Togo - Structural Adjustment Project

Document of The World Bank FILECOPY FOR OFFICIAL USE ONLY Report No. P-3534-1 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 36. 9 MILLION TO THE REPUBLIC OF TOGO FOR A STRUCTURAL ADJUSTMENT PROJECT April 26, 1983 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. i  CURRENCY EQUIVALENTS Currency Unit = CFA franc (CFAF) US$1.00 CFAF 355 1/ CFAF 1 million US$2,817 WEIGHTS AND MEASURES Metric ABBREVIATIONS AND ACRONYMS ACP countries - African, Caribbean and Pacific Countries BCEAO - Banque Centrale des Etats de l'Afrique de l'Ouest CEAO - Communaute Economique de l'Afrique de l'Ouest CEET - Compagnie d'En.ergie Electrique du Togo CIMAO - Societe des Ciments de l'Afrique de l'Ouest ECOWAS - Economic Community of West African States EEC - European Economic Community IMF - International Monetary Fund iVRD - Ministry of Rural Development OPAT - Office des Produits Agricoles du Togo OTP - Office Togolais des Phosphates RNET - Regie Nationale des Eaux du Togo SALINTO - Societe des Salins du Togo SISE - State Secretariat for Industry and State Enterprises SOTEXMA - Societe Togolalse d'Exploitation de Materiel SOTOMA - Societe Togolalse de Marbrerie et de Materiaux STH - Societe Togolaise d'Hydrocarbures TOGOROUTE - Societe Nationale de Transports Routiers "TOGOROUTE" TOGOTEX - Societe Togolaise de Textile FISCAL YEAR January 1 - December 31 1/ The CFA franc (CFAF) is tied to the French franc (FF) in the ratio of FF 1 to CFAF 50. The French franc is currently floating.  FOR OFFICIAL USE ONLY REPUBLIC OF TOGO STRUCTURAL ADJUSTMENT CREDIT CREDIT SUMMARY Borrower: Republic of Togo Amount: SDR 36.9 million (US$40 million equivalent) Terms: Standard IDA Credit Description: The credit would support the Government's program of structural adjustment as outlined in the Economic Policy Statement of the Government to the Association. The reforms envisaged by the program are designed to strengthen the balance of payments and to restructure the economy in a more productive direction with higher growth through: a) accele- rated rural development, largely food crops for local con- sumption and export; b) rehabilitation of state enterprises in association with the private sector; c) exploitation of a comparative advantage in mining by processing phosphate rock into phosphoric acid; d) promotion of industrial development through private investment in small- and medium-scale light manufacturing; and e) improvements in public investment planning and execution. The credit would finance imports of raw materials, intermediate goods, capital equipment and spare parts. Counterpart funds would be used for development-related expenditures and reduction of arrears. Estimated Disbursement: The credit would be disbursed in two tranches, $25 million immediately after effectiveness, and the remaining $15 mil- lion after a performance review to take place late in 1983. 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.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF TOGO FOR A STRUCTURAL ADJUSTMENT PROJECT 1. I submit the following report and recommendation on a proposed Devel- opment Credit to the Republic of Togo for SDR 36.9 million (US$40 million equivalent) to support a Structural Adjustment Program. The Credit would be on standard IDA terms. PART I - STRUCTURE AND DEVELOPMENT OF THE TOGOLESE ECONOMY 2. An economic report entitled: "Togo: Country Economic Memorandum" (3416-TO) was circulated to the Executive Directors in January 1982. Its assessment of Togo's economic prospects, updated by recent Bank missions, is reflected in the following paragraphs. Bank missions to prepare and appraise the proposed credit visited Togo in December 1981, and in February, March, May, November and December 1982. This report incorporates their findings. On March 4, 1983, the IMF Board approved a Stand-By Arrangement with Togo. The Arrangement provides for drawings up to SDR 21.4 million (US$23.3 million equivalent) between March 1983 and March 1984. Annex I provides basic country data and data on recent economic developments and prospects through 1990. Introduction 3. Togo is a small country (56,000 km2) with a population of about 2.6 million and a per capita GNP of about US$340 (1981). Phosphate mining has been the principal source of foreign exchange earnings, accounting for nearly 40 percent of export revenues in most recent years, and receipts from phos- phates normally represent about 30 percent of Government revenues. Political stability has prevailed since 1967, when a military Government came to power. General Eyadema remains President, but cabinet ministers are now all civilians. Togo's external policy favors regional and international coope- ration. Togo is a member of CEAO, Conseil de l'Entente, ECOWAS, and is a signatory country of the Lome convention between the EEC and ACP countries. Membership in the West African Monetary Union ensures a prudent credit policy and currency convertibility. 1/ 1/ The exchange rate of the CFAF is fixed with the French franc at a rate of 50 to 1.  -2- The 1960-74 Period 4. During the fourteen yeaars following independence, Togo experienced rapid growth, with real GDP growing at an average annual rate of 7 percent. The Government's economic policies were cautiously conservative, relatively efficient, and stable. Low, non-discriminatory tariffs, a legacy of Togo's earlier status as a UN trustee territory, were maintained and buttressed the Government's open door trading policy. The Government pursued frugal fiscal policies and financial equilibria were maintained. This atmosphere encouraged private initiative and Togolese traders, many of them women, displayed consi- derable dynamism. Total investmen-t rose from 10 percent of GDP in 1960 to 16 perce,nt of GDP in 1974. Private investment tended to favor commerce and real estate, and with few exceptions (such as the phosphate mine) very little was channeled into industry. Public investment during this period was directed primarily toward the development of road ard port infrastructure. 5. The rapid economic growth resulted in a significant change in the structure of the economy. Between 1960 and 1974, the share of commerce in GDP climbed from 11 to 21 percent, and the share of mining increased from 3 percent to 21 percent, while agriculture declined from 55 percent to 25 percent. Commerce thrived not only because of historical factors ard Government policy, but also because of Togo's corridor-shaped position between Ghana and Benin and from the Bight of Benin in the south to Upper Volta in the north. In addition, economic policies in Ghana led to the smuggling of cocoa and coffee from Ghana to Togo. These factors, along with the development of roads and the completion of the large, modern deep-water port at Lome in 1968, helped to consolidate Togo's role as a regional trading center. As a result, commercial activity expanded at an average annual rate of about 12 percent. The other pillar of growth during this period was mining. A large, efficient, export- oriented phosphate mine, a joint venture with foreign private partners, began producing in 1961. Production grew at an average annual rate of 17 percent and reached 2.6 million tons of phosphate rock by 1974. 6. Throughout this period, farming methods remained traditional and yields low. Farmers nevertheless responded to rising demand, especially with respect to foodarops, which were marketed by private traders, and Togo main- tained self-sufficiency in food-crops except in severe drought years. The experience with export crops was less positive. These were (and still are) marketed by a Government agency which has tended to keep producer prices relatively low in order to maximize Government revenues. Prices were never- theless more favorable than those prevailing in Ghana at the time. Exports of cocoa and coffee rose sharply through 1970, as Togolese production increased and large quantitites of cocoa from Ghana transitted through Togo. By 1970, nearly half of Togo's cocoa exports originated in Ghana. But Togolese pro- duction of cocoa and coffee declined during the latter part of the period for a variety of reasons including: institutional weaknesses, relatively low producer prices, the short planning horizons of both absentee landowners and landless migrant rural workers, and a decline in yields because of aging trees. As a result, by 1974 volumes of coffee and cocoa exports were no higher than those of the late 1960s. The potential of agriculture thus re- mained in part untapped, and whereas the sector had grown at a promising and healthy average annual rate of 5 percent during 1960-67, during 1968-74 the annual growth rate averaged only 2.4 percent.  7. During the early years of the 1960-74 period, agriculture was not a high priority of development policy, but by the late sixties, the Government was aware of its relative neglect of agriculture and the overemphasis on infrastructure. Thereafter, the Government officially assigned first priority to rural development, but, in practice, experienced great difficulties in identifying and preparing viable projects in agriculture. Public investment continued to be concentrated on infrastructure, because projects in this sector were both easier to prepare and easier to finance on concessionary terms. By 1974 Togo therefore had relatively well-developed infrastructure, but a rural sector that was not able to benefit fully from the facilities available. In addition to the new port, the road network was greatly extended and a road maintenance capacity built up. More roads meant less railroad traffic but, for political reasons, the Government refused to cut back on rail services. Consequently, the government-owned railroad company required annual operating subsidies and became a burden on the budget. Other state enter- prises, which were few in number and concentrated in utilities, were generally able to pay their way. A few state-owned hotels were built and, through arrangements with European tour operators, a small but growing number of tourists were attracted. 8. Throughout the 1960-74 period, the economy became more and more export-oriented. By 1974 exports were equivalent to 41 percent of GDP, compared to 25 percent in 1967. Exports had however become less diversified, because in 1974 phosphate rock accounted for 76 percent of the total. The once considerable importance of export crops in the balance of payments had greatly diminished. Exports of manufactures were insignificant, because the few industries that had been created, often with foreign capital and manage- ment, were generally on a modest scale and directed toward meeting demand from the small local market. Togo thus continued to be an important regional trading center, but without much of an industrial base. 9. Cautious fiscal policies were pursued during this period, and both external and internal financial equilibria were maintained. In 1973, the current account deficit was about 1.5 percent of GNP and official development aid amounted to 7.5 percent. The public sector payroll was kept under con- trol, because both recruitment and wage increases were modest. The Government was successful in mobilizing external aid on concessionary terms from a wide variety of donors which helped finance much of the increased investment. The disbursed external public debt was only 9 percent of GDP in 1974, and debt service was negligible. But behind this surface of financial rectitude, eco- nomic problems were stirring. Growth was tapering off and sectoral imbalances were becoming conspicuous. The Government was impatient with what it saw to lp be the economy's failure to take off and the unwillingness of the private sector to expand beyond commerce into industry. Uneasiness about the lin- gering backwardness of the rural sector was intensifying but remedial policies were not adopted. 10. Then portentous events occurred which greatly changed the course of the Togolese economy. In early 1974, in a climate of growing political pres- sures, the Government nationalized the phosphate company (Office Togolais des Phosphates, OTP). The foreign partners were satisfactorily compensated afterwards and many expatriate managers and technicians stayed on to work in  - 4 - the newly nationalized company. At first, the timing of the nationalization appeared to have been very fortunate for Togo. The world market price of phosphate rock had remained around $14/ton since the early 1960s, but in 1974 prices rose above $60/ton as phosphate producers, led by Morocco, succeeded temporarily in exercising an OPEC-Like influence on the world market. The value of Togolese phosphate exports increased to CFAF 34.5 billion in 1974 from CFAF 6.3 billion the previous year. The 1975-78 Period 11. The boom in phosphate prices led to an increase in Government revenue from phosphates from CFAF 3.5 billion in 1974 to CFAF 12.1 billion in 1975. As a result, total government revernue nearly doubled in 1975. Not knowing immediately what to do with such a large windfall, the Treasury accumulated large external deposits in 1975. With its confidence greatly boosted by this financial surplus, the Government decided to change radically its development policies. A new and prosperous Togo was to be created on the basis of abun- dant phosphate revenue. Economic takeoff was to be achieved quickly and "modern" sectors created with corresponding speed. Euphoria dominated govern- ment thinking. The Government's self-confidence and optimism was also bolstered by successes in the political arena. Togo's political influence, or more precisely, the President's personal influence, had greatly increased in the region when Togo assumed the role of intermediary between Nigeria and Francophone West Africa. Togo also maintained close relationships with another powerful African country, Zaire. Internally the Government felt fully in control as a result of its policy of balancing traditionally rival pro- vinces. For all these reasons, the Government believed it had a unique opportunity to break the bonds of under-development once and for all. 12. Instead of promoting growth and development through limited govern- ment intervention in the economy with primary reliance on private initiative, a policy the Government had found wanting, the new development policy assigned primacy to direct state intervention in most sectors. The Government had decided to become the first investor in all modern sectors. State capitalism was the order of the day. This represented a sudden, radical break with past policy and with Togo's established role as a regional trading center sustained by private commerce. In addition, implementation of the new policy was not based on careful analysis and preparation. The results were disastrous. 