP - Abolition of administered Vegetable____ paddy prices | Vegetable Jan 1995 Jan 1995 Jan 1995 Deregulation, imports and oils prices Wheat flour Nov 1995 Denunciation of Protocol of Agreement, Nov 1994; deregulation of imports and prices, Nov 1995 Sugar Nov 1994 Nov 1994 Nov 1994 Renegotiation of Agreement, Nov 1994; deregulation of imports and prices Oil April 1995 Setting of producer price by groundnuts CNIA, Apr 1995 Seed cotton 1993 Setting of price by support fund committee Cotton 1995 Price mechanism fiber detennined by negotiation between SODEFITEX and clients  41 Annex II (Page 7 of 39) ABOLMTON OF PRIOR AUTHORIZATIONS Products Calendar | Observations Fertilizer June 30, 1994 Decree # 94669 of June 30, 1994 Jute bags June 30, 1994 Decree # 94669 of June 30, 1994 Vegetable oils October 1994 Decree # 941033 of October 4, 1994 Sugar Renegotiation of Decree # 9599 of Jan. agreement, 30, 1995 approving November 1994 Agreement Onions, potatoes, December 1994 Decree # 941426 of bananas December 26, 1994 Broken rice February 1996 Whole rice In effect Decree # 92155 of January 22, 1992 Intermediate rice In effect Decree # 92155 of January 22, 1992 Flour November 1995 Renegotiation of Protocol, Nov. 1994 Deregulation Nov 1995 at latest Polypropylene bags September 1994 Decree # 941171 of October 31, 1994 Table groundnuts Decree # 94668 of June 30, 1994 Cereals Decree # 94668 of June 30, 1994 Oil groundnuts in Export conditions will be husk discussed with future buyers and the CNIA  42 Annex II (Page 8 of 39) 3.3 Withdrawal by Government and Abolition of Monopolies The Government is withdrawing from the activities of production, processing and marketing of agricultural products and inputs in favor of the private sector. At the same time, it undertakes to put the necessary conditions in place to promote fair competition among the various economic participants. In this connection: (i) the CPSP and SAED/URIC withdrew from the local rice sector on June 30, 1994; (ii) the CPSP will complete its withdrawal from the importation and distribution of broken rice by February 1996 at the latest; (iii) SONACOS no longer has a monopoly over the purchase of oil groundnut seed (cf Decree # 88943 of July 8, 1988); (iv) Following the abolition of prior import authorizations for vegetable oils in September 1994 and the deregulation of consumer prices in January 1995, the market will be totally deregulated; (v) In the cases of sugar and wheat, renegotiation of the special agreements will be completed in November 1994. Attention is drawn to the adoption since July 1994 of a series of legislative measures governing domestic and foreign trade aimed at enforcing observation of the practices of fair competition. 3.4 Public Pro2rams and Expenditures in the A2ricultural Sector Withdrawal by the Government, which will henceforth devote itself to public service functions, means that financing of the restructuring of these services and their recurrent charges needs to be better assured, taking due account of the guidelines of the medium-term economic and financial policy framework paper. The restructured ISRA will receive loans to eliminate its liabilities, as per para. 9.4.1 of the action plan. Operating expenditure budgets will promote a better balance between the wage bill and other recurrent charges. Financing priority will be accorded to ISRA for research, extension, training, policy formulation and monitoring-evaluation functions and also those performed by the regional development companies such as SAED, SODEFITEX and the new Casamance regional development company due to be set up. The Government undertakes to prepare an investment program in line with the priorities of the Three- Year Rolling Public Investment Program (PTIP) so as to facilitate the harmonization of financing by donors and the Government respectively. This program will be updated annually and will be reviewed  43 Annex II (Page 9 of 39) by the World Bank and the Government in October each year, along with any other donor that expresses a desire to that effect. The program prepared in November 1994 in conjunction with the donor community covers: rehabilitation of irrigated perimeters with a view to their transfer to producer groups and other socio-occupational organizations; rehabilitation and maintenance of rural infrastructures; - creation of new infrastructures designed to promote productive private investment (for example, PDRG). 