Rwanda - Emergency Recovery Project (Vol. 1 of 2) : Main report

Docment of The World Bank FOR omCAL USE ONLY Report No. P-6483-RW MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 34.3 MILLLION TO THE RWANDESE REPUBLIC FOR AN EMERGENCY RECOVERY PROJECT JANUARY 12, 1995 MICROGRAPHICS Report No: P- 6483 RW Type: MOP 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 EQUIVALENTS Currency Unit Rwanda Franc (RwF) US$ 1.00 RwF 134 (average for 1994) SDR I US$ 1.43 SYSTEM OF WEIGHTS AND MEASURES Metric US Equivalent 1 meter (m) 3.28 feet (ft) I hectare (ha) 2.47 acres (a) FISCAL YEAR January I - December 31 ABBREVIATIONS BNR Central Bank of Rwanda (Banque Nationale de Rwanda) CCFF Compensatory and Contingency Financing Facility ERC Emergency Recovrery Credit ERP Emergency Recovery Program ESAF Enhanced Structural Adjustment Facility EU European Union FAO Food and Agriculture Organization IDA International Development Association MEf International Monetary Fund NGO Non Governmental Organization PCC Project Coordination Committee PFP Policy Framework Paper RPF Rwanda Patriotic Front SAC Structural Adjustment Credit SAF Structural Adjustment Facility UN United Nations UNDP United Nations Development Program UNHCR United Nations High Commission for Refugees UNICEF United Nations Children's Fund WHO World Health Organization  FOR OFFICIAL USE ONLY RWANDA EMERGENCY RECOVERY PROJECT CREDIT AND PROGRAM SUMMARY Borrower: Rwandese Republic Implementing Agency: Ministry of Finance Credit Amount: SDR 34.3 million (US$ 50 million equivalent) Terms: Standard IDA terms with 40 years maturity Economic Rate of Return: Not applicable Poverty Rating: Not applicable Environmental Rating: C There is no Staff Appraisal Report. A Technical Annex is being distributed together with this report. Emergency Recovery Program (ERP) Financing Plan for 199S Amount Percent (US$ milions) IDA: Emergency Recovery Credit 50.0 25.0 Project Rescturing 25.0 12.5 Subtotal 75.0 37.5 Other donors 1:___ __ _EMSgency support 0 100.0 50.0 Project restiucturing 25.0 12.5 S_u_b_total 125.0 62.5 TOTAL 200.0 100.0 Othea donors include the Aria Development Bank, Belgium, Canad, the Eurpean Union, Geman,y the Nethlands, Swivtemrd, UNDP and the United States. Other donor fim commitnens to date amount to US$ 81 million, from the European Union; the rainder are to be finmed up at a govrtmentUNDP round table meetingscheduledforJanuaiy 18-19,1995. ThIs docU has a metid ditbun and may be used by recipiesant ona the peftane Ifte afficialduties Its content may not oherw be disclosedwitot World Bantborztl-  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCL'IION TO THE EXECUTIVE DIRECTORS ON A PROPOSED EMERGENCY RECOVERY CREDIT TO RWANDA 1. I submit for your approval the following memorandum and recommendation for a proposed Emergency Recovery Credit (ERC) to Rwanda for SDR 34.3 million (US$50 million equivalent), on standard IDA tenns with a matuity of 40 years, to help finance Rwanda's Emergency Recovety Program (ERP). The credit would finance imports of high priority items on a broad positive list and technical assistance for basic governent finctions and for the implemnentation of the ERP. Country Backound 2. Rwanda is a small (26,000 square kilometers), resource-poor and landlocked country in Central Afiica. Its population has been growing at an average of 3.0 percent per annum since 1980. By 1993, the country had the highest population density in Africa (290 inhabitants per square kilometer), while its GDP per capita was estimated at US$195, among the lowest of the continent. In the 1960s and 1970s, Rwanda achieved sustained growth in per capita income and made inportant advances in health and education based on prudent economic managemen, increased agricultural output and generous external assistance. Agricultural success in this period was aided by an expansion of cuttivated lands and by relatively favorable world prices for coffee, which accounts for 80 percent of the country's exports. In the 1980s, however, Rwanda faced a severe financial crisis brought about by a combination of falling coffee prices, the impact of oil price shocks and inappropriate macroeconomic policies. In 1990, the government embarked on a reform program supported by an IDA structural adjustment credit (SAC), approved in FY91, and a Strucural Adjustment Facility (SAF) arrangement with the IMF. The government implemented most of the agreed structural reforms, but the macroeconomic framework was thrown off course owing to civil war in 1991, causing unsustainable fiscal deficits due largely to increasing military outlays. The Emeruencv 3. The Civil War. The Rwandan civil war was the culmination of widespread opposition to President Juvenal Habyarimana, a military officer from a clan of the country's maority Hutu tribe, who had seized power in a coup in 1973. In late 1990, the rebel Rwanda Patriotic Front (RPF) - composed mainly of Tutsis lving in neighboring Uganda - invaded Rwanda, seeldng to militarily overftirow the regime. The Rwandan army fought the imvading group to a standstiL but fighting between the army and the RPF continued on and off through early 1994. Meanwhile, the internal opposition to President Habyarimana organized into a number of political parties, most of which were made up ot and headed by, Hutus opposed to the president.  