13. The Government adopted an ambitious development plan for 1976-80. Total plan investment was to be CFA1F 251 billion, with most of the financing to be provided through budgetary savings. Priority was assigned to agricul- ture and infrastructure, with industry in third place. In aggregate terms, the initial implementation of the p:Lan appeared to be a success. Gross fixed investment rose from 28 percent of GDP in 1975 to 46 percent of GDP in 1978. The expansionary strategy adopted by the Government might have been successful had the financing of investment been sustainable and viable projects imple- mented. Neither was the case. 14. The phosphate boom was spectacular but short-lived. By late 1975 world market prices of phosphate rock were falling sharply, and they continued  to fall in 1976 before levelling off at around $30/ton, twice the nominal pre- boom price. At the same time, slack demand led to a 55 percent decline in export volume in 1975. As a result, export receipts from phosphate rock fell by 25 percent, with a corresponding reduction in government phosphate revenue in 1976. Believing that the drop in price was only temporary, the Government resorted to heavy external borrowing to fill the financial gap caused by rapidly rising investment. The increase in external borrowing was accompanied by a hardening of terms, as the proportion of concessionary aid decreased while the proportion of suppliers' credits increased. By the end of 1978, disbursed external public debt had risen to US$624 million, or 65 percent of GDP, with nearly half of all disbursements having taken place in 1978. Debt service obligations amounted to 34 percent of merchandise exports. 15. The rapid increase in the external debt need not have caused insur- mountable problems, had the projects that were financed by borrowing generated the funds with which to repay the debt, but they did not. Project selection was poor, and implementation was often accompanied by delays and cost over- runs. In fact, the 1976-80 Development Plan quickly ceased to be a guiding instrument for public investment: the availability of foreign financing and the salesmanship of promoters became the decisive criteria for project selec- tion. Foreign funds were not available with equal ease for all sectors. It turned out to be particularly difficult to attract foreign funds to agricul- ture and actual investments fell far below targets in spite of an increase in multilateral and bilateral assistance, including IDA credits. Increased pro- ducer prices and improved extension services led to modest increases in export volumes of cocoa and coffee, while the start of replanting schemes was expected to have an impact on production a few years later. Financing for industrial and infrastructure projects, including tourism, was on the contrary abundant and investment in these sectors far exceeded targets. Particularly in industry and tourism, several large projects, such as a steel mill, an oil refinery and two luxury hotels, were realized on the basis of flimsy feasi- bility studies. The Togolese industrial landscape became dotted with state enterprises which in most cases incurred operating losses and were totally unable to service their foreign debt. Ghana and the Ivory Coast had joined Togo as shareholders of the promising clinker industry, CIMAO, located in Togo, but this venture also experienced technical and financial difficulties. 16. Apart from a passing boom in construction, the impact on growth of the large increase in investment was negligible, because of the poor perfor- mance of most state enterprises. Real GDP increased at an average annual rate of 4.3 percent, but this average hides wide swings from one year to another, as the pace of economic activity became much more prone to variations than it had been in the past. In agriculture, growth averaged only 1.7 percent. 1976 and 1977 were poor crop years and for the first time in several years food shortages became a real threat. The 1978 crop was, however, very good. Mining declined steeply in 1975 as exports of phosphate rock slumped, but growth in this sector subsequently recovered when exports gradually increased again. Growth in commerce slowed down due to uncertainties about government policy and because of slower growth in the region as a whole. The openness of the economy remained about the same.  - 6 - 17. The change in government policy during the 1975-78 period is vividly illustrated in a deteriorating fiscal performance. Fiscal discipline became lax after 1974, and the overall Treasury deficit (excluding operating losses of state enterprises and semi-autonomous public agencies) rose from CFAF 2.2 billion in 1974 to CFAF 9.1 billion in 1978 (Table 1). Budget revenue rose considerably, because when phosphate prices fell, coffee and cocoa prices rose. Current expenditure also rose quickly because of salary increases (20 percent in 1975, 15 percent in 1977), and an increase in government employment from 23,000 in 1975 to 38,000 in 1978. Furthermore, in addition to increased investment expenditures, a good part of which were "extra-budgetary" due to faltering budget control, the Treasury had to assume practically all of the debt service of the loss-making state enterprises. This soon became too great a burden. First, maintenance and the provision of counterpart funds to pro- jects financed from abroad were curtailed. This greatly impeded the execution of projects supported inter alia by the Bank. Second, and ultimately with more deleterious consequences, the Treasury began to accumulate arrears on debt service. By the end of 1978, arrears amounted to CFAF 9.3 billion (equi- valent to 17 percent of budget revenue). The financial situation had become critical, and Togo was forced to reconsider seriously its economic policies. 18. It is against this background that the Togolese Government began discussions with the IMF in 1979 and later with the Bank regarding programs of financial rehabilitation and structural adjustment that the two institutions might support financially. It was hoped that these programs would reverse the deterioration of the economic and financial situation and at the same time restructure the Togolese economy on the basis of a better analysis of compa- rative advantages, especially with respect to new opportunities in agriculture and industry. PART II - THE GOVERNMENT'S PROGRAM FOR REHABILITATION AND STRUCTURAL ADJIJSTMENT 19. The Togolese Government was initially rather slow to realize the scope of the financial and economic problems that had arisen. The awareness of the need for remedial policies was in the beginning correspondingly narrow and superficial. The Government's first reaction was to take decisive mea- sures in some areas (notably with respect to curtailing the rapid rise in current expenditure), while at the same time maintaining a lax stance in other areas (such as public investment and management of state enterprises). The slowness with which the Government began to deal with the serious problems confronting the economy was exacerbated by a conspicuous shortage of skilled and experienced staff in the ministries of finance and plan. This shortage explains the frequent lack of basic economic and financial data, which led to the adoption of unrealistic plans and the poor execution of even the most soundly conceived projects. Because of the lack of an adequate data base, macroeconomic management has been conducted in an ad hoc fashion. Emerging problems have come to the attention of the Government with substantial delays, thereby necessitating more far-reaching remedial policies. Nevertheless, the Government is now fully aware of the need for sweeping new policies and is committed to the implementation of such policies.  - 7- A. The process of rehabilitation 20. This process began in 1979 and was pursued with varying degrees of success until 1982. It was characterized by a heavy emphasis on financial issues, especially the problem of arrears on the external debt. The remedial policies considered were primarily of a budgetary nature and tended to deal more with symptoms (arrears) than with underlying causes (indiscriminate borrowing on onerous terms for poor projects). During this stage, the Togolese Government dealt primarily with the IMF. The policy dialogue with the Bank got off to a slower start. 21. By the end of 1978 it had become clear that Togo was not able to meet its debt service obligations without major rescheduling. Between 1978 and 1979, debt service obligations would have ri-sen from CFAF 19 billion to CFAF 22 billion in the absence of rescheduling, yet even in 1978 Togo was able to pay only about 60 percent of debt service due. To prepare the ground for a rescheduling with the members of the Paris Club, to which 70 percent of dis- bursed debt at end 1978 and 90 percent of the arrears were owed, Togo nego- tiated a stand-by arrangement in the upper credit tranches with the IMF for 1979 and 1980. Table 1: Summary Indicators of Treasury Operation, 1974 and 1978 (In billions of CFAF francs and percent) 1974 1978 Average annual rate of charge, percent Revenue 17.4 53.5 32.4 Current expenditure -19.1 -34.2 15.7 Capital expenditure -3.3 -12.3 38.9 Extrabudgetary expenditure and other operations (net) 2.9 -16.1 __ Overall Treasury Surplus/Deficit -2.2 -9.1 42.6 Memorandum items (in percent of GDP) Revenue 12.9 26.6 Current expenditure -14.2 -17.0 Capital expenditure -2.4 -6.1 Extrabudgetary expenditure and other operations (net) 2.1 -8.0 Overall Treasury Surplus/Deficit -1.6 -4.5 Source: Data provided by the Direction du Tresor.  22. Using the stand-by arrangement with the IMF as evidence that it was implementing corrective financial policies, Togo succeeded in negotiating a debt rescheduling agreement with the Paris Club and a large part of debt service charges due in 1979 and 1980 was rescheduled. Although the terms of the debt rescheduling appear generous, Togo's debt service obligations in 1979 and 1980 were equal to one quarter of government revenues. The need for debt rescheduling in 1981 and beyond was; to be reviewed at a later date, and was considered to depend on the volatile market for phosphate rock. The stand-by and the Paris Club rescheduling paved the way for a debt rescheduling agree- ment with most private creditor banks in March 1980. Remaining debt service was CFAF 13 billion in 1979 (32 percent of government revenue, 28 percent of exports), and CFAF 19 billion in 1980 (24 percent of government revenue, 26 percent of exports). In the case of Togo, Government revenue, rather than exports, is a more relevant indicator of debt service capacity, because nearly all debt service is paid by the Treasury, while membership in the West African Monetary Union helps to ensure the convertibility of the CFA franc. The budget, and not the balance of payments, is thus the binding constraint on debt service. 25. Financial performance improved in 1979-80, despite a continuing rise in arrears. Actual debt service payments on the external public debt rose from CFAF 8 billion in 1979 to CFAF 13 billion in 1980, equivalent to 6 per- cent of GDP. The Government realized this increase through an array of fiscal measures, but without adopting a consistent set of sustainable policies. Cur- rent expenditures were constrained and revenues were boosted by various tax measures and increases in public utility rates. The Government was able to pressure OTP to raise its budget contribution to an unprecedented level in 1980, but as a result OTP incurred large, costly bank overdrafts and had dif- ficulty meeting its own debt service payments. OTP was consequently unable to make a significant contribution to the budget in 1981. 24. Capital expenditure remained a weak link in fiscal policy. So great was the investment momentum that had built up since 1975, through projects under way and debt committed though not yet disbursed, that public investment continued to rise in 1979 and declined only slightly in 1980. Lax budgetary management could not be tightened quickly, and extra-budgetary expenditures continued, although at a lower level than earlier. 25. The improvement in financial performance was accompanied by a major slow-down in economic activity. In 1979, GDP declined by about 4 percent, and increased by only about 1 percent in 1980. The cresting of the investment boom led to a recession in construction. Some of the slack in the secondary sector was picked up by the inauguration of the large CIMAO clinker plant in early 1980, Agricultural activity stagnated due to unfavorable weather condi- tions and the freezing of producer prices as the Government attempted to raise more revenue from the rural sector to meet debt service obligations. Exports declined in 1979, because of lower cocoa exports but more than recovered in 1980 following an unforeseen increase in the world market price of phosphate rock. 26. Despite the improvement in the world market price of phosphate rock in 1980, by the end of that year it was clear that Togo needed additional debt  - 9 - rescheduling for 1981 and beyond. Without debt rescheduling, debt service obligations would have risen to CFAF 46 billion in 1981, equivalent to 69 per- cent of government revenue. A second stand-by arrangement was consequently negotiated with the IMF for 1981-82. The accompanying financial program covered only 1981, but a 1982 follow-up program was to be agreed upon in late 1981. 