3.5 Partnership Between Government and Socio-Occuuational Ormanizations (Or-fanisations Socio-Professionelles) The various types of socio-occupational organizations wish to provide themselves with the necessary skills to promote their own development. In this connection, the Government undertakes to adopt appropriate measures to facilitate the emergence of such organizations and their efficient operation, by: simplifying the procedures for setting up such organizations; furnishing technical support to improve their management capacities; - transferring development-related field missions in step with the emergence of socio- occupational entities able to assume responsibility for them. 3.6 Land-Tenure Security and Managyement of Natural Resources In order to improve the farmers' land-tenure security and ensure sustained management of natural resources, the Government, with the help of the international community of donors, including the World Bank, has undertaken a study concerning a land-tenure action plan. This plan has generated recommendations, in conformity with the Law on Public Property (Loi sur la Domaine National), that should facilitate access to land and land-tenure security in order to promote sustained management of natural resources, including among others: - greater involvement of local communities in natural resource management; - clarification of the concept of working of the land; - promotion of private investment; - execution of a cadastral plan.  44 Annex II (Page 10 of 39) The implementation of the land-tenure action plan will incorporate among other features: - the preparation of agreed plans for the settlement and development of rural areas, particularly in irrigation zones; - access to land for non-residents; - the creation of new pioneer or economic investment zones to allow all private individuals access to land; - consolidation of usage rights via administrative titles of long duration. It is recommended that workshops be organized at various levels (national and local) to disseminate the recommendations of the plan. To promote the sustained management of natural resources, the Government has set up a national consultative framework known as the Higher National Council for the Environment and Natural Resources (Conseil National Superieur de l'Environnement et des Ressources Naturelles - CONSERE) which is responsible for preparing the National Plan for the Environment. This work is being undertaken with the active involvement of the population and the donor community, particularly USAID. When completed, the National Plan will constitute the frame of reference for the integrated management of natural resources. 3.7. Food Security In addition to the measures designed to boost agricultural production, eliminate monopolies so as to enhance market efficiency, and promote a moderate level of taxation on staple items, the Government will take action in order to help the most disadvantaged groups cope with the crisis situations created by natural disasters. To this end, the authorities intend to improve the coordination of warning systems and the efficiency of the information system with respect to improvement of emergency management. In this connection, the CPSP will be eliminated and replaced with a small management and surveillance unit that will monitor the rice market. 3.8 Rural Credit The proposed measures concerning the financing of agricultural activities are in compliance with the general guidelines and objectives subscribed to by the Government in the medium-term economic and financial Policy Framework Paper. To meet the varied credit needs of the rural population, the Government will promote the privatization and diversification of the credit system, together with its decentralization, through mutualistic arrangements at the grassroots level which would have management autonomy.  45 Annex II (Page 11 of 39) For rural credit to be effective, it needs to enjoy a favorable operating environment, created through measures to improve the legislative framework, set up a disaster fund, and provide land-tenure security so that farmers can offer their land and means of production as loan guarantees. The Government will at the same time take action to encourage saving. 3.9 Promotion of the Role of the Target Groups (Women, Young People. Small Farmers) in the Develonment of Rural Production In view of the importance of the target groups in rural life, the Government will promote their more effective involvement in agricultural development through action to provide them with better access to training, health, land ownership, credit and agricultural services. To this end, the program of artisanal and semi-industrial processing of agricultural products will be strengthened, as will the system of extension services specific to rural women. The Government has already undertaken programs to assist target groups, such as the development of short-cycle livestock, milk production and market gardening and the alleviation of domestic chores. 