2 4. In the face of widespread and growing opposition at home, President Habyarimana sought to obtain international support by casting his opponents as Tutsis detenmined to seize power from the Hutus Internaily, Mr. Habyariana increased the size of the army and created a large militia torce, which harassed opposition groups and was responsible for the murder of a number of prominent opposition leaders, most of whom were Hutus. 5. Beginning in 1992, neighboring Tawzania sought to defuse the growing Rwandan crisis by sponsoring peace talks in Arusha between the Habyarimana government and the opposition (including the RPF). In August 1993, a power-sharing agreement was igned in Arusha, but implementation of the accords lagged. An impasse developed and that is where things stood on April 6, 1994, when President Habyarimanas plane was mysteriously downed over the airport at Kigali (Rwanda!s capital) as he was returning from a fiuther round of negotiations, accompanied by the president of Burundi. Both presidents were killed, and immediately thereafter the Rwandan blood bath began. 6. Subsequent events are well known. Over several months of violence that shocked the world, up to one miUion people (i5 percent of Rwanda's population) were killed. The victms were mainly Tutsis, but up to 200,000 opposition Hutus were also kIlled by militiamen and some elements in the arm-y. Fighting between the RPF and the army also resumed. By nid-July, the RPF achieved minty victoly and a new government was sworn in on July 19, 1994. The President, the Prime Minister and most Cabinet members are Hutut, belonging mostly to parties that had been aligned against the Habyarimana regime. True power rests, however, with the Tutsis from the RPF who control the army. 7. The situation in Rwanda - and, indeed, in the region - is precarious. Some two miilion Rwandan reffugees fled to neighboring Zaire, Burundi and Tanzania, where they have been living in large, squalid refugee camps. Another million people have been displaced within Rwanda and are also facing the grim conditions of camp life. These refugees and internally displaced persons are afaid to return to their homes, either because they mistrust the new regime or because they are being deterred by militiamen and soldiers from the former Rwandan army who, in effect, control the camps and hold their compatriots hostage. 8. Rwanda now has a govemment but virtally no aininstration. On average, only about a fifth of public sector professionals are currently at work, as most officials have eiter been klled or fled the country. The new govenment is nearly devoid of financial resources and has barely been able to pay the army. Meanwhile, an estimated 300,000 "old refugeesW - Rwandans who had left their homeland in the late 1950s and early 1960s - have returned from neighboring countries and have, in some instances, reclaimed for themselves the property of absent or deceased former owners. This has comelicated the property rights picture, particularly in Kigali and in other towns. 9. Within this explosive framework, the new goverment is confronting the complex task of consolidatig peace and national reconciliation, seeking to reintegrate into the  country both old and new ref&gees while iniating efforts to rehabilitate the economy and stimulate recovery. Should these efforts fail, conditions could once again degenerate and throw the entire region into a renewed state of tmoil. In this difficult situation, the donor community is looking to the Bank to take the lead in mounting a rehabiitation-cum- recovery effort that would help reduce tensions in Rwanda and get the country back on the road to recovery. 10. Economic and Social Impact. Although relatively short, the Rwandan civil war dealt a severe blow to the foundations of a narrow and fragile economy, badly battered even before this latest crisis. As esfimated by Bank staft real GDP declined by as much as 50 percent in 1994. Tlis came on the heels of an 11 percent contaction in 1993. More than half the country's agncultural and industrial output has been lost, while most enterprises are not operating. The coliapse of the banking system is also impeding efforts to normalize economic activites. Foreign exchange reserves have vanished, coffee stocks have been stolen and the government can barely generate revenue. Damage to physical infrastructure such as roads and bridges has been relatively modest, but human losses have been huge; as a result, the central administrative capacity has been paralyzed. The country's institutional memory and project implementation capacity have been all but wiped out by the ldllings and disappearance of personnel, destruction of files, and theft of computers and equipment. Overall, the sharp decline in economic activity has intsified poverty in Rwanda, which ranked among the continent's poorest countries even before the crisis. 