27. With its negotiating position buttressed by the stand-by, in February 1981, the Togolese Government approached the Paris Club for a second round of debt rescheduling. Once again a comprehensive debt rescheduling was nego- tiated for 1981-82, although the provisions for 1982 would apply only if Togo by then had an agreement in force in the upper credit tranches with the IMF. The eventual need for debt rescheduling in 1983 and afterwards was to be reviewed early in 1983. The debt rescheduling granted for 1981 reduced debt service due in 1981 by 54 percent to CFAF 22 billion, still equivalent to 32 percent of government revenue. 28. The results expected from the 1981 financial program with the IMF did not materialize. A slackening phosphate market caused a 22 percent drop in the volume of phosphate rock exports. In addition, OTP was burdened with expensive bank overdrafts at the beginning of 1981 as a result of the extra- ordinary contributions to the Government budget in 1980. OTP's new director gave priority to reducing overdrafts rather than maintaining a substantial budget contribution at the expense of the financial health of the company. Rather than contributing CFAF 13.5 billion to the budget as anticipated, OTP contributed only CFAF 5 billion. Primarily because of this large revenue shortfall, arrears on the external debt rose by CFAF 11 billion to CFAF 20 billion. The program with the IMF had stipulated a reduction in arrears of CFAF 5 billion. The widening divergence between the program requirements and actual performance during the course of 1981 meant the demise of the IMF program. 29. The assessment of Togo's apparently poor performance under the IMF 1981 program should be tempered by a recognition that the program may have been too narrowly focused. Had OTP been integrated into government financial accounts, a reduction in domestic bank overdrafts would have been equivalent to a reduction in arrears, and the performance of total public sector finances would have appeared to be better than indicated under the program. In this regard, it should be noted that OTP is the mainstay of Togo's export earnings and is Togo's most dynamic industry. The company's management is currently investigating the feasibility of a large phosphoric acid plant which would result in higher value added and a diversification of exports. This project could have far-reaching benefits for the economy of Togo. For these reasons, the financial health of OTP is a high priority. It was therefore justifiable for OTP's management to assign priority to the restoration of the company's financial soundness. But the problem which this caused revealed a serious weakness in the management of the economy. Because of a lack of coordination, different parts of the public sector were pulling in opposite directions and working at cross-purposes. This had serious consequences for the public sector as a whole, for after the 1981 stand-by was abandoned, Togo's credi- bility with the IMF sank to a new low.  - 10 - 30. In December 1981 and June 1982, IMF missions went to Togo to nego- tiate a new stand-by arrangement, but the negotiations failed on both occasions. The gap between what the IMF considered necessary and what the Government considered feasible was too wide to be bridged. Nevertheless, some narrowing of the policy gap took place on the second occasionr Subsequently, following a third IMF mission to Togo in October-November 1982, agreement was reached on a 13-month financial stabilization program for 1983. This program, which was approved by the Executive Board of the IMF on March 4, 1983, aims to reduce external arrears by CFAF 10 billion (US$29.4 million). Current expen- diture for 1983 would be reduced by- about 10 percent, including an estimated 5 percent reduction in personnel costs. The program would be supported by a 13- month stand-by arrangement for up to SDR 21.4 million (US$23.3 million equiva- lent). Purchases after March 1983 will be contingent on debt rescheduling with public and private creditors, as well as an in-depth review of the pro- gram to be completed by mid-June 1983. 31. In December 1982, the Head of State convened the National Council of the country's only political party (the Rassemblement du Peuple Togolais) and delivered a major policy speech. In very frank terms, the Head of State made a critical review of recent financial and economic developments. He did not spare his own Goverrment from implied sweeping criticism, and announced that henceforth an austere policy was required to resolve the crisis in public finances and to rekindle growth. The most tangible manifestation of the strong determination to rectify the deteriorating situation was the introduc- tion, at considerable political risk, of a 5 percent national solidarity tax on all public and private sector salaries effective January 1, 1983, in conformity with the financial stabilization program negotiated with the IMF. With inflation continuing at an annuaal rate of around 10 percent, in real terms the salary cut will be substantial in 1983, yet little political opposi- tion or social unrest accompanied the announcement of the salary reduction. There seems to have been a consensus that temporary sacrifices were warranted. 32. In addition, the closure of six unviable state enterprises was an- nounced. With immediate effect, there would be no more subsidies to state enterprises. All remaininig state enterprises were instructed to prepare recovery program showing whether, and if so, how they can become profitable. In cases where this objective cannot be realized, the enterprises will be closed or sold to the private sector. To cut back on the frequently bloated wage bill of state enterprises, salaries will be reduced by aligning them with the salary structure of the civil service. These far-reaching measures represent the first serious attempt to resolve the entrenched problems of the state enterprise sector. Implementing these measures will require perse- verance and a clear sense of purpose. 33. The absence of an agreement on a stand-by arrangement between the Government and the IMF left the application of the Paris Club rescheduling arrangements for 1982 in abeyance. Total external debt service obligations in 1982 amounted to CFAF 49 billion, equivalent to 63 percent of government revenue (table 2). Since only CFAF 2 billion were rescheduled in 1982 and actual debt service payments increased only marginally to CFAF 12 billion from CFAF 11 billion in 1981, arrears rose precipitously by CFAF 38 billion to CFAF 58 billion at the end of 1982. The debt situation is thus critical. The  - 11 - success of both the financial program with the IMF and the structural adjust- ment program with the Bank depends on substantial debt rescheduling. Both institutions are advising the Government as regards a desirable time profile of debt service, i.e., one that would not completely frustrate economic development. Arrangements for debt rescheduling with public creditors were agreed through the Paris Club in April, 1983. Debt rescheduling with private creditors is expected to be negotiated shortly. Agreement with both public and private lenders on the rescheduling of the Borrower's medium- and long- term debt would be a condition of credit effectiveness (Section 5.01 of Development Credit Agreement). Nevertheless, even after major debt rescheduling, IMF drawings and some counterpart funds under the structural adjustment credit will have to be used to service the debt, because projected actual debt service payments would still amount to nearly half of government revenue. Table 2: Summary Debt Data, 1978-83 (In billions of CFA francs) 1978 1979 1980 1981 1982 1983 1/ Debt due before rescheduling 18.7 22.3 46.1 46.4 49.3 52.6 Rescheduling -- -9.6 -27.1 -24.9 -2.1 -23.9 Debt due after rescheduling 18.7 12.7 19.0 21.5 47.2 28.7 Change in arrears (increase -) -7.1 -4.8 -6.3 -10.5 -35.7 10.0 Debt actually paid 11.6 7.9 12.7 11.0 11.5 38.7 Memorandum items (in percent of government revenue) Debt due before rescheduling 31.6 38.3 58.1 69.4 63.1 63.8 Debt due after rescheduling 31.6 21.8 24.0 32.1 60.4 34.8 Debt actually paid 19.6 13.6 16.0 16.5 14.7 47.0 Source: IMF 1/ Projection. 34. The economy continued to stagnate in 1981 and 1982 as mining con- tracted and the Government reduced investment in an effort to cope with the deteriorating budgetary situation. Exports declined in 1981 and 1982, as exports from the oil refinery, which had begun to operate in 1978, reached a peak in 1980 but declined thereafter. Refinery operations were discontinued in early 1981 after large losses had been incurred. The small size of the refinery, which precluded economies of scale, and the inability of the Togolese market to absorb its production caused this venture to turn into a costly failure.  - 12 - 35. The mixed experience of the economy during the 1979-82 period re- vealed the limitations of fragmented government policies that were narrowly focused on financial issues. Little attention was paid to basic economic and management issues which often were the root causes of the serious financial problems that arose. The Government was slow to realize the need for more comprehensive and far-reaching financial stabilization and economic adjustment measures to be applied consistently over several years. Eventually the reality of the deteriorating economic and financial situation could no longer be ignored. Having tried but failed to turn the situation around by isolated financial measures, the Government now realizes that a very different approach is required. Its commitment to this new approach was demonstrated in December 1982 when the Government announced stringent economic reforms and austerity measures (para 31). It is in this spirit that the Government has embarked on the program of structural adjustment. B. The process of structural adjustment 36. In order to overcome its pressing financial problems, and at the same time lay the foundation for resumed growth and development on a more produc- tive and thereby sustainable basis, the Government has finally become convin- ced of the need for an approach of comprehensive and mutually reinforcing policies. Financial stabilization over the short- and medium-term, through the implementation of the IMF program (summarized in paragraph 30 above) will provide the framework within which an economic program of structural adjust- ment can be prepared and launched. Financial stabilization will also free policy-makers from the need to deal on a daily basis with financial crises, so that their attention can be directed toward careful planning and the formula- tion of macroeconomic policy. Financial stabilization will require some real sacrifices in the short run and will test the Government's capacity to imple- ment corrective policies, the positive results of which will only gradually become obvious. Yet so grave is the financial crisis that a lasting solution will inevitably require a painful reckoning and correction of past mistakes. The real challenge for the Government will be to reach a delicate balance between the urgent need for financial stabilization and the vital need for economic development. Financial discipline should not be allowed to stifle development as was, to some extent, the case before 1974. 37. To rekindle growth and development under such difficult circumstances requires much more than a mere tampering with past policies. What is called for is a radical reorientation of policy to deal with the new and serious challenges confronting the Togolese economy. The ultimate objective is to achieve and sustain a higher level of economic activity, with concomitant development repercussions, consistent with the constraints imposed by the balance of payments. Higher growth together with a viable balance of payments can be achieved only through policies that render the economy more productive and less vulnerable to external shocks. This requires adapting to new external conditions and opportunities while exploiting present and potential comparative advantages. 38. In the case of Togo, structural changes that will strengthen the balance of payments and accelerate development can be envisaged in at least  - 13 - three sectors, where there remains a significant untapped development poten- tial. These sectors are mining, agriculture and industry. In mining the most conspicuous example is the phosphoric acid project. Unless government econo- mic and financial management are improved, this project will be greatly delayed or indefinitely postponed. With structural adjustment, the project implementation should start in 1985; plant construction should be completed by 1987 and full capacity utilization attained by 1990. The project is very large in relation to the economy (total cost nearly half annual GDP) and would make a very significant contribution to exports and government revenue. In the agricultural sector, production could be increased through more competi- tive price and marketing policies. Rural development could be enhanced through the formulation of a coherent strategy and more careful coordination of projects and support services. A food crop development strategy aimed at eventually penetrating regional markets, especially Nigeria, would not only increase export revenues but would contribute to higher incomes throughout the rural areas of Togo. In industry, the rehabilitation of selected state enter- prises would increase value added, occasionally add to exports, and relieve the Government of a major financial burden. Joint ventures with foreign partners should be sought, and small and medium size private enterprises should be encouraged. These measures should be designed to increase the cur- rently modest share of industry in GDP and to expand Togo's role from that of a regional trading center to that of a regional manufacturing center for light industries. The actions necessary to implement these structural changes are listed in Annex III. In order to carry out successfully such a fundamental reorientation of policies, the Government acknowledges that a major improve- ment in planning capacity and economic management is indispensable. The second IDA-supported Technical Assistance Project is scheduled to play a major role in this respect. 