Madagascar - Emergency Economic Recovery Project

Document of The World Bank Report No: 29567 IMPLEMENTATION COMPLETION REPORT (IDA-37160) ON A CREDIT IN THE AMOUNT OF US$ 50 MILLION TO THE REPUBLIC OF MADAGASCAR FOR AN EMERGENCY ECONOMIC RECOVERY CREDIT June 29, 2004  CURRENCY EQUIVALENTS (Exchange Rate Effective June 29, 2004) Currency Unit = Malagasy Franc (MGF) US$ 1 = 10,432MGF FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AGOA - Africa Growth Opportunity Act CAS - Country Assistance Strategy CISCO - School district CPI - Consumer Price Index CPIA - Country Policy and Institutional Assessment CRESED - Credit for Strengthening the Education System in Madagascar CRESAN - Credit for Strengthening the Health Sector DCA - Development Credit Agreement EBFs - Extra-budgetary Funds EERC - Emergency Economic Recovery Credit EFA - Education for All EPZ - Export Processing Zone EU - European Union FID - Community Development Fund FDI - Foreign Direct Investment FMG - Malagasy Franc FRAM Parent-Teacher Association GDP - Gross Domestic Product GEFB Free Enterprise Business Association GOM - Government of Madagascar HIPC - Heavily Indebted Poor Countries IATA - International Air Transport Association IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund INSTAT - Institut National de la Statistique Malgache MEFB - Ministry of Economy, Finance and Budget MENRS - Ministry of Education and Scientific Research METFP - Ministry of Technical and Vocational Training MOH - Ministry of Health MOP Memorandum of the President MOU - Memorandum of Understanding NGO - Non-Governmental Organization NNP - National Nutrition Policy PGDI - Good Governance and Institutional Development Program PIP - Public Investment Program PIU - Project Implementation Unit  PRGF - Poverty Reduction and Growth Facility PRSP - Poverty Reduction Strategy Paper QAG - Quality Assurance Group RMF - Road Maintenance Fund SALAMA - Central Drug Purchasing Agency STA - Technical Secretariat for Adjustment TSA - Treasury Single Account UNDP United Nations Development Programme VAT - Value Added Tax WB World Bank Vice President: Callisto Madavo Country Director: Hafez Ghanem Sector Manager: C. Sanjivi Rajasingham, Co-Task Team Leaders: Wolfgang Fengler, Susanne Holste ICR Task Manager: Noroarisoa Rabefaniraka  MADAGASCAR Emergency Economic Recovery Credit CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 10 6. Sustainability 11 7. Bank and Borrower Performance 13 8. Lessons Learned 14 9. Partner Comments 15 10. Additional Information 17 Annex 1. Key Performance Indicators/Log Frame Matrix 18 Annex 2. Project Costs and Financing 23 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 26 Annex 6. Ratings of Bank and Borrower Performance 27 Annex 7. List of Supporting Documents 28 Annex 8. Implementation, monitoring, and last status of the EERC 29 Annex 9. Direct Crisis Impacts, Main Risks, and Government Strategy/ Impacts 37 Annex 10. Priority Actions and Programs in the Recovery Program 39 Annex 11.Macroeconomic indicators 40 Annex 12. Annex to Government's Assessment of the Project 42  Project ID: P080345 Project Name: Emergency Economic Recovery Credit Team Leader: Susanne Holste TL Unit: AFTTR ICR Type: Core ICR Report Date: June 29, 2004 1. Project Data Name: Emergency Economic Recovery Credit L/C/TF Number: IDA-37160 Country/Department: MADAGASCAR Region: Africa Regional Office Sector/subsector: General agriculture, fishing and forestry sector (30%); General transportation sector (30%); Other social services (20%); Health (10%); General education sector (10%) Theme: Social risk coping (P); Rural services and infrastructure (P); Infrastructure services for private sector development (P); Health system performance (S); Education for all (S) KEY DATES Original Revised/Actual PCD: 08/16/2002 Effective: 12/11/2002 12/11/2002 Appraisal: 10/03/2002 MTR: 11/01/2004 11/01/2004 Approval: 11/14/2002 Closing: 12/31/2003 12/31/2003 Borrower/Implementing Agency: GOVERNMENT OF MADAGASCAR/MINISTRY OF ECONOMY AND PLAN Other Partners: STAFF Current At Appraisal Vice President: Callisto E. Madavo Callisto E. Madavo Country Director: Hafez M. H. Ghanem Hafez M. H. Ghanem Sector Manager: C. Sanjivi Rajasingham Maryvonne Plessis-Fraissard Team Leader at ICR: Wolfgang Fengler, Susanne Wolfgang Fengler, Susanne Holste Holste ICR Primary Author: Noroarisoa Rabefaniraka 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time:  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: 3.1.1 Background 3.1.1 