11. Losses of agricultural output were particularly severe because of the widespread dislocation of people; furthermore, the most violent phase of the war coincided with the harvesting season. Although subsistence crops were not totally lost, being harvested by passers-by, cash crops were badly affected: only about 700 tons of coffee were formally exported in 1994 (the annual average had been around 30,000 tons). Tea was not exported at all in 1994 and almost all the tea plantations and processing plants were destroyed. Estimates of industrial losses in the private sector range between 60 and 80 percent of normal annual output. Although ifrastructure was mosdy spared by the violence, public buildings, particularly in Kigali, were significantly damaged. The state of many roads and bridges has deteriorated due to both lack of maintenance and damage caused by the rainy season. In the areas of energy, water and sanitation, the war made it impossible to carry out normal maintenance, thereby compounding an already precarious situation. Although water supply has been almost normalized in many parts of Kigali, other cities and the countryside are facing serious shortages. 12. The crisis caused a sharp drop in the delivery of social services. Particularly hard hit were health and education. A sizable part of the services personnel in both sectors was ffilled or fled. Medical supplies, essential medicines and vehicles were stolen, medical centers were damaged and normal distribution channels broke down. Equally, educational equipment was stolen and schools vandaLized. Nevertheless, some primary schools had restarted activities by mid-September 1994, albeit with greatly reduced resources: student/teacher ratios, already high before the crisis (57 primary pupils per teacher) have  4 greatly deteriorated; school buildings have been danaged and basic equipment and essential learning materials (textbooks, notebooks, pencils, etc.) are lacking. Re- establishment of basic social services to their normal levels would facilitate the return of displaced persons and refiigees to their homes. 13. Early emergency assistance. Beginning in the sunmer of 1994, external assistance began to arrive in the region mainly to provide relief to Rwandan refugees in neighboring countries. Total outlays since the onset of the crisis have been estimated at over US$1.0 billion. Early on, the UN made a consolidated appeal to donors to meet needs in July-December 1994 related to the provision of food aid, health, nutrition, education, water supply and sanitation, and the related logistics. Donors have responded generously. In addition, NGOs have been extremely active. The Bank has also participated in the relief effort: in August 1994, the Executive Directors approved grants totaling US$20 million to four UN agencies (UNICEF, UNHCR, FAO and WHO). The objective of these grants is to help lay the foundations of a broad-based reconstruction and development program, filling identified gaps in each of these agencies' programs for Rwanda, with parficular emphasis on the emergency needs of returnees. Agreements with the agencies on indicafive programs were completed; the first tranche (for a total of US$ 11 nillion) has already been disbursed to all four agencies. According to a progress report prepared in December 1994 by the UN agencies and the Bank's resident mission in Kigali, implementation of the grants is proceeding well; more than 60 percent of the first tranche has already been spent and release of the second tranche is expected to take place before the end of Februauy 1995. 14. The government of Rwanda was not a party to the early relief efforts, as none of the early assistance was channeled through it. With a firmer grip on the administration, the government is now initiating efforts to respond effectively to the current situation. To do so, however, it has aniously appealed for international support. 15. The Govemment's Response. The Government of Rwanda has embarked on rebuilding the nation and the economy. To that end, it is taking steps to demonstrate its commitment to peace based on national reconciliation. Important among these are its recent appointment of a high-level official to coordinate the government's human rights efforts, and its commitment to take significant actions in the political, social and economic areas (para. 16 and 17). An essential condition for fostering national reconciliation is the resettlement within Rwanda of both refigees and intermnlly displaced persons; equally critical are efforts towards the rehabilitation and development of infrastructure as well as socio-economic recovery. The government has sought international support for getting on with the urgent task of reconstruction and for taking up, once again, the economic reform agenda. The total costs associated with reconstruction and resettlement are esimated by the government at US$764 million, to be incurred over several years. The government's Emergency Recovery Program (ERP) for 1995 represents a short-term recovery program aimed at addressing the country's most immediate reconstuction needs, including the re- establishment of the government's capacity to rebuild the nation. The ERP has a total cost of US$200 million and was designed in consultation with donors, on the basis of an IDA  5 preparation mission in September 1994 followed by an appraisal nission in November 1994. 