39. The deficiencies in planning and public investment policies since 1975, which led to the creation of a series of unviable state enterprises, have made it clear that there is an urgent need to improve (a) project selec- tion and implementation, and (b) financial planning, so as to ensure a better balance between project yields and debt service. But the problem goes much further than this. The real issue is what role the state should assume in the development of the economy. The state has intervened in the economy since the mid 1970s, both directly (state enterprises) and indirectly (price and mar- keting regulations). Recognizing that this intervention has not fostered growth and has greatly undermined public sector finances, the Government is now ready to pursue a more balanced and pragmatic policy regarding the res- pective roles of the public and private sectors. The envisaged retrenchment of the public enterprise sector will be combined with an attempt to stimulate private sector activities. 40. Given Togo's long and permeable frontiers, and the deeply ingrained trading mentality in large (and articulate) sections of the population, a policy of extensive price and marketing regulations would be futile if not counterproductive. Private traders and entrepreneurs are in general highly competitive and dynamic in Togo. Their contribution is of vital importance if the economy is to secure higher growth on a more productive basis by tapping actual and potential comparative advantages.  - 14 - 41. The Government's memorandum on development policies and a covering letter (Annex IV) set forth the structural adjustment program, the two main objectives of which are to reinforce the competitiveness of traditional acti- vities, and to exploit new areas of comparative advantage that the economy should be able to develop. The formier were adversely affected by the distor- tions that resulted from the expansionary policies pursued in 1975-78 and the subsequent austerity policies. The latter have so far not been thoroughly explored because of a lack of attention to structural issues in recent years. 42. To reach its enunciated structural adjustment objectives, government action will focus on three distinct, but closely interrelated areas, namely: (i) consolidation of public sector interventions; (ii) reactivation of traditional activities; and (iii) promotion of new areas of comparative advantage. Consolidation of public sector interventions 43. This aspect of the program complements the IMF financial stabiliza- tion program in scope and duration. The general direction of the measures to be taken is to pursue a selective investment policy within constrained finan- cial resources and to restructure and retrench the state enterprise sector, through closures when necessary, in order to set the stage for a subsequent modest expansion on a more solid foundation. As part of the improved macro- economic management, an Investment Plan will be prepared for 1984 and 1985. This plan should emphasize highly productive and quick-yielding projects financed on concessionary terms. The weeding out of unviable state enter- prises will be accompanied by the rehabilitation of those found to be viable after a reasonable amount of redesigning and additional investment (see paras 52-60 below). 44. The deepening financial crisis forced the Government to cut public investment (including state enterprises) from CFAF 67 billion in 1980 to CFAF 35 billion in 1981, with a further reduction to CFAF 32 billion in 1982 (i.e. from about 31 percent of GDP in 1980 to about 12 percent in 1982). Most of the investment implemented under this restricted program was for the comple- tion of ongoing projects. Foreign financing, 90 percent of which was on concessionary terms, comprised about 75 percent of total investment expen- dituires. Nevertheless, because of government difficulties in providing its contribution to projects financed largely from abroad, the execution of several of these projects had to be delayed. Projects that were exclusively financed from the Government's investment budget (i.e. without foreign financ- ing) were cut back severely. All new investments are being financed by grants and concessionary loans. 45. Due to its preoccupation with more pressing day-to-day issues, the Government effectively abandoned investment planning in 1980. A 1981 -85 Development Plan was issued in 1980 and projected total public investment during the five-year period at a minimum of CFAF 250 billion and at a maximum of CFAF 350 billion. An overly ambitious program, it was soon de facto abandoned. A 1981-82 Interim Investmnent Plan was less unrealistic, but nonetheless never became operative because of a shortage of funds.  - 15 - 46. Realizing that under the present strains, it can no longer continue a haphazard approach to investment planning, the Government has decided that it needs a systematic, high yielding plan for 1984 and 1985. This plan should be consistent with financial and physical realities but ensure that acceptable growth and development are maintained. The Investment Program for 1983 is essentially a consolidation program, consisting of the continuation of a small number of high-priority projects financed largely from external sources on concessionary terms. The IDA-supported Technical Assistance Projects are designed to facilitate the preparation of a sound pluri-annual investment plan. A Senior Economic Advisor has the main responsibility of providing the Government with sound macroeconomic policy advice to ensure, inter alia, that the two-year 1984-85 Plan fits into a realistic and coherent macroeconomic framework. This has never been done before in Togo. The Second Technical Assistance Project provides for an Investment Programmer who will assist the Minister of Plan to coordinate the financing of projects on sustainable terms. This task will require the development of a consolidated picture of public investment financing to replace the hitherto fragmented system of financial recording under which total financing of each project, not to men- tion the grand total of public investment, is rarely known. Finally, the First Technical Assistance Project provides a Senior Project Advisor who plays a leading role in project identification, preparation, selection and evalua- tion. The experts work with a team of Togolese counterparts for each of whom a training program will be set up and monitored. It is this manpower nucleus that will assume primary responsibility for the preparation of the 1984-85 Plan. 47. The financial constraints over the next three years mean that the 1984-85 Plan will have to be very selective. In practice, it should be limited to: a) completion of projects under way; b) replacement investments and other minor investments required to maintain or reach an optimal level of operation for existing physical assets; and c) a few new projects financed almost entirely by concessionary aid. Apart from focusing on productive projects, the sectoral allocation of plan investment will favor rural development. Expansion of mining production and exports, in line with comparative advantages, will be a second priority. To ensure optimal use of existing facilities, the upkeep of existing infrastruc- ture, but with no significant additions apart from the ongoing expansion of the port of Lome, will be a third priority. Whereas rehabilitation of selected existing state enterprises will be an important component of the Plan, no new state enterprises are foreseen, with the exception of a large phosphoric acid plant to be realized with foreign partners, and for which construction could begin toward the end of the plan period (see paras 79 and 80 below). State intervention will be strictly limited in those sectors where  - 16 - there is a possibility of private investment. Despite the severity of finan- cial constraints during the next two years, investment iL training and social services should not be neglected. Balanced development between all regions of Ehe country and all strata of the population remains an important goal. 48. Strict economic efficiency criteria will be applied in project selec- tion. In general, all new projects exceeding CFAF 300 million will require feasibility studies based on detailed technical studies and realistic cost estimates. Projects will normally not be selected unless they show an eco- nomic rate of return equal to or higher than 10 percent. Regarding projects which because of their nature are not amenable to the calculation of economic rates of return, the selection criterion will be cost-efficiency. 49. The Ministry of Plan will allocate the necessary manpower to the pre- paration of the 1984-85 Plan so that a draft plan will be ready for review by the Bank before the end of 1983. in carrying out the review, the Bank will ensure that the investments foreseen for 1984, and the financing thereof, will be consistent with Togo's financial commitments toward the IMF. Once the plan has been reviewed by the Bank, an 'IMF program consistent with planned invest- ment for 1984 adopted, and a debt rescheduling with the Paris Club negotiated for 1984, the Government intends to organize a donors' meeting to present the Plan and to solicit and orient official external aid i.n line with its objec- tives and priorities. 50. Once the 1984-85 Plan is adopted, a rigorous system for the implemen- tation and monitoring of public investment will be set up to avoid the large discrepancies which arose in the past between plan projections and realiza- tions. Starting with 1983, the following procedures will be established and respected: a) by September 30 of each year, projections of expenditures for the next two years will be made for each on-going project, with particular attention paid to the realism of cost estimates, any cost overruns, and the StELtUS of project financing; b) by November 30 of each year, each ministry and agency will prepare statements of their investment needs for new projects for each of the next two years, and the Ministry of Plan will complete the aggregation and selection of projects (both on- going and new) for the next two years; c) reports on project execution, expenditures committed and funds disbursed will be prepared. quarterly, and meetings of the relevant ministries and financial department will be held quarterly to monitor macroeconomic indicators covering all areas of public finance. These procedures imply -the adoption. of detailed two-year rolling plans.  - 17 - 51. To broaden the Government's monitoring of economic and financial events beyond public investment, a system of macroeconomic indicators is being created with which the Government will be much better equipped to take prompt remedial action when necessary. The Investment Programmer under the Second Technical Assistance Project, in collaboration with a fiscal expert provided by the IMF, will play a leading role in the implementation of the system of macroeconomic indicators. Reporting of data for all indicators in the system will be quarterly, but more readily available data will be reported monthly. The system is scheduled to be operational by April 1983 and will provide both the Bank and the IMF with valuable up-to-date information on economic and financial trends. Monitoring of the respective Bank-Fund programs will be correspondingly facilitated. Reform of state enterprises 52. The Government is convinced that drastic remedial actions are needed to prevent state enterprises from remaining a serious drain on the economy. The large losses incurred by state enterprises as a group have already forced the Treasury to assume virtually all of their debt service, with devastating consequences for public sector finance. So far, budgetary subsidies have not been used extensively to cover operating cash losses. These have instead been financed primarily through regularly rolled over bank credit and through the accumulation of arrears toward local suppliers, especially utilities. Bank credit has thus been diverted to unproductive uses, while the liquidity position of otherwise healthy companies has been seriously undermined. Their demand for bank credit has consequently increased. In addition, the state enterprises have not made appropriate allowances for depreciation and are in no position to finance their rising need for replacement investment. Under these circumstances, it is not surprising that most state enterprises are perpetually short of cash. As they cover only a portion of their actual costs and are consuming their assets, they have become a serious drain on public sector finances. The large sums of public funds invested in state enterprises have unfortunately in the aggregate yielded a negative rate of return. 53. At the request of the Government, a Bank mission visited Togo in April 1981 to examine a representative sample of state enterprises. The report of the mission was presented to the Government in September 1981 and was discussed in depth in various ministries during the following months. The report was frank. In view of the lack of funds to subsidize loss-making state enterprises, quite apart from any desirability of so doing, the report recom- mended that, unless compelling political and social considerations dictated otherwise, state enterprises that were not able to generate a positive opera- ting cash flow (i.e. excluding financial charges and depreciation) should be closed down as soon as possible. 