3.10 Redefinition of the Agriculture Ministry's Public Services Functions Redefining government's role in the agricultural sector makes it possible to distinguish between the public service functions normally assigned to government and the rural population support functions that can be progressively transferred to socio-occupational organizations and private operators. 1. Public service functions normally assigned to government: - formulating agricultural policies and strategies at the national level and passing them down to the regional level; - agricultural research and extension operations, and basic training; - policing and supervision to ensure compliance with laws and regulations; - data gathering and dissemination (statistics); - action in the areas of major risk and natural disaster prevention and management. 2. Rural support functions that can be progressively transferred to socio-occupational organizations and private operators rural outreach, leadership and organization; technical assistance;  46 Annex IT (Page 12 of 39) - technology diffusion; These guidelines will be reflected in a program of restructuring of the Ministry of Agriculture through: - division of functions; reduction of the central structures (reductions in functions, agencies and staffs); reallocation of services to the regional and local levels. This restructuring will promote: a budget resource allocation that enhances the efficiency of the regional and local services; effective assumption of responsibility by the socio-occupational organizations for the functions transferred to them. 3.11 Re2ional Inte2ration Policv Senegal intends to promote development of the regional agricultural produce markets through action to upgrade the transportation and marketing infrastructures and strengthen cooperation in agricultural research through the Conference of African Authorities on Research in Africa (Conference des Responsables Africains de la Recherche en Afrique--CORAF) and the Special Program for Agricultural Research in Africa (Programme Special pour la Recherche Agricole en Afrique--SPAAR). To this end, Senegal has joined with 16 other countries in the framework of the Conference of Ministers of Agriculture of the Western and Central African Countries (Conference des Ministres d'Agriculture des Pays de l'Afrique de l'Ouest at du Centre) with a view to promoting intraregional exchanges of views and strengthening the competitiveness of the region's agricultural products IV. ANALYSIS OF OBJECTIVES BY SUBSECTOR The program includes a series of measures to be taken in accordance with a precise timetable for each agricultural subsector. The main subsectoral activities may be summarized as follows: Cereals Deregulation of prices and domestic trade. Withdrawal of the SAED and CPSP from local rice marketing and processing, and progressive deregulation of broken rice imports.  47 Annex II (Page 13 of 39) Setting up a tariff protection scheme. Groundnuts Sale of SONACOS in line with the conclusions of phase 3 of the study on the privatization of that agency which will define, among other criteria, those pertaining to: a) the strategic attributes of the buyer: technical competence, financial capacity, knowledge of the international vegetable oils market, etc; b) continuation and development of the industrial activities of crushing and refining of groundnut oil for a period of at least 5 years; Deregulation of domestic groundnut-seed marketing. lDeregulation of vegetable-oil importation and trading. Cotton - Consolidation of the restructuring measures already undertaken and deregulation of the transfer price of fiber to local spinners. Sugar Abolition of prior authorizations and determination of a suitable level of protection. Revision of the taxation and customs systems. Horticulture Promotion of domestic production (onions, potatoes, bananas). Development and diversification of exports (beans, strawberries, melons, flowers). Livestock Privatization of veterinary medicine services and upgrading of marketing circuits by: lifting administrative constraints; preparing a program of action to revitalize and develop livestock production.  48 Annex II (Page 14 of 39) V. ATTACHMENTS 11 11M and IV are an integral part of the LPDA. Washington, D.C. April 21, 1995 For the Government of Senegal (The original letter in French is signed) Isl Robert Sagna Minister of State Minister of Agriculture  49 Annex II (Page 15 of 39) Attachment I (Page 1 of 1) RICE SUBSECTOR Mechanism of Tariff Protection of Local Rice Senegal has adopted the objective of promoting local rice production. To achieve this it is necessary both to raise the subsector's productivity and to enhance its ability to compete with imported rice. However, in order to reconcile producer and consumer interests, this protection rate needs to be adjusted. This is why the protection system proposed