Mali - Economic memorandum

Report No. 3200-MU Economic Memorandum FILE COPY on Mali June 30, 1981 West Africa Region FOR OFFICIAL USE ONLY Document of the World Bank 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 Fank authorization.  EXCHANGE RATES 1/ 1972 US$1 MF 504.42 1973 US$1 = MF 445.40 1974 US$1 MF 480.99 1975 US$1 MF 428.64 1976 US$1 MF 477.96 1977 US$1 = MF 491.34 1978 US$1 = MF 451.27 1979 US$1 MF 425.45 1980 US$1 = MF 422.60 1/ Period average FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY MALI ECONOMIC MEMORANDUM Table of Contents Page Preface Summary and Conclusions i Chapter I. National Income and Growth ..... ............. 1 The Primary Sector ...................................... 1 The Secondary Sector 3........*.......................... 3 The Tertiary Sector .......... . .... ............ ....... 4 Pric es . 0. 0. 0. ...... 0. ... ...... o. ...... . ..... o. .. . . * ... . .. ........ 0 4 The National Accounts and their Reliability ............. 5 Chapter II. Balance of Payments and Trade ............... 7 The Trade Accounts ........ o ............................. 7 Unilateral Transfers and the Capital Account ... ....... 9 Foreign Debt .... -oo ................................ 11 Chapter III. Money and Credit ........ o ....... o ........ o ........ 13 Instruments of Credit Policy ......*000006 14 Overall Money and Credit Developments ................... 15 Chapter IV. Government Finance ....... o........ ................ 19 Current Developments 19 Financing of the Overall Deficit ......... oo ....... 23 Chapter V. The Special Funds ................................. 25 Chapter VI. The State Enterprise Sector ........ o ..... o ......... 28 Background and Institutional Setting ............ o ....... 28 Global Financial Performance, 1975-78 ..... o ............ 30 Public Finance Implications ....... -.. - ..... o ......... 33 Chapter VII. Consolidated View of Public Finances ......o ...... 35 Concluding Note ................................ ...... o. 38 Statistical Annexes qt | 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.   Preface This memorandum reflects the work undertaken by a country economic mission to Mali in January-February, 1980. This Mission was led by Mr. Philip Berlin (Sr. Economist) and included Messrs. Sven Kjellstrom (Economist, IMF), Thien Pham (Economist) and Ms. Doris Jansen (Economist-Consultant). While the report is primarily based upon the findings of the economic mission, it also incorporates information received during the course of two joint IBRD/IMF mission in which Mr. Berlin participated, the latest of which was in November-December, 1980.   MALI IBRD COUNTRY ECONOMIC REPORT SUMMARY AND CONCLUSIONS i. Despite an economic growth rate of about 3.5 percent per year for the two decades since independence, Mali in many ways represents a paradigm of the problems associated with economic development. While the country has grown at an acceptable rate since 1960, and 4.4 percent per year since 1972 - it nonetheless remains one of the poorest countries of the world with a recorded per capita income of US$159 in 1978. Moreover, even though much of the growth benefited the urban areas, particularly Bamako, Mali's cities demonstrate few of the outward signs of unbalanced wealth found in other developing countries with the same characteristics. Even in the cities, although somewhat better off than the surrounding countryside, overall life expectancy and infant mortality rates are among the lowest and highest in the world, respectively, and access to basic amenities such as clean water, adequate medical services, schooling and electrification is far from satis- factory. Despite consumption subsidies, nutritional requirements are seldom met, particularly in the last several years. ii. Perhaps the most striking feature of Mali's economic circumstances is that the country has, particularly since 1968, basically never faced a foreign exchange constraint as such. Although aid donors have seldom been lacking, the most important element of Mali's relatively easy access to foreign exchange is the virtually free line of credit to the so-called operations account of the French Treasury, which has directly guaranteed the convertibility of the Mali franc since 1968 by automatically providing the residual balance of payments financing required to this end. While the other countries of the franc zone in Africa enjoy a similar arrangement, it is jointly shared and exercised under the collective discipline of the member countries of the Union Monetaire Ouest-Africaine, and is rarely as open-ended for the member countries as it is for Mali. iii. In return for the privilege in question the growth of domestic credit is subject, under the Franco-Malian agreement, to relatively strict controls so as to avoid the likelihood of unrestricted growth in domestic credit leading to equivalent drawings on the operations account. Severe restrictions on government borrowing from the Central Bank have in fact held down demand-induced inflationary tendencies as well as drawings on the operations account, but even in face of these restrictions on the financing of budget deficits, the government has never been able to reduce access into the civil service, nor the growth of scholarships, so that it has been obliged to hive off large segments of the basically state controlled economy from the nominal discipline of budget controls through the creation of "parallel budgets". Moreover, while rediscount and general credit restric- tions are imposed by the Central Bank, the practical effect of these has not been so much to slow down access by the generally deficitary state enterprise sector to bank financing, as to limit access by more productive undertakings (largely agricultural credit) to investible funds.  - ii - iv. With budgetary resources endemically short, the government has consistently been obliged to take measures often prejudicial to both produc- tivity and growth as well as to domestic income distribution; economic manage- ment has badly suffered as well. However, the problem in Mali is not simply that the government is continually obliged to do battle with an apparently chronic current deficit; it is also that excessive overall government consump- tion for services whose marginal social productivity is probably near or equal to zero, demonstrably limits incomes, consumption and (private) investments in the productive sectors of the economy which are only imperfectly offset by foreign assistance. Measures increasing domestic revenues may help with problems associated with budget deficits, but will not improve domestic resource allocation as a whole. v. Government salaries have been kept low because of the plethora of civil servants on the payroll. As a consequence grain prices have them- selves been kept low, as well as subsidized in varying degrees, largely for the benefit of urban-based civil servants, although rural populations in endemically deficit areas have, in varying degrees benefited as well. The complex process by which this is carried out has tended to keep producer prices low and to discourage movement of the rural sector away from sub- sistence farming, and it is almost certain that despite the availability of underutilized land that per capita cereals output has regressed since 1960 for this reason. While foreign assistance has directly absorbed a part of the cost of these policies, especially in times of drought, it has been the rural sector which has borne the brunt of the cost. The effectiveness of foreign assistance--as well as its totals--have been compromised in various ways, in particular through a frequent under-financing of certain recurrent costs which should ordinarily be paid by the budget, or to a stinting of the resources made available to the semi-autonomous "Operations de Developpement' through inadequate provisions for costs in the so-called baremes 1/ to the same end. In general, while Government has had few difficulties in the funding of personnel costs as an element of recurrent costs, 2/ equipment and materials expenditures for this purpose have often been sharply limited. This had the consequence that many individual development projects have been characterized by disinvestments (especially in the highway system and the irrigation infra- structure) which have indirectly been used to cover the growth in government consumption largely arising from personnel expenditures not associated with productive investments. vi. Analysis has also shown that, particularly in the case of the rural sector during the 1974-78 Plan, foreign lending has not been suffi- cient even to compensate for the resources absorbed from this sector through taxation and unfavorable terms of trade movements although it is clear that 1/ Cost reimbursement schedule. 2/ In Mali, therefore, the problem does not so much seem to be that re- current costs are insufficiently covered; the more striking fact is that it is the non-productive ones which are excessively covered, suggesting that the concept of "recurrent costs may be unnecessarily aggregative.  - iii - the agricultural sector must ultimately represent an important source of government revenue. Thus not only has the rural economy bee! Laxed to support a largely inefficient and unproductive state superstructure, but investments financed by external donors mainly concentrating in this sector have not compensated for the adverse shifts. vii. With respect to the public enterprise sector the substantial and growing operating losses of this sector, financed in large part through bank borrowing, have absorbed substantial quantities of investible funds which very likely would have gone for more productive purposes, particularly (again) to the rural sector, where very little direct agricultural credit now exists. Given the severe constraints to economic efficiency under which the public enterprise sector must suffer, this suggests that inordinately high opportunity costs are involved with the use of domestic resources for these purposes. viii. The rate of capital formation in Mali is limited more by a savings constraint than by a foreign exchange constraint, principally because of the country-s failure to use foreign resources available to it effectively. In one sense this suggests a limited degree of absorptive capacity. In another sense, it indicates rather that the country-s economy--and the ever growing need for resources of its state and para-statal sectors--discourage the generation of savings, so that the net increment to the country's productive infrastructure may be much less than implied by the inflow of external resources. Consumption growth has regularly been greater than GDP growth, and domestic savings average near zero, if not below. In the most simple terms, much foreign aid replaces capital infrastructure run-down because of the country-s persistent failure to maintain it. This phenomenon reflects the serious imbalances in Mali's budget structure. ix. Thus the structure of the state-run Malian economy is characterized by a complex series of transfer mechanisms, by which a swollen civil service and student population receive 90% or more of the country's budget resources and by which employment is maintained for a miniscule proportion of Mali's total labor force in an inefficient para-statal sector at high opportunity cost. The sources of funds are not only the rural sector as such, but the potentially more efficient and productive sectors of the economy unable to borrow or to accumulate investible surpluses, in the urban, as well as the rural areas. In sum, Mali