16. The government recognizes that national reconciliation is essential for the success of the recovery effort and for the sustainabifity of donor support. In this regard, a multi- part National Assembly was swom in on November 29, 1994. Furthermore, tue government issued in December 1994 a Declaration of Principles spelling out its political, social and economic agenda for a "New Rwandae. On the political side, the Declaration deals with political-cun-reconciliation issues such as human rights and policy actions to stimulate the return of refligecs. Specifically, the government is allowing the deployment of human rights monitors and UN troops; seeking support for establshing an impartial judicial system; and ensuring adherence to property rights. The government is also committed to a substantial reduction of the army as soon as the security situation permits. Regarding social issues, the Declaration recognizes the sharp decline in recurrent and investment expenditures for social services relative to pre-war levels and the resulting need to urgently rebuild and re-equip health and school infrastructure. Shortage of qualified managerial and other staff is, however, identified as a major constraint. The Declaration also promises special efforts to address the needs of vulnerable groups, including women, children and surviving war vicfims. 17. On the economic side, the Declaration addresses issues such as the size and scope of government, the role of the private sector, the privatization of public enterprises, the trade and exchange rate regime, the appropriate level of miltary expenditures and regulatory reform. The government is committed to a market-based economy, with a key role for the private sector and with a smaller government focusing on the social sectors. The current economic team includes the Mnister of Finance and Director of the Ministry of Planiing, who had both shown comiutent to liberalizing the economy while holding the same posts in pre-crisis administrations. The Declaration's economic principles, and accompanying actions, would serve as the basis for a medium-term macroeconomic framework to be designed by the government in close consultation with the Fund and Bank. A joint Bank/Fund mission is scheduled to visit Rwanda in February 1995. These consultations and the government's early actions would pave the way for a possible Fund ESAF arrangement and a resumption of adjustment lending by the Bank. Proiect Obiectiva and Descrintion 18. Project Objectives. The Emergency Recovery Credit (ERC), recommended in this memorandum, aims at helping Rwanda begin to overcome the problems created by the events of the past months, and facilitate the return to normal life and productive activities. Success in the pursuit of this objective is important for both the ongoing process of national reconciliation and for creating conditions for longer-term development. Towards that end, the operation is designed to: (i) help the government begin the restoration of key economic and social services, rebuild the institutional capacity necessary for sustainable economic recovery and design a coherent economic policy framework; and (ii) provide the private sector with the means to resume operations and crate jobs.  6 19. Project Description. The proposed credit of US$50 million would help support the government's Emergency Recovery Program (ERP) during 1995. The project's components support imports by the government and the private sector of high priority items on a broad positive list, and technical assistance to help implement reconstruction and re-establish basic government fimctions. Eligible imports would include spare parts, inputs and capital equipment in priority sectors such as: agriculture, industry, transportation, energy, water and sanitation, education and health. The project is part of a broader support effort (para. 20) which also features the restructuring of the Bank's and other donors existing portfolios to make them more responsive to Rwanda's immediate priority needs. These combined efforts should lay the groundwork for economic activity to rebound in 1995. 