below is to be applied for three years and will be subject to revision with a view to its gradual reduction, which will encourage producers to improve their production costs. Proposed protection system - the protection rate will comprise the normal 16% duty plus a levy ranging between 0 and 30%, which, cumulatively, may not exceed 46%. These rates are applicable to the reference price, as defined below. - the c.i.f reference price will correspond to the average of weekly quotations for special Al- quality broken rice in current CFA francs calculated on the basis of the last two months prior to adjustment (September-October and April-May). - the tariff scale will be adjusted twice a year prior to each harvest (November-June) Mechanism: Reference Price (SP) Normal Duty Levy Cumulative SP > F 160/Kg 16% 0% 16% SP >F 150- 160/Kg 16% 5% 21% SP > F 140 - 150/Kg 16% 10% 26% SP >F 130- 140/Kg 16% 15% 31% SP > F 120 - 130/Kg 16% 20% 36% SP <F 120/Kg 16% 30% 46%  50 Annex II (Page 16 of 39) Attachment II (Page 1 of 2) MECHANISM TO SUPPORT A MINIMUM PRODUCER PRICE FOR OIL GROUNDNUTS Principles to govem the establishment of an inter-occupational organization and mechanism to set a minimum producer price for groundnuts. The basic principles to govern the privatization of the groundnut subsector can be listed as follows: 1. The establishment of a truly inter-occupational organization to respond to the concerns of the various categories of operators within the subsector that will enable them to be directly involved in defining and managing groundnut subsector policy. 2. It is essential that it be possible for the operating rules for this new institution to be based on nonral trading relations and to be related to the system of ordinary law rather than special treatment schemes. 3. The institution thus established must allow everyone to take optimum advantage of an open and rigorous management of their activities by being directly involved in the operation of the subsector. 4. The Government may help with the establishment of the inter-occupational organization without necessarily being directly involved in it. 5. Clarification of the current situation must be based on a very clearcut distinction between operations relating to the groundnut subsector and those relating to the import of crude or refined vegetable oils. 6. The establishment of a mechanism to set a minimum producer price is, intended to guarantee producers a certain revenue level, in the interests of maintaining the financial equilibrium of the subsector, and as a result of the establishment of a price support fund. 7. The support fund, which will serve as an inter-occupational tool, will help to support producer revenue levels without any Government intervention. 8. The mechanism to be introduced will totally replace the current Government price-setting system. 9. It is essential that the fund thus set up have sufficient autonomy and that, from the moment of its creation, it be given a significant initial allocation to enable it to fMlly perform its role. 10. The fund must, in its operations, seek to support itself from the fees paid directly by the operators rather than from ad hoc levies on imports; any maintenance of excessive ad hoc levies on  51 Annex II (Page 17 of 39) Attachment II (Page 2 of 2) imports might either lead to the reduction or elimination of certain operators and thus hinder the achievement of a balance among partners. 11. The primaxy purpose of the support fund thus created will be to provide sufficient financial reserves (established without Government intervention) to be able to guarantee the payment of a minimum producer price at mill based on: available reserves (initial amount for the first year or replenished amount for subsequent years); production forecasts; average world prices observed over a significant prior period; a significant decline in these world prices; prospects of transferring Stabex groundnuts. Mechanism for setting a minimum producer price The Government of Senegal has commissioned a general study on the groundnut subsector, which will propose a mechanism for setting a minimum producer price among the vafious agents active in the subsector. This price, while guaranteeing the producer a minimum revenue, will also make it possible to achieve an equilibrium in the subsector. This minimum price will also be calculated in such a way that it reflects any significant falling trend in world prices, so as to be able to manage such a situation on a long-term basis.  