Following a contested presidential election in December 2001 between the incumbent president Didier Ratsiraka and the mayor of Antananarivo, Marc Ravalomanana (see the box below), a general strike ensued that was to paralyzed economic and social activity for six months. This crisis interrupted a period during which Madagascar had achieved high and sustained growth averaging 4.5 percent in the second half of the 1990s., and reaching 6 percent in 2001, led largely by private investment, and particularly by textile activities in the Export Processing Zones (EPZ) Textile activities grew at an average rate of 24 percent between 1999 and 2001. In 2001, the sector employed 110,000 people; by the end of 2003, employment had returned to its pre-crisis levels. . This period also coincided with implementation of the World Bank-financed Structural Adjustment Credit (SAC) and the IMF-financed Poverty Reduction and Growth Facility (PRGF). 3.1.2 The crisis had a particularly severe impact on growth and private investment, causing foreign direct investment (FDI) in particular to falter, thereby adding to a sharp drop in export revenues and long-term financing. Government finance was hard hit, with domestic revenue collection falling from 11.6 percent to 6.9 percent. A detailed sector analysis was carried out to determine what the direct impacts of the crisis might have been if assistance had not been forthcoming (Annex 9). 3.1.3 The economic collapse and resulting stoppage of many public social services caused widespread social distress. Rural incomes of communities located far from markets fell by as much as 50 percent due to lower farm-gate prices and a sharp reduction in informal sector activities in villages. Poverty headcount index rose as high as 80 percent. School dropout rates increased as much as 14 percent during the 2002 school year, and health service utilization declined by 36 percent in rural areas and 14 percent in urban areas. Especially worrisome was the decline in assisted birth rates (-16 percent) and prenatal care for pregnant women (-9 percent). The country experienced a severe 6-month political and economic crisis that brought the economy to a complete standstill and jeopardized the foundations of the previous growth period. Damage occurred on several levels: (i) regarding infrastructure, the crisis coincided with a cyclone that damaged the road network in Toamasina Province; fifteen key bridges were also destroyed during this period. International air traffic was severely curtailed along several regional routes, inflicting heavy financial losses on the national airline; (ii) public finance was compromised by the suspension of treasury bond trading in February 2002. Foreign banks froze Madagascar's assets abroad and the domestic foreign exchange market was suspended due to the temporary emergence of two rival Central Bank factions, both attempting to conduct business abroad, including continuing to issue payment orders; (iii) all economic activity, including foreign trade, came to a nearly complete halt. In the EPZ sector, most foreign textile firms left the country, leaving more than 80,000 workers without jobs. As Mr. Ravalomanana's domestic support increased, his control of the country widened and foreign governments that initially had taken a neutral position began recognizing him as the legitimate President. In early July 2002, Mr. Ratsiraka left the country, thereby putting an end to the crisis. 3.1.4 In July 2002, the Government presented a short- and medium-term recovery plan to the donors and partners in Paris at the "Friends of Madagascar" meeting. Its priority recovery program was designed to achieve macroeconomic stability, rebuild physical assets, and restore economic and social activities. The - 2 -  international community demonstrated its strong support for this reconstruction and development program, underlining the importance of adhering to the principles of good governance, promotion of a strong private sector, and poverty reduction. The overall recovery program implemented between August 2002 and December 2003, and financed by both Government funds and donor support, was estimated at around US$540 million. Within this larger recovery program, Government identified a number of priority actions that were of the utmost short-term importance in terms of aiding the most vulnerable, restarting productive sectors and re-establishing public services for an estimated US$237.7 million. The EERC, which was intended to close in December 