54. While not disputing the logic of the report, the Government was nevertheless initially reluctant to face up to the conclusions. Since then, follow-up work by specialized consultants reinforced the findings of the initial study, and the financial situation has worsened. The Government now recognizes that time is running out and that radical measures are required. Consequently, in December 1983 the Government decided to close six state enterprises. To soften the blow, closures will be phased over time. The  - 18 - state enterprises not included in the sample will be examined and sector-wide performance criteria will be elaborated and applied. Potentially viable enterprises will be identified and restructured. This work has already started with the assistance of consultants financed under the First Technical Assistance Project. 55. The following state enterprises, which have no chance of developing a positive cash flow (excluding debt service) were or will be closed down or liquidated by the dates indicated (closure taken to mean discontinuation of production and dismissal of 90 percent of the staff): (i) SALINTO (salt production through desalinization) was closed in December 1982. (ii) SOTEXMA (agriculture and earthmoving equipment) was closed in December 1982. (iii) TOGOFRUIT (cashew nut factory) was closed in December 1982. (iv) CNPPME (small and medium enterprise promotion) was closed in December 1982. (v) Compagnie du Benin (processing of tubers) was clcsed in December 1982. (vi) RMTU (urban transportation) was closed in December 1982. (vii) TOGOROUTE (trucking) will be taken over by a private company by June 30, 1983. (viii) STH (oil refinery) will not be reopened; consultants will examine the best way of transforming the refinery into a storage depot for im- ported refined products; the consultants' recommendations will be reviewed with the Bank by August 31, 1983; and implementation of the measures decided upon will begin by December 31, 1983. 56. The steel mill (SNS) is a marginal case. Further consultant studies are required to determine whether i-t would be worthwile to save SNS. The re- commendations of the consultants wiLl be reviewed with the Bank and a final decision taken by August 31, 1983. 57. A decision on the future of the TOGOTEX textile mill will be made in consultation with the Bank by May 31, 1983 on the basis of a consultants' study financed under the First T'echnical Assistance Project. The marble and brick company (SOTOMA) will also be redesigned and re-equipped to process local marble deposits, which a consultant's study has confirmed exist in sufficient quantity and quality. SOTOMA's ceramic tile production, which had no future, has been closed. A study of the brick department will be completed by July 31, 1983, and a decision on its future will be taken in agreement with the Bank by September 30, 1983.  - 19 - 58. Lome suffers from an excess capacity in luxury hotels. This has led to unprofitable competition among the state-owned hotels which are managed by different foreign hotel companies. To deal with this problem, the Government has decided to revise its hotel policy. The prestigious Hotel du Deux Fevrier is not financially viable in the medium-term and there is no attractive alter- native use for the building. The hotel will continue operations, with the inevitable cash losses covered by an explicit government subsidy rather than as hitherto by an accumulation of arrears. To coordinate government policy, a holding company was recently created to prevent price wars (which benefitted customers but not the state), and to orient each hotel toward its most appro- priate market segment. The holding company will introduce a common system of accounts and supervise the activities of hotel management companies. Such supervision is currently very limited. There are signs of increased private interest in the hotel sector in response to the new policy, which augurs well for an increase in business and beach tourism. Lome has already become a significant convention center. 59. Under the IDA-supported Second Technical Assistance Project correc- tive policies will be introduced beyond the sample of state enterprises already examined. Performance criteria, by which to guide future policy with respect to state enterprises in a coherent fashion, will be elaborated. Analytical accounting will be introduced. Rehabilitation programs will be introduced, first on a small.test scale during 1983, and then for a larger number of relevant state enterprises starting with 1984. Analytical, forward- looking studies will be undertaken of all important state enterprises to diagnose problems and map future actions in light of the performance criteria. Expatriate experts provided under the Technical Assistance Project together with their Togolese counterparts will be responsible for most of this work. 60. To facilitate the monitoring of their performance, the Government will prepare a sector-wide annual report on state enterprises. This report will be based on financial audits of all enterprises with an annual turnover of more than CFAF 200 million. These audits should be completed within six months after the end of each year (i.e. by June 31). Given their importance in the economy, special management studies will be conducted of RNET (water supply) by December 1983, of OPAT (marketing of export crops) by June 1983, and of CEET (electricity supply) by June 1983. These studies will define restructuring and expansion plans for these enterprises. Reactivation of traditional activities 61. To rekindle growth and development under adverse financial condi- tions, more is needed than a consolidation of public sector interventions. Initially this will be primarily an exercise in preventing further waste rather than directly generating additional resources. In the long term, the impetus for growth and development will have to be generated by new activi- ties. The growth potential of traditional products, such as food crops, export crops and phosphate rock, is limited, but given the inevitable lags in developing new activities, and the need to prevent an even longer and deeper recession, the reactivation of traditional activities is of crucial importance in the short- to medium-term.  - 20 - 62. Until now, the Government has pursued a very conservative price policy with respect to export crops. The main reason was the relative ease with which it was possible to attract cocoa from Ghana. The Government relied on extension services, bonuses for replanting, and subsidized inputs, instead of competitive producer prices to promote production. The fall in the export prices of coffee and cocoa from their peaks in the late 1970s has caused pro- blems for Togo. Export revenue from these two products is no longer as important as it used to be, nor is their contribution to public revenues. Because inflation is rapidly eroding farm incomes, the policy of keeping producer prices comparatively low could have very adverse long-term effects on production and exports. The Government has realized that it is in its own long-term interest to pay the producers an adequate price for their export crops, while making up for the possible short-term revenue shortfall by increasing tax revenue elsewhere in the economy. 63. Nevertheless, because of the vagaries of the world market, and the difficult financial situation, the Government cannot go too far in raising producer prices. If world market prices were to drop subsequently and prices had to be lowered it would undermine farmer confidence and become a disin- centive for increased production. Nevertheless, because of the substantial margin between producer prices and export prices, there remains some scope for increasing producer prices. In addition, while export prices for coffee and cocoa have stagnated recently in dollar terms, in CFA francs they have risen. (This is due to the substantial depreciation of the CFA franc since 1981.) Increases in producer prices should be accompanied by a reduction and ultimate elimination of subsidies on inputs. Most farmers have become con- vinced of the value of these inputs in raising yields, and a gradual removal of input subsidies would not provoke a return to traditional low-yielding production methods. Under these circumstances, the policy with respect to producer prices for crops should consist of a gradual increase in producer prices in parallel with a gradual reduction in input subsidies. The Govern- ment has already begun to implement such a policy. Fertilizer subsidies were cut by one half in 1981 and several producer prices were increased for the 1981/82 crop year, notably (all prices in CFA francs per kilo): cocoa from 220 to 225, coffee from 200 to 215, cotton from 60 to 65 and palm nuts from 10 to 12. The prices of cocoa and coffee were further increased to 235 for the 1982/83 season, and the price of cotton was increased to 75 for the 1983/84 season. Furthermore, the Government has agreed to phase out subsidies on fertilizers for cotton and food crops over a five-year period beginning in 1983. 64. However, the Government has not formulated a medium-term producer price policy in light of such conflicting objectives as maximizing government revenues versus maximizing farmer income, and short-run versus long-run objec- tives. In 1982, the Government agreed to set up a price analysis and moni- toring unit in OPAT. The unit became operational in February 1983 with assistance from consultants financed under the First Technical Assistance Project. By the end of June 1983, the price analysis and monitoring unit will complete an in-depth study of the structure of agricultural prices and sub- sidies, farmer production costs, public sector expenses for marketing, pro- cessing, etc., and world market price prospects. A comprehensive medium-term price policy will subsequently be elaborated and applied on the basis of the  - 21 - conclusions and recommendations of the study. Particular attention will be paid to cotton, for which production and exports have risen sharply since 1978, and which, unlike cocoa and coffee, provides a cash income to a large number of farmers. 65. In the past, rural development projects and support services have not been carefully planned or coordinated. Two ministries and a multitude of agencies, with unclear delimitations of authority, are involved in rural development. There are numerous area-specific rural development projects cur- rently underway, financed by different donors and involving several different approaches to development. Many have their own support services. As a result, rural development is fragmented and may suffer from duplication and inefficiency in some areas. Applied agricultural research hinges on indivi- dual projects with research components. The scope and longevity of the re- search is correspondingly limited and coordination with other projects poor. There is moreover a pressing need to evaluate the long-term prospects for traditional crops, such as coffee and cocoa, and to lay the basis for expan- sion into more promising crops, such as cotton, and into agro-industries which could enable Togo to reap greater benefits from its export crops. 66. The Government is cognizant of these shortcomings and needs and will use the Second Technical Assistance Project for remedial action. A rural development planning unit was set up in March 1983 within the Ministry of Rural Development. Staffed by a resident expert and local counterparts and supplemented by short-term consultants, this unit will undertake a study of the rural sector including (a) a review of the recent evolution of the sector, the potential for and constraints on develoment, (b) an evaluation of the institutional and policy environment, (c) an evaluation and comparison of on- going and recently completed projects, and (d) an investigation of project support services (such as training, extension and research) to determine how they could be coordinated and combined. On the basis of its findings, the study group will make recommendations for strategy formulation and aid coor- dination. The final report on this study will be completed by December 15, 1983. After review of the report and consultation with the Bank, the Mini- stries of Rural Development, Rural Works and Plan will formulate a rural development strategy. The planning unit will then participate in the imple- mentation of the agreed strategy through project selection and monitoring. This unit will be an indispensable instrument for realizing the priority to be assigned to rural development in the 1984-85 Investment Plan. In addition, a unit to coordinate applied agricultural research was created in March 1983. Staffed by one resident expert, counterparts, and if need be by short-term consultants, this unit will coordinate the research elements attached to various projects and improve the flow of knowledge from international agencies engaged in research of relevance to Togolese agriculture. 67. OTP is an efficiently managed enterprise and makes major contribu- tions to export proceeds and public sector finances. In 1981 and 1982, a slackening in the world market for phosphates led to a low capacity utili- zation, but short-sighted financial imperatives have also occasionally ham- pered smooth operations. This was the case in late 1980 when excessive funds were drained from the company. In order for OTP to operate optimally under the present less than favorable world market conditions, OTP must retain  - 22 - enough funds for its own present and future operations before being called upon to contribute to government finances. Since the financial surplus of OTP is constrained by a poor market, while the Government has a pressing need for revenue, the financial surplus of OTP should be transferred directly and openly to the budget, rather than as hitherto being partly siphoned off on the way for vaguely indeterminate uses. Export compensation contracts have been used in the past for two different reasons: first as a source of financing of extra-budgetary expenditure, and second as a marketing device in slumping markets. The first reason is controversial and not consistent with sound financial management. 