20. The 1995 Emergency Recovery Program. Rwanda's overall funding needs under the ERP for 1995 are estimated at about US$200 million. The proposed ERC would finance US$50 million of reconstruction-related import needs, and some urgently needed short-term technical assistance. Other donors are expected to fund the remaining US$100 milion; firm commitments to date amount to US$81 niillion (para. 27). This quick- disbursing support by IDA and other donors would be complemented by the restructuring - amounting to US$50 mi}lion in 1995 - of ongoing donor-financed investment projects, including IDA's to respond more effectively to Rwanda's immediate priority reconstruction needs (see Technical Annex). To facilitate private sector access to imports, special attention would be paid to the quick reactivation of the financial system and availability of credit to the private sector. This objective would be achieved primarily through the restructuring of the IDA-financed FY94 Private Sector Development Credit (Cr.2541- RW), under which US$12.7 million is undisbursed. 21. Indicative Sectoral Allocations. Preliminary estimates of the sectoral breakdown of the 1995 ERP, along with the respective contributions from IDA, are shown in Table I. The IDA allocations are based on an analysis of priority needs for 1995, but maxinum flexibility wil be maintained to ensure effective complementaity with other donors and rapid project implementation. 22. The ERC's contribution to the private sector addresses the need to replace lost assets, encourage new activities and restore the sector's operational capacity. Assistance for rehabilitation efforts in the agricultural sector would help fund imports of inputs, such as fertilizers, insecticides, agricultural instnments, live animals for breeding, and disease control supplies. In health, the ERC would finance medical and surgical equipment, and medicines and supplies to help re-funiish health facilities, including rural health centers. In education, the ERC would meet the costs of school equipment, textbooks and other educational materials, as well as short training programs for teachers. In all sectors, poor women, widows and female-headed households are likely to be among the principal beneficiaries of the recovery program. The infiastructure component would provide building mateials for repairs and upkeep of roads and bridges, public buildings and water and sanitation installations. To help ensure efficient implementation of the project, a sum  7 of US$2 million of the total funds earmarked for institutional capacity needs would be used to finance the services of a private agency which would be responsible for procurement and project management. This sum accounts for a portion of the total technical assistance of US$5 million to be provided under the ERC (para. 23). Indicative sectoral allocations are covered in more detail in the Technical Annex to this report. Table 1 IDA Contribution to Rwanda's Economic Recovery Program (In millions of US dollars) IIDA Contribution Sector ERP ERC Project Total (% of ERP) restructurint Prtivate sector 40.0 25.9 3.2 29.1 (73%0) Agriculture 40.0 6.0 2.0 8.0 (20%) Health 36.0 5.0 6.0 11.0 (31%4) Education 30.0 4.0 3.0 7.0 (23%) Eerg 21.0 - 1.0 1.0 (5%) Infrastructure 18.0 4.9 5.5 10.4 (58%) Instit. capacity 9.0 2.8 0.8 3.6 (40%) Other 6.0 1.4* 3.5** 4.9 (82%) TOTAL 200.0 50.0 25.0 75.0 (37,50%) * Central Bank of Rwanda (US$0.9 million) Commerce and Industry sector (US$0.5 million) ** To be identified 23. Technical assistance to the government. The collapse of adniinistrative and project implementation capacity resulting from the recent events has made the early provision of technical assistance a top priority in Rwanda. The ERC proposes a total of US$5 million to help meet the technical assistance needs identified under the ERP. The focus of the proposed technical assistance, beyond the immediate needs of effective project implementation, would be on training and rebuilding capacity. gh priority would be given to strengthening: (i) local project implementation capacity (for the proposed credit and other projects) in procurement and project management, by providing short- term technical support to key ministries and by contracting a private agency to temporarily perform these services; and (fi) capacity to cary out key govermment functions, including: preparation and monitoring of the budget and of the public investment and expenditure programs; foreign exchange management; and implementation of recovery activities and economic policy reform.  8 24. Technical assistance to help establish basic government functions and implement recovery will also be funded by a number of other donors. A detailed technical assistance program would include the services ", short-term foreign experts to carry out specific tasks and provide training. The IMF, for instance, will assist the government in reconstituting its revenue collection and tax administration efforts; it will also help in the re-establishment of basic central bank functions, including accounting and bank supervision as well as reconstituting the collection of key economic data for policy making. A number of other donors/agencies, including UNICEF and UNDP, are already providing technical assistance in key ministries. Other donors plan to support the re- establishment of the justice system. 