2003, was designed to support these priority activities. EERC Original Objective 3.1.5 The overall objective of the project was to limit and if possible reverse the crisis impact on the poor, in the wake of the social and political crisis resulting from disputed presidential elections in December 2001. The credit would address urgent financing needs until mid-2003, by providing complementary funding for activities that could not be financed through other instruments (such as ongoing projects, already planned lending, other donor financing or the Government's own resources) through quick-disbursing liquidity and the financing of a positive list of imports 3 deemed necessary for the country's short-term recovery program and at the same time ensuring macro-economic stability. 3.1.6 Counterpart funds (domestic currency equivalent) under the Credit were released and provided budgetary resources enabling the Government to implement its recovery program. Details of the priority program are provided in Annex 8. 3.1.7 The scope of the program was clear: a targeted recovery program for a post-conflict situation. The objective was fully in line with the Government's identified emergency measures which were aimed to: (i) support the most vulnerable; (ii) assist private sector recovery; and (iii) restore public services. The Government's strategy consisted of getting the economy back on track and mitigating the social impact of the crisis on the poorest segments of the population by adopting a priority economic and social program as part of its overall recovery plan. 3.1.8 The objective of the EERC also reflected the priorities identified in the Bank's Interim Country Assistance Strategy (I-CAS), which were to limit and, if possible, reverse the impact of the crisis on the poor. The I-CAS proposed three instruments in response to the crisis: (i) portfolio restructuring, (ii) new lending (including the Emergency Credit), and (iii) policy advice on structural reforms to minimize the impact of future crises. The mix of instruments was particularly effective in supporting the government's reconstruction program in consultation with the other development partners See I-CAS, Section 5.. The 4 EERC and the I-CAS supported the recovery strategy, and common indicators were chosen for both instruments. 1in the second half of the 1990s. 2Textile activities grew at an average rate of 24 percent between 1999 and 2001. In 2001, the sector employed 110,000 people; by the end of 2003, employment had returned to its pre-crisis levels. - 3 -  3.2 Revised Objective: Not Applicable 3.3 Original Components: 3.3.1 The EERC financed part of the Government's priority recovery program of US$ 237.7 million; hence, the amounts for the different components do not reflect the actual amounts financed by the project. 3.3.2 Component 1: Support for the most vulnerable: US$57.7 million. This component was designed to support Government policy aimed at population groups most affected by the crisis. This component consisted of the following sub-components: (i) free access to social services : - Education (US$ 8.5 million): the government was to assume responsibility for primary school enrollment fees, suspending those fees as of September 2002, assuming the burden of public primary school teacher salaries previously paid by the parents' association (FRAM), and providing supplemental nutrition to school students with assistance from the CRESED project; - Health (US$ 12.5 million): Public health facilities were to dispense medical care and essential drugs free of charge through January 2003. The Central Drug Purchasing Agency, SALAMA, was to be recapitalized so that it would have sufficient financial backup to supply drugs to the public sector. SALAMA's payment arrears were to be cleared and the agency was to receive a supplemental transfer enabling it to replenish its drug stocks at the end of the period of free distribution to public dispensaries outside the capital. The CRESAN 2 Project would import additional types of drugs to extend the range of drugs and consumables available at SALAMA for hospital centers (e.g. for surgery, reanimation); (ii) establishment of a social safety net (US$ 6.5 million) through the creation of labor-intensive jobs, especially in public works, to reach specific population groups. (iii) in rural development (US$ 30.2 million): - support for rural farmers through payment, by the end of 2002, of the arrears of the state-owned Madagascar Cotton Company, HASYMA, vis-