68. In recognition of the preceding considerations, the Government has decided to straighten out its financial relations with OTP along the following lines (as a first step toward the ultimate o-bjective of making OTP subject to export and profit taxes): (i) starting June 1, 1983, all export receipts from phosphate rock will be deposited into a general sales account; (ii) the general sales account will be used first to meet OTP's operating needs, second to pay an obligatory contribution to the budget and third (the rest) to constilute a residual account; (iii) the funds accruing to the residual account (a function of actual export performance) will be split between OTP's self-financing reserve and a variable budgetary contributions; (iv) as of February 1, 1983, export compensation contracts to finance extra-budgetary expenditure were discontinued; contracts needed for maarketing purposes will be used only as a last resort and will be clearly identified in the accounts of OTP or the Treasury. The system implies that all of OTP's contributions to the state will be channeled through the budget. Promotion of new areas of comparative advantage 69. In light of the structural imbalances which have accumulated over a long time, it is clear that a consolidation of public interventions and a reactivation of traditional activities, while indispensable to overcome the current recession and financial crisis, will not provide a sufficient basis for sustained rapid growth consistent with a viable balance of payments. In order to create a dynamic economy in the medium and long term, a reorientation of development and investment policy will be needed. This reorientation should consist of the elimination of uneconomic activities (such as many existing state enterprises) and the implementation of a highly selective investment strategy aimed at developing or encouraging new economic activities for which the country has, or can develop, a comparative advantage. The Government should limit its investment to those sectors where there is no chance for private investment and should create incentives for private investment in productive activities.  - 23 - 70. Togo has an open economy. Geography and tribal links dictate that this will remain the case. The domestic market is small. For all these reasons, the Togolese economy cannot escape being highly dependent on the outside world. In the past, Togo was quite successful in establishing itself as a regional trading center. While regional trade retains a growth poten- tial, it is by now a well established activity which cannot be counted on to provide a major forward thrust for the economy. For this, new or hardly developed activities are needed. Since Togo is far too small to compete internationally in a broad range of activities, it is rather a question of identifying a few specialized activities with the highest potential and concentrating on these. 71. Fortunately several such activities could be developed over the medium-term, provided government policy is adapted to make the most of the country's considerable human and natural resources, which so far have been far from fully utilized. The most obvious are food crop production and market- ing. Demand for food crops is large and rising in Nigeria (with a population nearly 40 times that of Togo). Food crop production has kept pace with popu- lation growth in Togo, despite the predominance of traditional cultivation methods and low yields. Higher yields would result in a substantial market- able surplus, which would be an excellent means for widely disseminating higher incomes throughout the rural sector. Another opportunity would be the production of phosphoric acid using low-grade phosphate deposits which are unsuitable for rock exports. The evolving cost pattern in the world phosphate industry has come to favor strongly the processing of rock into acid or fer- tilizer at the mine site. Further opportunities include the tapping of na- tional energy resources to reduce the heavy burden of energy imports on the balance of payments, and the development of indigenous small- and medium-scale private manufacturing industries by encouraging the more dynamic and innova- tive traders to develop their backward linkages and become full-fledged entrepreneurs. 72. The Government realizes that a considerable growth potential remains untapped in the rural sector and would like to see an increase in the market- able surplus of food crops. Until now, only about 20 percent of food crop production is marketed in a normal year, and during drought years the marketed surplus becomes insignificant. Another concern is the large seasonal fluctua- tion in food crop prices in urban areas, which arises because of the great difficulties of storing most food crops (especially cereals) for any length of time in Togo's humid climate. Immediately after the harvest, food crop prices practically collapse. They then rise, first slowly, then rapidly to a peak before the next harvest. There is some staggering of the crop season between various parts of the country, and some substitutability between crops not har- vested at the same time, but there remains a fundamental problem of uneven supply and concomitant wide price fluctuations between the seasons. 73. The Government's initial approach to this problem was (a) to ban exports of food crops; (b) to impose price controls on major food crops at the retail level in urban areas; and (c) to enhance the role of the state-owned grain trading agency TOGOGRAIN. The main concern of the Government was to ensure that prices of food crops did not rise beyond the means of modest wage earners such as lower-grade civil servants during the pre-harvest season.  - 24 - Price controls and increased state trading in cereals were impulsive and short-sighted policies, which did nothing to increase the supply of food crops and could become a disincentive for increased production. The ban on exports might conceivably increase local supplies temporarily, but could also become a disincentive for production. Nevertheless, the Government's overriding objec- tive was to try to regulate market forces to secure steady supplies of food crops at affordable prices to meet urban demand before any exports could be envisaged. 74. TOGOGRAIN was created in the early 1970s, but assumed a significant role only after the imposition of the export ban in August 1981. A special "solidarity fund" was established to collect from the population (more or less on a voluntary basis) funds to finance grain purchases by TOGOGRAIN. In prin- ciple TOGOGRAIN is to promote production through a high producer price and to support consumption through a low selling price. De facto, the latter objec- tive has become predominant. During -the 1982 pre-harvest season cereals were sold at a price substantially below cost, and even at a price below the ceil- ing fixed for private traders. These have strongly protested about the ceil- ing prices, despite the Government's affirmation that the prices take account of all costs, including a reasonable markup. 75. The Government has acknowledged that this kind of interventionist policy was exceptional and will not be repeated. TOGOGRAIN will consequently not sell below cost again. In addition, TOGOGRAIN will only be a complement to, and not a substitute for generally more efficient private traders, and the volume of its stocks will not exceed 15,000 tons between now and 1985. This will leave the predominant share of grain trade in private hands. Depending on the availability of funds, a decentralized network of small and simp'le storage facilities, possibly rented to farmer cooperatives and private tra- ders, could be envisaged as a means of reducing transport costs. Before the end of June 1983, the Government will discuss with the Bank the efficiency of TOGOGRAIN and how best to use the limited funds that can be allocated to TOGOGRAIN. 76. The Government recognizes that the only lasting solution to season- ally high prices for food crops in urban areas is a sustained increase in supply. Furthermore, the export markets are too promising, and the balance of payments too weak, to ignore the opportunity to export. In any case, since smuggling cannot be prevented, it is far better to export openly and offi- cially. In this way, the Government could raise some tax revenue from this activity, which should be very profitable given the large margin between food crop prices in Nigeria and Togo. Before the end of June each year, the Government in consultation with IDA will review progress realized toward increasing supplies of food crops first to urban areas and subsequently for exports and will examine whatever additional measures might be necessary to accelerate this process. 77. In addition to reducing Government regulation of food crop marketing and leaving more room for price incentives to stimulate production, various measures will be taken to boost food crop production within the context of rural development projects, which will be the priority of the 1984-85 Invest- ment Plan. The IDA-supported Second Rural Development Project will be a major  - 25 - instrument to this end. The project covers all of Togo, except the small cocoa/coffee growing area and the agriculturally less promising coastal area. The project is targeted to food crops and cotton. It will provide for production and multiplication of cotbon and food crop seeds and improved extension services for training in cultivation techniques. The project will furthermore provide for fertilizers, pesticides, animal traction, feeder roads, tube wells and some storage facilities. Input subsidies and agricul- tural credit are important issues in promoting food crop production and will be studied by the price analysis and monitoring unit recently created in OPAT. 78. The increased emphasis on the development of food crops is expected to greatly improve Togo's food balance. With population growing at an annual rate of 2.5 percent and food crop production projected to grow at an annual average of 3.9 percent between 1983 and 1990 under the new policy direction, the surplus available for exports, after satisfying urban demand, should increase considerably whereas imports should register less of an increase. Between 1981 and 1990 the volume of food exports is projected to increase twentyfold (albeit from a very low base) while the volume of food imports (including beverages) is projected to increase by 40 percent. Togo would still be a modest net importer of foodstuffs, because of the limited substitu- tability between local production and most imports (for instance wheat and alcoholic beverages). 79. The construction of a phosphoric acid plant offers the most dramatic opportunity for diversifying exports and restructuring the economy. In order to reap the necessary economies of scale, the plant would have to be large - with an annual capacity of around 300,000 tons of acid. Together with related infrastructure, the whole project would cost between US$500-600 million at current prices if realized in the mid-1980s. This amount corresponds to about half of annual GDP. This means that even if the project is realized over a bhree-year period, the investment would be huge in relation to the economy. Assuming the project is completed by 1987-88 and full capacity utilization reached by 1990, exports of phosphoric acid would account for 24 percent of exports in that year. 80. Given the high stakes of this project, thorough preparation is re- quired. Under an IDA Technical Assistance and Engineering Credit, the Government is currently undertaking a comprehensive feasibility study of the project. The study is expected to be completed in late-1983. If the results show that a phosphoric acid plant would be economically viable in Togo, the Government will contact potential foreign partners. Some self-financing of the project, albeit on a modest scale, would be provided by OTP under the financial scheme agreed upon between itself and the Government, but most of the financing would have to be provided through foreign equity participation and borrowing. Because of the size and complexity of the project, as well as the necessity to assure market outlets for a new product, foreign partners are needed not only for equity contribution, but also for collaboration on technical, managerial, and commercial matters. 81. The Government recognizes that the past nationalization of OTP and subsequent centralization of industrial policy could deter foreign investors from considering participation in the phosphoric acid plant. At the same  - 26 - time, the Government realizes that foreign equity partners could provide the technical and marketing expertise necessary to ensure the success of the project, and has consequently turned down offers for suppliers' credits and has decided to take the steps necessary to make the project attractive to foreign investors. The Government has also requested that the Bank act as lead financier in preparing a financial package for the project. 82. At the moment, Togo is heavily dependent on imported energy to meet demand. All petroleum products are imported in refined form since the closure of the refinery, and nearly all electricity is imported from the Akosombo dam in Ghana. Local sources of energy are limited to wood and charcoal, but in- creasing consumption and inadequate replanting have led to deforestation. Imports of refined petroleum products accounted for 19 percent of import value in 1981. Because of sharp retail price increases to reflect higher import costs, and the current recession, the! volume of imports has declined slightly since 1979. Increased economic activity would however soon lead to renewed growth in the volume of imports. 