Senegal - Structural Adjustment Loan and Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5637 PROGRAM PERFORMANCE AUDIT REPORT SENEGAL STRUCTURAL ADJUSTMENT LOAN AND CREDIT (LOAN 1931-SE/CREDIT 1084-SE) May 9, 1985 Operations Evaluation Department This dacument has a restricted distribullon and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizatie. FOR OFFICIAL USE ONLY ABBREVIATIONS CFAF - Central Franc Area Franc EEC - European Economic Commnity EFF - Extended Financing Facility (IMF) GDP - Gross Domestic Product IDA - International Development Association IMF - International Monetary Fund OHLM - Urban Housing Sites and Services ONCAD - Office National de Cooperation et d'Assistance au Development PCR - Project Completion Report PREF - Economic and Financial Rehabilitation Program SAED - Soci&t& d'Amfnagement et d'Exploitation du Delta, (for Irrigated Rice) SIES - Soci&ti Industrielle des Engrais de Senegal (the Fertilizer Company) SODEFITEX - Socift6 de Developpment des Fibres Textiles TA - Technical Assistance 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. PROGRAM PERFORMANCE AUDIT REPORT SENEGAL STRUCTURAL ADJUSTMENT LOAN AND CREDIT (LOAN 1931-SE/CREDIT 1084-SE) TABLE OF CONTENTS Page No. Preface ........... ........................ .............. 1 Basic Data Sheet .................................................. i Highlights......................................................... i1 PROGRAM PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND .............................................. 1 II. THE STRUCTURAL ADJUSTMENT PROGRAM ....................... 2 A. Objectives .......................................... 2 B. Action Program . 2 C. Expected Impact of Program ......... ................. 4 D. Disbursement Conditions .................... ....... 5 III. PREPARATION AND DESIGN OF THE PROGRAM ................... 5 A. Staff Work in Preparation and Design of the Program ..............00...................... 5 B. Cooperation with IMF ................................ 7 C. Dialogue with Government ..........o................. 7 D. Overall Assessment of Program Design ................ 8 IV. PROGRAM IMPLEMENTATION .................................. 8 V. IMPACT OF SAL ........................................... 10 VI. SAL MONITORING AND TECHNICAL ASSISTANCE ................. 11 A. Monitoring of Program Implementation ................ 11 B. Technical Assistance Related to SAL ................. 12 VII. DISBURSEMENT AND USE OF COUNTERPART FUNDS ................ 13 VIII. CONCLUSIONS AND LESSONS ................................ 14 Annexes: 1. Declaration on Economic Policy .............................. 17 2. Calendar of Major Events Related to SAL ..................... 34 TABLE OF CONTENTS (cont'd.) PROGRAM COMPLETION REPORT I. History of the Project ............ ................... 35 II. Project Content and Implementation ......*............... 39 III. Role of Foreign Donors .............................. .... 47 IV. Assessment of Strengths and Failures .................. 50 V. Conclusion .************..... 0............................ 53 - i - PROGRAM PERFORMANCE AUDIT REPORT SENEGAL STRUCTURAL ADJUSTMENT LOAN AND CREDIT (LOAN 1931-SE/CREDIT 1084-SE) PREFACE This is a performance audit of the Structural Adjustment Loan 1931-SE (US$30.0 million) and Credit 1084-SE (SDR 22.9 million) made to the Republic of Senegal. Loan 1931-SE and Credit 1084-SE were approved on December 18, 1980 and signed on January 26, 1981. The whole credit (equivalent to US$26.8 million) and US$13.8 million of the loan were disbursed on schedule by September 1981 to finance the first tranche (US$40 million) of the imports program. Release of the second tranche was postponed because of delays in implementation of the agreed adjustment program; eventually the remaining part of the loan (US$16.2 million) was cancelled on June 30, 1983. The audit consists of a Program Performance Audit Menorandum (PPAM) prepared by the Operations EvaluTion Department (OED) and a Program Completion Report (PCR) dated April 26, 1984 and prepared by the Western Africa Regional Office. The PPAM is based on a review of the President's Report (No. P-2869a-SE) dated November 26, 1980, the Loan and Credit Agreements, the summary of Board discussions, the PCR, and related documents in the Bank files. Bank staff associated with the loan and credit have been interviewed, and discussions have been held with IMF staff. An OED mission visited Senegal in July 1984 to review the structural adjustment operation with Borrower representatives. Their valuable assistance is gratefully acknowledged. The draft report was subsequently sent to the Borrower for comments; however, none were received. - 1i - PROGRAM PERFORMANCE AUDIT REPORT SENEGAL STRUCTURAL ADJUSTMENT LOAN AND CREDIT (LOAN 1931-SE/CRED1084-SE) BASIC DATA SHEET Original Disbursed Cancelled Repaid Outstanding Credit No. 1064-SE 30.0/a 26.8/b - 0.0 26.8/b Loan No. 1931-SE 30.0 13.8 16.2 0.0 13.8/c Original Loan/Credit Dates Actual Initiating Memorandum 03/80 03/14/80 Letter of DevelopmenL Policies 10/80 10/31/80 Negotiations 09/80 (09/10/80-09/23/80 and (09/29/80-10/03/80 Board Approval 11/80 12/18/80 Loan/Credit Agreement 01/81 01/26/81 Effectiveness 04/27/81 03/30/81 Credit Closing 12/31/81 09/24/81 Loan Closing 12/31/81 06/30/82 Actual Completion 12/81 06/83 CUMULATIVE LOAN/CREDIT DISBURSEMENT (US$ million) FY81 FY82 FY83 FY84 (i) Planned 40.0 60.0 60.0 60.0 (ii) Actual /b /c 16.0 40.0 40.2 40.6 (iii) (ii) as-T Wo (1) 40Z 67Z 67% 68% MISSION DATA No. of No. of Date of Item Month, Year Weeks Persons Manweeks Report Preparation 09/74 3.0 6 14.0 (11/04/74 (11/27/74 Preparation 01/80 1.0 1 1.0 01/28/80 Appraisal 03/80 4.0 5 12.0 (03/28/80 (06/19/80 Supervision 1 01/81 4.0 7 21.0 (02/11/81 (04/08/81 Supervision II /d 04/81 3.0 2 6.0 - Supervision III7- 06/81-07/81 2.0 1 2.0 07/29/81 Supervision IV 05/82-06/82 5.0 4 25.0 09/30/82 Supervision V 09/82-10/82 3.0 1 1.5 10/20/82 Completion 05/83-06/83 1.0 4 4.0 06/21/83 FOLLOW-ON SAL OPERATIONS - None so far. /a Computed at rate of approval date. 7W Computed at market rate on dates of disbursements. Credit was completely disbursed (SDR 22.9 million). Discrepancies between original and disbursed amounts due to varying US$/SDR conversion rate. /c Prior to exchange adjustments. 7d Does not include sector specific missions (e.g. agriculture, IDF, urban, etc.) nor the Donors' Conferences held in October 1981 and March 1982. - 111 - PROGRAM PERFORMANCE AUDIT REPORT SENEGAL STRUCTURAL ADJUSTMENT LOAN AND CREDIT (LOAN 1931-SE/CREDIT 1084-SE) HIGHLIGHTS Following a prolonged period of relative financial stability and modest economic growth during the 1960s and early to aid 1970s, Senegal in the late 1970s faced serious external and domestic financial difficulties. The deterioration in the country's financial position was triggered by a worsening in the external terms of trade, low rainfall and drought which affected agricultural production and exports, and the need to substantially increase food imports. But underlying these short-term changes were serious structural constraints which had their roots in the gradual increase since 1960, of state controls leading to growing and inefficient bureaucracies and a complicated system of protection, subsidies and price controls. These developments resulted in an unsustainable growth of urban consumption at the expense of rural development, and to an erosion of production and export incentives (PPAM, paras. 1-6; PCR, paras. 1-3). In order to redress the serious imbalances the Government, after extensive discussions with the Bank and IMF, issued in December 1979 an Economic and Financial Rehabilitation Program, followed in October 1980 by a Declaration on Economic Policy. These documents reflected the Government's commitment to major economic reforms and provided the basis for an EFF agreement with the Fund signed in August 1980, and the structural adjustment loan/credit (SAL) approved by the Bank in December 1980. In addition, large amounts of program assistance were provided by bilateral and other multilateral donors. The SAL program specified a number of actions, to be implemented within an agreed time frame, aimed at increasing public savings, raising the productivity of investments, improving the efficiency of the parastatal sector, providing stronger incentives to producers and exporters, containing urban consumption, and initiating institutional and policy reforms in the important agricultural sector (PPAM, paras. 8-17, PCR paras. 14-30). During the following two years the Government succeeded in substantially improving its investment program, reforming a number of important parastatals, providing export incentives to domestic producers, and reducing distortions of some key commodity prices. However, the Government failed to meet the macro-economic objectives laid down in the SAL and EFF agreements, and made virtually no progress on agricultural reform. Consequently, the EFF was discontinued (January 1981) and replaced by one-year stand-by agreements; disbursement of the second SAL tranche was postponed and eventually, the outstanding balance of the loan was cancelled (June 1983). - iv - There were several reasons for the partial failure of the SAL program. One of them was that the baseline data used in preparing the program turned out to be seriously deficient, understating the magnitude of the financial problems by a wide margin. Key national performance criteria built into the EFF and SAL programs were thus obsolete soon after the agreements had been approved. A second factor causing non-compliance with SAL and EFF conditions was the severe drought in 1981/82, following a poor agricultural season in the previous year. The impact of these factors which affected both the state budget and the balance of payments, was reinforced by insufficient political resolve to carry out actions expected to cause polular discontent. It also appears that institutional and administrative weaknesses in the public sector constrained the implementation of the reform program. Finally, powerful rural interest groups failed to support the SAL program thus preventing the implementation of its agricultural components (PPAM, paras. 33-41; PCR, paras. 17, 19, 22, 23, 25, 29, 30). ..s a structural adjustment operation, the Bank loan/credit were not fully successful. The agreed SAL program was only partly implemented and a medium-term effort to carry out a comprehensive reform program of national and sector institutions and policies could not be sustained. As a result, the second tranche of the Bank loan was cancelled. On a more limited scale, however, the SAL did have a significant impact on Senegal's economic institutions and policies. It also provided the basis for a close dialogue between the Government and the Bank on a broad range of national and sectoral development issues, and hightened awareness among Senegal's political leaders of the need for structural reforms (PPAM, paras. 