52 Annex II (Page 18 of 39) Attachment III (Page 1 of 1) SYSTEM OF TARIFF PROTECTION FOR HORTICULTURAL PRODUCTS ONIONS. POTATOES AND BANANAS Horticulture constitutes one of Senegal's main diversification crops and offers an opportunity to improve its trade balance following devaluation. It is important that all the necessary measures be taken to promote its development and its ability to compete with similar imported products, particularly potatoes, onions and bananas. Domestic production is available on the market from December to July. To protect it, a tariff protection mechanism will be set up in the form of a compensatory duty as defined in the law on measures to safeguard domestic production against illegal trade practices. This duty is set at cumulative rate of 60 percent, taking into account the subsidies and drawbacks of 30% accorded to potatoes and onions originating in the European Union, and of 30% for non- ECOWAS bananas.  AGRICULTURAL SECTORAL ADJUSTMENT PROGRAM - ACTION PLAN Subsector Objective Action to be taken Timetable Comments I. Local 1. 1 Increased production and 1.1.1 Liberalization of prices and of June 1994 D94,668 of 6/30/94 liberalizing cereals improved food security domestic and external trade cereal exports (millet/sorghu m/maize) 1.1.2 Protection of subsector: * Devising of a system to fix a level of FAO will not now finance the study protection against non-ECOWAS cereal that was condticted by an imports (maize/millet/sorghum) and wheat interministerial committee. The system is defined in L. 95.004 of 1/5/95 which amends import-export . Completion of FAO study December 94 duties . Application January 95 1.1.3 Preparation of a local cereals December 94 Various related projects were development program consistent with PASA submitted for evaluation within the guidelines and within the PTIP framework P.I.S.A framework . Implementation Starting in 95 1.2 Promotion of consumption 1.2.1 Definition and application of Starting Vast program to promote the incentives for artisanal and semi-industrial September 94 processing and consumption of local processing of local cereals cereals (FCCAA/ENDA) 0 lb 0 W  Subsector Objective Action to be taken Timetable Comments 2. Local rice 2.1 Increased production and 2.1. I Liberalization of the subsector June 94 Completed (cf Council of improved food security June 94 Ministers, 6/7/94) * elimination of paddy price controls June 94 * elimination of transport subsidy June 94 * liberalization of margins June 94 * CPSP withdrawal from local rice purchasing and distribution 2.1.2 Protection of local rice * Adoption of 46% maximum cumulative protection November 95 Adoption of law and for local rice against imported rice (see Annex 1) publication of decree 2.2 Promotion of private introducing application of investment levies 2.2.1 Reorganization of SAED n * Sale of SAED rice mills May 94 Completed: rice mills sold * Payment of government counterpart May 94 to laid-off staff * Financial restructuring: settlement of liabilities December 95 In progress * Preparation 5th SAED Mission letter 1995 In progress 2.2.2 Privatization of collection, processing and marketing * submission of applications for working capital May 94 Request for financinig from private rice mills submitted to USAID and to FCCAA. CNCAS is currently financing the ivorking capital fund of 15 private rice mills in the ______________________________________________ ____________ valley 0rui C) 0  Subsector Objective Action to be taken Timetable Comments 3. Rice imports 3.1 Improved food security 3.1.1 Liberalization of import and distribution of whole-grain and intermediate rice * Elimination of prior authorization requirement January 92 Completed: Decree 92.155 (Decree 92-155 of January 22, 1992) * CPSP withdrawal from whole-grain and intermediate January 92 Completed: Decree 92.155 rice imports 3.1.2 Flat rate levy on whole-grain and intermediate rice January 92 Levy officially effected imports Evaluation and annual adjustment January 95 Evaluation and adjustment in progress 3.1.3 Liberalization of broken rice distribution U, * Freedom of supply granted to port dealers and CPSP 1993 Coniplectd U' warehouses * Passing on of entire transport subsidy in all regions March 95 Completed along with liberalization of margins * Liberalization of distribution margins in all regions March 95 Completed (cf Decree 95- 292 of 3/15/95) * CPSP withdrawal from broken rice distribution, and March 95 closing of warchouses in all regions except Dakar NB: Termination CPSP warehouse [contracts] Downsizing 0 x  Subsector Objective Action to be taken Timetable Comments 3. Rice 3.1 Improved food 3.1.4 Liberalization of broken rice imports imports security * Trial award to Senegalese private sector of a May 94 Completed quota of 60,000 tons of imported rice * Establishment of bidding procedures for broken August 94 Completed rice imports to replace sole-source contracts * Elimination of controlled wholesale pricing and March 95 Completed: action taken closing of Dakar warehouse