25. Project implementation. A Project Coordination Committee (PCC), composed of the Ministers of Finance and Planning and the Govemor of the Central Bank of Rwanda, will be responsible for overall project coordination. A Project Manager will oversee day-to-day project implementation in close collaboration with the central procurement agency. The process of selecting a suitably qualified project manager is proceeding well. The agency would be fully responsible for procurement execution and contract management, given the government's limited capacity to manage ERP implementation. In addition, the agency would meet both public and private sector procurement needs and be recruited (in accordance with Bank guidelines) prior to credit effectiveness. Simplified procurement procedures would be used in accordance with Bank guidelnes. To facilitate disbursements, a special account of US$10 million will be set up. Retroactive financing up to an aggregate amount of US$10 million would be acceptable for eligible imports paid for after project appraisal (November 28, 1994). Bank Stratesp and Donor Sugnort 26. Rationale for IDA involvement The Country Assistance Strategy for Rwanda presented to the Board in June 1992 was geared to the country's long-term development needs. It focused on the goal of promoting private sector-led, export-oriented economic growth, poverty alleviation, a reduced role for the state, and protection of Rwanda's environment. These goals remain valid, but reconstruction is the imnmediate order of business to get the country through the critical recovery phase. Following the US$20 million emergency grants, approved by the Executive Directors on August 1994, IDA!s response has been two-fold, consisting of the proposed Emergency Recovery Credit (US$50 nillion) and the restructuring of ongoing credits (US$25 million). Beyond these actions, Bank staff have begun preparations for the resumption of IDA lending that was suspended in April 1994. This would include both investment and adjustment operations. At this time, the proposed ERC would support the government's efforts in meeting urgent post-war needs and pave the way for renewed implementation of economic reform, by helping to restore institutional capacity and financial viability. This operation has also served as a catalyst for a coordinated global approach to the reconstruction of Rwanda and has encouraged burden-sharing amongst donors; as such, it represents an important part of a broad-based international rescue effort.  9 27. Donor coordination. Donor coordination has been an important element in the preparation and implementation of Rwanda's recovery program. The Bank convened two donor meetings in Paris, in September and October 1994. With growing world confidence in the new govermment's commitment to national reconciliation, many donors have declared their readiness to participate in the international effort to rehabilitate the country. Belgium, Canada, the Netherlands, Norway, Switzerland and the United States have already provided funds with which Rwanda's arrears with the Bank through Januaty 1, 1995 have been cleared and which cover debt service payments to the Bank through June 30, 1995 (US$9.5 niillion). Donor mobilization to cover Rwanda's reconstruction needs for 1995 is at an advanced stage, although not yet completed; commnitments will be more firmly established at the Round Table for Rwanda to be held in mid-January 1995. As of now, firm commitments amount to US$81 million, from the European Union (EU). Funding for reconstruction needs is also expected from the Afiican Development Bank, Belgium, Canada, Germany, the Netherlands, Switzerland, the USA and other countries. Finally, balance of payments support is likely from the IMF, which is expected to make available in 1995, initially about US$13 million under the Compensatory and Contingency Financing Facility (CCFF) and subsequently a larger amount under the CCFF and another facility to be determined. Apart from these contributions, donors are expected to contribute US$25 million through the restructuring of ongoing projects. Lessons from other Emeneenci OQerations 28. Several lessons learned from similar operations in war-tom countries are being incorporated into the design of the proposed operation. The ERC thus seeks to ensure: (i) simple project design to be complemented by the restructuring of the existing portfolio; (ii) strong government commitment to, and provision of technical assistance for, effective implementation; (iii) frequent communications and close coordination between the Borrower, other donors and the.Bank; and (iv) simplified procurement and disbursement procedures. Environmentad Asgects 29. The imnplementation of the ERC is not expected to have any negative environmental impact. AWreed