83. Until recently, the Governmetnt's energy policy was based entirely on the political motive to reduce dependence on imports from Ghana. To this end, large thermal plants were installed. But energy policy is now based more on economic considerations. For example, the Government intends to encourage energy conservation by keeping retail prices relatively high. By converting the oil refinery into a storage depot for imported refined products, Togo could realize substantial savings on the currently excessive freight charges, but energy would still be a major burden on the balance of payments. Since electricity imports from Ghana have recently risen sharply in price, Togo is now examining the possibility of alternative local and regional sources of supply. These include oil exploration, the Nangbeto hydroelectric dam and regional interconnection of the electricity network. 84. Although Togo has a coastline of only 55 kilometers, there is a po- tential for finding oil in offshore waters. Both Benin (to the east) and Ghana (to the west) have found commercially viable deposits in their offshore waters. At the request of the Government, IDA has therefore begun to prepare an oil exploration cum institution building project. Because of the small size of the domestic market, and assuming production costs are competitive, the discovery of even a small oil field could turn Togo into a net oil exporter and strengthen the balance of payments. 85. The development of local sources of electricity has made more head- way. Together with Benin, and with funding under an IDA Technical Assistance and Engineering Credit, Togo is carrying out a feasibility study of a hydro- electric dam at Nangbeto on the Mono river which forms part of the border with Benin. By mid-1983, enough information should be available to determine the timing, technical characteristics, and economic return of the project. Cru- c al variables which need to be evaluated are projected growth in electricity damand, future oil prices, and the cost of alternative sources of electrical e.ergy. 86. Because of the reluctance of private traders to move into manufactur- ing and the failure of most state enterprises in this sector, the non-mining  - 27 - industrial sector accounts for only a small portion of GDP (7 percent in 1981). After its costly failure with state enterprises, the Government has become convinced that this sector is better suited for private sector initia- tives. Despite the small size of the domestic market, which limits the range of potential manufacturing activities, there is still scope for a gradual expansion of industry through private initiative. This expansion could encom- pass both export promotion and import subtitution by making better use of local labor and other factors of production. To determine how best to promote such an expansion, consultants financed under the First Technical Assistance Project have reviewed the small- and medium-scale enterprise sector (SME's). Further studies include a review of the Investment Code and institutions dealing with SME's and the need for protection, if any. The scope and timetable for these studies will be decided in agreement with the Bank. Before the end of June 1983, the Government-and the Bank will agree on a plan of action and timetable for the implementation of the recommendations result- ing from these studies. Government Program: Macroeconomic Implications 87. The various elements of the structural adjustment program are cumula- tive and over time expected to lead to accelerated growth, concentrated among the more promising sectors of the economy, while at the same time reducing the resource gap to a level that can be sustained by external grants and borrow- ing. The two trends will be reconciled by increasing domestic savings and focusing on productive export-oriented investments. 88. While the direction of change in macroeconomic aggregates from the various mutually reinforcing structural adjustment measures should be unambi- guous, the size of the changes over time is more difficult to determine. Table 3 shows economic projections with and without a structural adjustment program. These projections should be interpreted only as general orders of magnitude and no great importance should be attached to any single specific number. The projections assume steady trend-like developments, whereas reality is rather characterized by erratic swings around trend-lines. Im- portantly, the projections assume (a) a stand-by with the IMF in 1983 (as well as in 1984-85) under which Togo will actually draw around 75 percent of its quota (SDR 21.4 million), and (b) debt rescheduling of a large part of remaining eligible maturities with members of the Paris Club in 1983-85. Because of the relatively large impact of the phosphoric acid plant, the feasibility of which has not yet been finally determined, the projections of the impact of the structural adjustment program are shown both with and without this project. 89. During the 1980-85 period, there are only minor differences in the macroeconomic aggregates with and without a Structural Adjustment Program, the reason naturally being that the impact of a Structural Adjustment Program will on3y materialize over time. By contrast, during the 1986-90 period major divergencies appear with and without a Structural Adjustment Program because of the gradual and cumulative restructuring of the economy resulting from the program. During the 1980-85 period, implementation of a Structural Adjustment Program from 1983 onward would lead to marginally higher growth, savings and investment. The implementation of the large phosphoric acid plant scheduled  Table 3. Projected Macroperformance Witn Structural Adjustment With Structural Adjustment Witnout Structural Adjustment (including phosphoric acid project) (excluding phospnoric acid proje3tz 1980 1985 1990 1980-89 1985-90 1990 1985-90 1985 1990 1980-85 1985-90 Percernt share of GDPl/ Growth Rate2/ f share Growth rate2/ snare of GDP / Growtn rate2/ A. Gross Domestic Product 100 100 100 2.3 5.9 100 4.8 100 tO0 1.9 3.2 Agriculture 24.6 27.0 26.6 4.2 5.6 28.1 5.6 27.2 27.9 4.0 3.7 Mining 11.0 12.0 14.0 4.2 12.7 11.6 4.1 11.4 11.3 2.8 3.0 Irndustry3/ 15.7 14.0 21.6 -- .4.6 13.9 4.6 14.0 13.9 -0.3 3.0 Services 48.7 47.0 37.8 1.7 4.5 46.5 4.5 47.3 47.0 1.3 3.0 Consumption 83.2 89.2 79.7 3.7 3.6 83.3 3.3 92.0 89.8 3.9 2.7 Savings 16.8 1O.8 20.3 -4.3 20.2 16.' 14.3 8.0 10.2 -10.8 15.5 Investment 33.4 26.2 27.5 -1.2 6.9 26.8 5.2 20.6 21.7 -6.9 4.3 Resource gap -16.7 -15.5 -7.2 1.8 -9.0 -10.1 -3.7 -12.6 -11.6 -3.2 1.4 Exports GNFS (35-4) (28.4) (35.2) (-0.7) (10.5) (30.2) (6.0) (28.4) (29.5) (-1.2) (4.0) Imports GNFS (-52.0) (-43.9) (-42.4) (-0.2) (5.2) (-40.3) (4.5) (-41.0 (-41.1) (-2.1) (3.2) B. Memorandum Items Current account balance (CFA franc billion) -47.4 -63.1 -56.2 -80.3 -59.7 -98.3 (% of GDP) 22.1 17.5 8.8 13.3 17.5 18.7 Consumption growth rat/ per capita (1) 1.2 1.1 0.8 1.4 0.2 Ratio of debt service-4 to current budget revenue (g) 25.1 36.7 28.5 26.5 32.3 29.7 Ratio of debt service4/ to exports (6) 23.0 28.7 19.2 17.4 25.8 25.7 1/ Projected years at constant prices. 2/ Percent per annum. 3/ Including handicrafts, constructiont and energy. 4/ Actual debt service, i.e. after rescheduling and chanige in arrears in 1980.  - 29 - to begin in 1985 would however temporarily lead to a bigger resource gap in that year. During the 1986-90 period, the results of the program would show up in significantly higher growth, savings and investment, as well as consump- tion, while the resource gap would be greatly reduced. The phosphoric acid plant would make a major contribution to these results, but even without the plant, the structural adjustment program would have a significant impact on the economy. Growth would average about 6 percent annually with structural adjustment and the phosphoric acid plant, about 5 percent with structural adjustment but without the plant, and only about 3 percent annually without structural adjustment. The resource gap as a percent of GDP would be about 7 percent with structural adjustment and the plant, 10 percent with structural adjustment but without the plant, and 12 percent without structural adjust- ment. Debt service would be less of a burden in 1990 following implementation of the structural adjustment program. The more rapid growth following struc- tural adjustment would be concentrated in mining (phosphoric acid), agricul- ture (food crops) and industry (promotion of small and medium-scale private enterprises and rehabilitation of existing state enterprises, often with private foreign partners: textile mills for instance). PART III - THE BANK'S ROLE - THE STRUCTURAL ADJUSTMENT CREDIT Credit History 90. The Bank began project lending in Togo in the late 1960s and has granted fifteen credits and two loans so far. Project work developed gra- dually through the mid-1970s. Since 1975 an average of two projects have been approved annually, including the CIMAO regional clinker project. In parallel with greatly stepped up project activity, the scope of the Bank's involvement broadened to include new sectors such as technical assistance and mining, while maintaining the priority assigned to rural development and road infra- structure. 91. The deteriorating economic and financial situation which prompted Togo to contact the IMF in late 1978 was also conducive to a deepening policy dialogue with the Bank. This was initially limited to planning issues, but subsequently broadened to include state enterprises, agricultural pricing, and ultimately a broad range of macroeconomic issues. Late i n 1978, the Minister of Plan requested technical assistance from the Bank to improve planning and project selection. In 1979 such a credit was approved. During a Bank eco- nomic mission in October-November 1980, the Government expressed interest in a Structural Adjustment Credit and Bank assistance in rehabilitating state enterprises. A Togolese delegation comprising the Ministers of Plan, Finance and Mining visited Washington in April 1981 to formally present a request for a Structural Adjustment Credit. A Bank mission to review state enterprises visited Togo in March-April 1981. 92. The country economic memorandum and state enterprise report were transmitted to the Government and discussed in September 1981. Along with the preparatory work for the Second Rural Development Project, they constituted  - 30 - the starting point for a more concrete structural adjustment dialogue. A mission in December 1981 led to a clarification of what could and should be the contents of a structural adjustm(ent program. 93. Building on the general mutual understandings reached in December, a draft Letter of Development Policies was discussed and revised during a mis- sion in March 1982. In April, after discussions with concerned ministers, the Minister of Plan cabled the Bank that the Government had approved of the entire letter. In April-May 1982, December 1982 and January 1983, Bank mis- sions went to Togo to negotiate fina:L details. 94. The Bank has gradually become a close partner in a far-reaching and comprehensive policy dialogue with the Government. Major progress was made when The Government perceived that the Bank was able to pull together scat- tered data in a systematic fashion and bring a new perspective and add analy- tical depth to the issues that were preoccupying it. During the discussions that followed, the Government became aware of what was necessary and the Bank of what was feasible. 95. The First Technical AssistarLce Project has been an invaluable instru- ment in furthering this dialogue. The Senior Economic Adviser in the Ministry of Plan (who arrived in late 1979) has made an important contribution in im- proving project selection. The arrival of a Senior Project Adviser in September 1982, made it possible for the Economic Adviser to concentrate on macroeconomic policies, the concepts of which are still not very familiar to many senior policy makers. The Project Adviser will play a crucial role in the project selection for the 1984-85 Investment Plan. The consultants' bud- get under the project has made it possible to prepare specific aspects of the adjustment program in an expeditious and effective way. The availability of these funds has increased the Government willingness to tackle a range of thorny issues, often at the initiative of the Bank. 96. The Second Technical Assistance Project is explicitly designed to support the implementation of the Structural Adjustment Program by meeting critical manpower shortages and training needs. In addition to providing for resident experts, the project includes a sizable general purpose consultants' budget. The project provides for a successor to the present Senior Economic Adviser and an Investment Programmer to coordinate investment with foreign financing possibilities and macroeconomic considerations. Resident experts are also being provided to the State Secretariat for Industry and State Enterprises and the Ministry of Rural Development in support of structural adjustment policies. All experts will be assigned full-time counterparts whose training needs and progress will be reviewed regularly. By March 1983, all the experts provided under the Second Technical Assistance Project had arrived in Lom6, with the exception of the replacement of the present Senior Economic Adviser (whose departure date is scheduled for August 1983). The new Senior Economic Adviser, seconded by iThe Bank under the special program of technical assistance to IDA-eligible countries, will take up his duties in July 1983.  - 31 - 97. Togo's relations with the IMF were described in paragraphs 21-33. From the beginning in late 1978, the Bank and the Fund have stayed in con- tact. Since mid-1981, when the stand-by for that year ceased to operate, and when the pace of the Bank's dialogue quickened with the presentation of the economic and state enterprise reports, the contacts have become closer and more frequent. Missions in December 1981 partly overlapped, and a Fund staff member participated in the Bank's investment review mission in January- February 1982. Frequent meetings have been held to share data and to discuss and coordinate policy. The emphasis of the respective programs sought by the two institutions is not the same, nor is their time-frame, but the Bank's Structural Adjustment Program and the IMF's financial stabilization program for 1983 are mutually supportive and geared toward the attainment of the same broad objectives: viable balance of payments in combination with a higher level of economic activity. The Fund is relying on the Bank to conduct the dialogue on investment planning and rehabilitation of state enterprises, while the Bank has left fiscal and monetary policy and debt management in the domain of the IMF. Consequently, the role differentiation between the two institu- tions has been respected and, more importantly, has been mutually supportive. 98. Final discussions of the Structural Adjustment Program took place in Washington, February 15-17, 1983. The Togolese delegation was headed by Mr. Walla, Minister of Plan and Administrative Reform. Loan Allocation 99. The proposed credit amount would be $40 million, of which $25 million would be made available immediately to finance imports of a wide range of raw materials, intermediate goods, capital goods and spare parts. A further $15 million would be released after second tranche conditions have been met (see para 102 below). The first tranche of the credit is expected to be disbursed substantially during the second half of 1983. It is estimated that less than 10 percent of the imports in the eligible categories would be paid for with the proceeds of the credit (see para 105 below). 100. The resource gap (goods and non-factor services) would amount to CFA francs 126 billion during the 1983-85 period with a Structural Adjustment Credit. The proceeds of the proposed credit would finance 14 percent of the resource gap; net IMF disbursements an additional 24 percent. Official grant aid is projected to cover 37 percent of the resource gap, and net factor income and current transfers 17 percent. The remainder would be covered by foreign borrowing. Monitoring of Policy Actions 101. The table in Annex III summarizes the actions IDA proposes to monitor during the supervision of the proposed SAC. Actions which have been taken as a condition of Board Presentation include: (i) agreement on a 1983 stand-by with the IMF; (ii) closure of selected state enterprises (SALINTO, SOTEXMA);  - 32 - (iii) recruitment of consultants to study SNS and STH; (iv) making the agricultural price analysis and monitoring unit operational; (v) agreement on the principles of full cost pricing and a limited role for TOGOGRAIN; (vi) preparation of an Investment Program for 1983. 102. Disbursement of the second tranche would be contingent upon satisfac- tory progress on the Structural Adjustment Program, particularly with respect to the following (Schedule 1, para. 2 and Schedule 3 of Development Credit Agreement): (i) initiation of implementation of decisions taken, after consultation with the Association, with respect to the conversion and/or liquidation of STH; (ii) adoption of an appropriate medium-term producer price policy for major crops, including specific prices for the 1983/84 crop year; (iii) adoption of an appropriate marketing policy for food crops; and (iv) adoption of an appropriate Investment Plan for 1984 and 1985. 103. The monitoring program would include a general progress review mis- sion to Lome in June 1983, and a mission to review progress realized in reha- bilitating state enterprises and in improving agricultural planning and policies during the third quarter of 1983. Toward the end of the year, a mission would review conditions for the release of the second tranche of the credit, especially the Investment Plan for 1984 and 1985, the successful implementation of which could serve as a starting point for a second Struc- tural Adjustment Program. Disbursement and Procurement 104. The proposed credit would be disbursed in two tranches, and, if con- ditions in para 102 are met, is expected to be fully disbursed within twelve months of effectiveness. The first tranche of $25 million would be available on credit effectiveness. The second tranche of $15 million would be made available as soon as Government has satisfied the conditions described in para 102. 105. Procurement and disbursement procedures have been designed to faci- litate rapid drawdown of credit proceeds. The proposed credit would finance 100 percent of the CIF cost of eligible imports, subject to documentary evi- dence that they had been paid for on or after signing of the credit. Any imports (except for a few standard exclusions) would be eligible for financ- ing, but no more than $10 million would be used for petroleum products and no more than $10 million for foodstuffs (Schedule 1, para 1 of draft Development Credit Agreement). Imports by public entities exceeding $100,000 would be  - 33 - through a modified form of international competitive bidding suitable for structural adjustment lending. Imports by private entities would be in accor- dance with acceptable commercial practices. Counterpart Funds 106. The local counterpart funds generated by the proposed credit would be deposited in a special account of the Central Bank and would be used exclu- sively to finance development-related expenditures and to reduce payment arrears (Section 3.01 of Development Credit Agreement). PART IV - BANK GROUP OPERATIONS IN TOGO 107. Bank Group lending to Togo totals fifteen credits amounting to $135.8 million, and two loans totaling $53.0 million. Annex II contains a summary statement of Bank Group operations as of March 31, 1983, and notes on the execution of ongoing projects. IDA lending has financed roads; agriculture (cocoa, coffee, cotton and food crops); education; technical assistance to the Ministries of Plan and Rural Development and to the State Secretariat for Industry and State Enterprises; a regional DFC operation; and feasibility studies for a phosphate fertilizer project and a regional hydroelectric power project. The two Bank loans (US$3.5 million to Togo and US$49.5 million to CIMAO jointly and severally guaranteed by Ghana, Ivory Coast, and Togo) have provided financing for the CIMAO regional clinker plant. 108. In the past, project lending has dealt with development needs and policy issues in particular sectors. However, the overall economic situation has now deteriorated to the point that sector specific actions are no longer sufficient. A more comprehensive approach such as that envisaged under the proposed structural adjustment program is required. Moreover, in a small country like Togo, where it is not possible to be involved in all sectors, structural adjustment lending provides an opportunity to influence development in a broad range of sectors. In those sectors where the Association is already involved, not only has project lending been consistent with the goals of the proposed structural adjustment program, but in addition components of several recent projects have been designed to prepare for and support the program. 109. The purpose of the first and second Technical Assistance Projects has been to help the Government begin to formulate sound investment and public finance policies (see para 46 above). Through these projects, the Association initiated a close policy dialogue which has been essential for the preparation of the proposed structural adjustment program. Medium-term policy level experts are now being financed in the Ministry of Plan, the Ministry of Rural Development (MRD) and in the State Secretariat for Industry and State Enter- prises (SISE), all three of which would play a primary role in the proposed program. Consultant studies of several state enterprises have been financed in order to determine whether they are potentially viable, and in the case of those which are, to identify measures necessary to improve their performance (see paras 54-60 above). A capacity to conduct further evaluations and to  - 34 - monitor the performance of state enterprises is being established in the SISE. A planning unit is being established in MRD. Under its auspices, a review of all rural development projects will be conducted in order to provide the basis for the formulation of a rural development strategy (see para 66 above). In addition, a price analysis and monitoring unit and a research coordinating unit are being created in MRD (see paras 64 and 66 above). 110. IDA has made five credits for agricultural projects designed to sti- mulate food crop production and to increase farm incomes through development of cash crops such as cocoa, coffee and cotton. Under the latest such credit, for the Second Rural Development Project in Cotton Areas, subsidies will be phased out and producer prices will be reviewed annually. Since this project covers most of the country, these measures will provide a good basis for the more comprehensive review of price and subsidy policies required for struc- tural adjustment (see paras 63 and 77 above). The project's emphasis on food crops and on the further development of a promising export- crop promote the goals of the SAC. 111. Another recent credit which is of relevance to the goals of the pro- posed SAC is the Phosphate Engineering and Technical Assistance Credit which is financing the pre-feasibility studies for a phosphoric acid plant (see para 80). A similar engineering credit provides financing for studies to assess the viability of the Nangbeto hydroelectric scheme, a joint project with Benin which could be an alternative to thermal power plants (see para 85). 112. A water supply project which is in the advanced stages of preparation would improve water supply in Lomb. The water and sewerage agency RNET, an important and economically viable state enterprise would be strengthened as a result of the project. A management study to be conducted under the project will contribute to the state enterprise component of the SAC (see para 60). 113. The four credits in the road sector have supported efforts to build up an efficient maintenance service, upgrade the country's main and more heavily trafficked roads, and start a comprehensive transport planning and coordination system, including an ongoing study of how to limit and improve the operations of the government-owned railroad company. A separate project for feeder road development provides for improvement works and maintenance operations. An ongoing education project finances the construction of teacher training facilities, expansion of existing facilities and fellowships. 114. Togo's performance with respect to project implementation and disbur- sement is generally satisfactory. The Government is by now quite familiar with the Bank's procurement and disbursement procedures. Delays are sometimes encountered, however, because of the cumbersome administrative regulations used in Togo to award public contracts. The Government is sensitive to this problem and is working with the Bank to find appropriate means to simplify the procedures.  - 35 - PART V - LEGAL INSTRUMENT AND AUTHORITY 115. The draft Development Credit Agreement between the Republic of Togo and the Association, and the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association are being distributed separately to the Executive Directors. 116. Features of the Development Credit Agreement of special interest are listed in Section III of Annex V. A special condition of credit effectiveness would be agreement on the rescheduling of the Borrower's medium- and long-term debt with its lenders. PART VI - RECOMMENDATION 117. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachments Washington, D.C. April 26, 1983  - 36 - ANNEX I Page 1 TABLE 3A T0G0 - SOCIAL INDICATORS DATA SHEET TOGO REFERENCE GROUPS (WEIGCTED AVERA2ES AREA (THOUSAND SQ. KhM.) ~- M9ST RECENT ESTIMATE) -L TOTAL 56.0 fMOST RECENT LOW INCOHE MIDDLE INCOME AGRICULTURAL 16.2 1960 lb 1970 /b ESTIMATE /b AFRICA SOUTH OF SAHARA AFRICA SOUTH OF SAHARA GNP PER CAPITA (US$) 90.0 200.0 410.0 250.8 1053.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 21.6 62.7 111.6 66.5 610.1 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 1499.0 1956.0 2503.0 URBAN POPULATION (PERCENT OF TOTAL) 9.8 ].3.1 20.0 17.8 28.3 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 4.7 STATIONARY POPULATION (MILLIONS) 15.0 YEAR STATIONARY POPULATION IS REACHED 2110 POPULATION DENSITY PER SQ. EM. 26.8 14.9 43.6 27.7 54.7 PER SQ. EM. AGRICULTURAL LAND 102.3 122.9 150.7 86.7 129.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 44.0 45.3 46.4 44.8 46.0 15-64 YRS. 53.4 52.0 50.9 52.3 51.1 65 YRS. AND ABOVE 2.6 2.7 2.7 2.9 2.8 POPULATION GROWTH RATE (PERCENT) TOTAL 2.2 2.7 2.5 2.7 2.8 URBAN 5.2 5.6 6.7 6.2 5.2 CRUDE BIRTH RATE (PER THOUSAND) 50.6 48.2 47.8 47.3 47.2 CRUDE DEATH RATE (PER THOUSAND) 26.8 21.8 18.1 19.5 15.7 GROSS REPRODUCTION RATE 3.3 3.2 3.2 3.2 3.2 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. USERS (PERCENT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 99.0 102.0 78.0 88.7 90.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 97.1 94.9 91.9/c 90.2 93.9 PROTEINS (GRAMS PER DAY) 46.0 46.1 48.77 53.1 54.8 OF WHICH ANIMAL AND PULSE 11.5 11.6 12.77/ 18.4 17.0 CHILD (AGES 1-4) MORTALITY RATE 41.8 23.1 21.1 26.7 23.9 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 37.2 42.2 47.1 45.6 51.0 INFANT MORTALITY RATE (PER THOUSAND) 181.5 134.0 109.0 129.9 118.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 17.0 16.0/d 23.9 URBAN .. .. 49.71o 54.9 RURAL *- 5.0 io.o