earlier than planned (cf Decree 95-292 of 3/15/95 - closing of Dakar wholesale warehouse February 96 3.1.5 Start of CPSP restructuring study, limiting its Study began 8/10/94 functions to: August 94 - monitoring of the subsector; - contracting with the private sector for the import of broken rice only and exclusively in emergencies; - contracting with private sector for buffer stock management for the government's account (private stocks); X N CD CD o0 9  Subsector Objective Action to be taken Timetable Comments 3. Rice 3.1 3.1.6 Restructuring of CPSP imports Improved food 1. Adoption of study findings December 94 The steering committee security adopted the study findings (cf report of meeting on 12/28/94) 2. Creation of Unit for the Management and Surveillance of the Rice In progress Market (CGSMR), which calls for: - drafting of the founding decree; In progress - creation of a supervisory committee made up of the President of the In progress Republic, the Prime Minister (Primature?), MEFP, MA, MCA, SAED AND CGSMR; - closing down of CPSP In progress - financial audit of CPSP May 95 3. Compensating CPSP staff 1995 In progress u. 4. Implementing market surveillance: In progress - international market; - local market (stocks and prices) 5. Private sector buffer stock management (two formulae under study): In progress The two formulae referred to - in the form of stocking tool?; here are currently under - for the government's account with financial costs incurred being study payable by government. Study of ways of involving the private sector in the subsector will help determine the appropriate formula. 6. Emergency imports within the framework of the plan adopted can only February 96 be justified in the event of natural disasters (drought, floods, plagues of locusts, etc.) The rules for market surveillance should make it possible to react quickly in case of diminishing stocks. 7. CPSP withdrawal from broken rice importation February 96(*) *) This date may be brought forward if the compensation of personnel becomes effective. t'. -  Subsector Objective Action to be taken Timetable Comments 4. Groundnuts 4.1.1 Revitalize 4.1.1.1 Preparation of a program to revitalize December 94 Draft program examined at MA coordination 4.1 Oil production groundnut production consistent with PASA meeting on 11/3/94 groundnuts guidelines and within the PTIP framework . implementation January 95 Changes will have to be made in the program 4.1.2 Improve prior to implementation subsector's competitiveness 4.1.2.1 Adoption of a mechanism for setting of In progress A general study of the subsector is in progress minimum producer prices by the different actors in with a view to establishing an autonomous the subsector (General evaluation of the inter-occupational organization responsible for subsector/Study by Government of Senegal-European managing the subsector Union) 4.1.2.2 Elimination of prior authorization September 94 Completed: cf Decree 94-1003 of 11/4/94 requirement for vegetable oil imports liberalizing imports 4.1.2.3 Liberalization of oil consumer prices January 95 Completed: Decree 9577 of 1/20/95 4.1.2.4 Setting up of an import tariff protection January 95 Law 95-004 of 1/5/95 amending duties system for raw and refined vegetable oils of non- ECOWAS origin n 4.2.1.5 Privatization of SONACOS June 93 Completed: cf minutes of meeting of steering committee 5/12/93 - Adoption by the Government of the principle of privatizing SONACOS - Adoption of Phase 2 findings of the SONACOS September 94 Law 95-05 of 1/5/95 authorizing the total privatization study and transfer of the pertinent file to privatization of SONACOS the Privatization Committee - Adoption of SONACOS privatization law January 1995 Completed: cf minutes of meeting of steering committee 11/11/94 - Start of Phase 3 of the study specifying procedures April 1995 Phase 3 has started for implementing privatization - Start of preparation of bidding documents with start April 1995 of phase 3 of study -Issue of call for bids September 95 In progress 0 CD 0  Subsector Objective Action to be taken Timetable Comments 4.2 Groundnut seed 4.2.1 Stabilization and securing of 4.2.1.1 Setting up of an inter-occupational In progress groundnut seed production seed committee 4.2.1.2 Privatization of multiplication and In progress distribution of selected and certified seed 4.2.2 One-third replenishment of seed 4.2.2.1 Maintenance of government 1995-97 stock management of basic seed production 4.2.3 Improvement of seed quality 4.2.3.1 Establishment of regulations December 94 Completed: cf Law 94-81 of concerning seed 12/23/94 establishing regulations governing seed 4.3 Table 4.3.1 Increase table groundnut 4.3.1.1 Development of regional TG In progress groundnuts (TG) production production poles (Groundnut Basin, Kolda, Tambacounda, Senegal River Valley) 4.3.2 TG promotion on world markets 4.3.2.1 Creation of a "Senegal Groundnuts" In progress Q label 4.3.2.2 Completion of subsector June 94 Completed: Decree 94-668 liberalization of 6/30/94 establishing liberalization of TG exports o o  Subsector Objective Action to be taken Timetable Comments 5. Cotton 5.1 Increased production 5.1. 