Actions 30. Management of procurement and contract administration will be delegated to a procurement agency, to be recruited competitively based on a list of international agencies specialized in general procurement and contracting (para. 25). The recruitment of this agency will be a condition of credit effectiveness. Pre-shipment inspection for all imports under the credit will be undertaken by a private firm already under contract with the Centra Bank of Rwanda. The ERP will be an integral part of the 1995 budget that is being prepared in close consultation with the IMF, the Bank and other donors. This  10 would help ensure that the quality and composition of government expenditures would support peacefuil economic recovery and lay the foundations for development. Proiect Benefits and Risks 31. The proposed operation provides imrportant support to Rwanda at a critical time, in particular by catalyzing assistance from the donor community, to help achieve the restoration of basic conditions for economic and social recovery and continued adjustment. Specifically, it would contribute to the emergency need to rebuild government capacity, help the private sector get back on its feet and facilitate national reconciliation. In parallel, it would provide an opening to begin the tasks of redefining the functions of government and building a leaner and more efficient public administration. Finally, it would reopen the policy dialogue between the government and the Bank and lay the groundwork for a resumption of sustainable economic growth in Rwanda. 32. This operation faces significant risks. Rwanda and some of its closest neighbors are in a state of political flux. Ethnic tension have been exacerbated in the past 18 months and the large number of refugees and displaced persons in the region is contributing to the area's volatility. One threat which Rwanda faces is that troops and militia from the previous regime may seek to re-open the civil war by invading from neighboring countries, especially Zaire. And within the country, conditions could be destabilized by abuses by the current government's army or by fissures in the current coalition government. Finally, the badly deteriorated economic and social conditions in the wake of last year's civil war contribute to unrest in the country as does the absence of a well endowed civilian administration to provide minimal governance and also spearhead econonic and social recovery. 33. As is indicated by its moderate behavior to date and by its recent Declaration of Political and Economic Principles, the govermnent has embarked on the path of national reconciliation and on a binding of the country's wounds. It is also committed to beginning the task of social reconstruction and to laying the groundwork for a modern, more efficient state and sound economic policies. Against this backdrop, the Bank has played a leading role in mobilizing international financial and economic support for Rwanda's reconstruction. Bilateral and multi-lateral agencies have joined the Bank in an economic rescue effort and are also seeking to contribute to the resolution of Rwanda's political issues. This international coalition has come together aware that conditions in Rwanda are in a tenuous environment but also in the realization that the stakes are high in the country and the sub-region and that the risks associated with inaction or delays far outweigh those linked to moving ahead with a constructive program of support. 34. Ultimately, it wili be up to the people and government of Rwanda to find sufficient common ground for the country to get back on the path of peaceful and sustainable development. But without strong international support, including the credit proposed in this memorandum, the chances of Rwanda recovering economically and socially --a necessary albeit insufficient condition for sustainable development- are nil as is the  I) likelihood of making Rwanda whole again. Given the delicate nature of conditions in Rwanda, Bank staff will monitor developments in the country closely. Moreover, IDA would suspend or cancel undisbursed amounts of the proposed credit if conditions in the country deteriorated to the point where the credit's objectives were no longer attainable. Recommendation 35. I am satisfied that the proposed Credit of SDR 34.3 million would comply with the Articles of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Washington, D.C. Januay 12, 1995 Attachments  Schedde A RWANDA EMERGENCY RECOVERY CREDIT OISBURSEMENT SCHEDULE (US$ Mlilon) (IDA Fiscal Year) FY 1995 inLsL IDA ERC 20 30 50  Schedule B RWANDA EMERGENCY RECOVERY CREDIT rimetable of Key Processinc Events Time taken to prepare the ERC 2.5 months ERC prepared by Govemrnment and IDA staff Appraisal mission November 17-30, 1994 Negotiatons December 28-29,1994 Board presentation January 31, 1995 Planned date of effecUveness March 31, 1995 Expected compleiUon March 31, 199  (fA N"r*x 30. O99) aIn USS uumom Cr9a dDa soer MLo)