1 Liberalization of marketing of seed Marketing Completed. colton, cotton fiber and seed within a seison Negotiations under way commercially-based framework negotiated 1994/95 concerning local fiber between SODEFITEX and its clients market 5.2 Improved 5.2.1 Review of the third lettre de mission in November 95 Under examination by competitiveness order to prepare the action plan for the cotton the lettre de mission subsector monitoring committee 5.2.2 Rehabilitation and modernization of November 94 Industrial investment industrial units project of the third letter de mission executed. The complementary project has been carried out 0 5.2.3 Reductions in: * labor force Completed overhead In progress - 0 OQ2  Subsector Ob.jective Action to be taken Timetable Comments 5. Cotton 5.2 Improved 5.2.3 Establishment of a flexible pricing Completed competitiveness system with inter-occupational decision on minimum price 5.2.4 Upgrading of fiber quality In progress 5.3 Financial equilibrium of 5.3.1 Refocusing of SODEFITEX' activities Completed the subsector on development of the cotton subsector 5.3.2 Transfer of SODEFITEX headquarters In progress to Tarnbacounda 5.4 Improved producer 5.4.1 Grant from the internal support fund to 1994/95 a0 incomes the subsector 5.4.2 Continuation of SODEFITEX' public 1994/95 service activities in support of rural development in the cotton zone -Ps  Subsector Objective Action to be taken Timetable Comments 6. Sugar 6.1 Improved 6.1.1 Renegotiation of the CSS/Govemment November 94 Decree 95-99 of competitiveness contract, setting course of action and January 1995 approving timetable for: the renegotiated agreement eliminating prior authorization requirement and establishing a protection level overhauling the tax and customs tariff system 03 o  Subsector Objective Action to be taken Timetable Comments 7. Horticulture 7.1 Revitalization of 7.1.1. Identification and implementation of In progress horticultural production horticultural development projects and (vegetables, fruit, flowers, programs consistent with PASA guidelines ornamental plants) and within the PTIP framework 7.1.2 Privatization of production, conservation December 95 and marketing of vegetable seed 7.1.3 Creation of the MarchO d 'Inter& December 95 National (MIN) 7.1.4 Promulgation of the law on measures for November 94 Law 94-68 of 8/3/94 on a safeguarding domestic production against measures in mentioned illegal commercial practices 7.1.5 Elimination of prior authorization December 94 Completed: Law 95- requirement and establishment of a system to 004 of 1/5/95 institutes protect local horticultural products against a protection surtax on non-ECOWAS imports (Decree on prior horticultural products authorization requirement) (Decree 94-1426 Of 12/26/94 liberalizing the importation of potatoes and onions)  Subsector Objective Action to be taken Timetable Comments 7. Horticulture 7.2 Export promotion 7.2.1 Standardization of horticultural products In progress and promotion of a "Senegal" quality label 7.2.2 Study to facilitate credit access for September 94 Conditions governing private exporters of horticultural products credit allocation have been decided on 7.2.3 Overhaul of chartering system to reduce January 95 Following negotiations transport costs with the air pool, a quota has been set for horticultural products 7.2.4 Improvement of transport by air freight In progress and promotion of sea freight (D 0 C , CD, 0  Subsector Objective Action to be taken Timetable Comments 8. Livestock 8.1 Improved health 8.1.1 Govemment withdrawal from veterinary Completed coverage care and privatization of veterinary medicine 8.1.2 Strengthening of the Govemment in February 96 performance of its public service functions: health inspection and monitoring, intervention in outbreaks of epidemics 8.1.3 Distribution of costs of epidemic control Completed (vaccination costs distributed between the Govemment and the stockraisers) ON 8.1.4 ISRA vaccine production unit made In progress autonomous with a view to privatization 8.2 Livestock product 8.2.1 Preparation of a program for livestock December 94 Draft program already promotion and development product revitalization and development, by prepared by Direction subsector, consistent with PASA guidelines de l'Elevage. and within the PTIP framework Document to be reviewed in light of comments made 0 a I0