60-61). The lessons emerging from this operation are: - the need for firm political support on the part of the Borrower to the structural reforms (PPAM, para. 62; PCR, para. 51); - the impact alternative sources of external finance can have on the political resolve to adhere to the conditionality of a SAL (PPAM, para. 63); - the need for adequate preparation of a SAL program, especially when conditions are derived from questionable baseline data (PPAM, para. 64); - the advisability of a clear differentiation between responsibili- ties of the Bank and IMF in the context of SAL operations (PPAM, paras. 65-66). - 1 - PROGRAM PERFORMANCE AUDIT MEMORANDUM SENEGAL STRUCTURAL ADJUSTMENT LOAN AND CREDIT (LOAN 1931-SE/CREDIT 1084-SE) I. BACKGROUND 1. Senegal is a resource-poor Sahelian country, with modest growth potential. It suffers from unfavorable ecological conditions. As in other Sahelian countries, the 1970s and early 1980s were characterized by poor rainfall and drought conditions. 2. Despite the prestige of Senegal's leaders and their keen interest in economic development, per capita income had not grown in real terms from Independence in 1960 to the late 1970s. GDP growth averaged 2.5 percent annually, slightly less than estimated population growth (President's Report. para. 3). Duriug this period, the Government assumed control of key economic activities mainly through strengthening the parapublic sector, and through Senegalization of trade in agricultural inputs and products. 3. Despite the importance of Dakar, the capital city and former center of French Western Africa, Senegal's economy remains basically rural; two thirds of the population live outside urban areas. The major agricultural products are groundnuts, the largest export item, and millet, for domestic consumption. The value of groundnut exports is determined mainly by weather conditions, on one hand, and by international prices, on the other hand; both are subject to wide fluctuations, affecting not only incomes of farmers, but also public finance and savings. Production of millet has been constrained by technical factors and by price distortions, resulting from a policy of low priced imported rice, the major food component of the urban population. 4. Manifacturing is based on production and processing of primary products (phosphate, cement, groundnut oil) and some light manufacturing for import substitution. The growth rate of manufacturing in the twenty-year period 1960-1980 was relatively slow, averaging 4 percent per year. The development of manufacturing was constrained by relatively high wages for con-skilled labor, due partly to the political power of urban workers, and inadequate incentives for private enterprise (President's Report paras. and 13). 5. One of the outstanding features of Senegal is the wide disparity between the relatively high living standards in Dakar, and the low levels of rural incomes. Such disparity is due mainly to Government policies which favor the urban dwellers, at the expense of the rural population. 6. In the past, Senegal was able to balance its external accounts with long-term public capital inflows, largely from France. However, from 1978 onwards the deficit on current account increased to a level of 15-20 percent - 2- of GDP, due to a combination of poor export quantity performance resulting from severe droughts, deteriorating terms of trade, and a high import level, including large amounts of food. At the same time, the Government faced increasing difficulties in financing its development programs; all public investments had to be financed from external sources, and the external debt service increased to a level of 15% of exports in 1979, and would have risen to an unsustainable level of 25% in 1981 (PCR, para. 17). 7. Against this background, the Government decided that basic economic reforms were needed. The aim of these reforms was to gradually redress the previous imbalances which favored the urban population at the expense of the rural, to improve the disappointing performance of public enterprises, and to simplify the complex and inefficient indirect tax system (PCR, para. 3). The Government, with the encouragement of Bank staff, decided to seek support for its program from the Bank, through a SAL, and from the IMF, through an EFF. The SAL was to be complemented by a much larger special assistance package, most of which was to come from France, the EEC and Arab donors. In fact, the share of the Bank's SAL in the total financing package was only about 11% (President's Report, para. 113). II. THE STRUCTURAL ADJUSTMENT PROGRAM A. Objectives 8. The structural adjustment program was prepared in close consulta- tion with the Bank and Fund staff. Its major objectives were the following: (a) to redress the serious deterioration in the domestic and external financial situation; (b) to accelerate economic growth to a rate exceeding that of population growth; and (c) to reduce income disparities between urban and rural populations-l/ B. Action Program 9. The SAL program stated in detail the actions which the Government was expected to take, together with dates for implementation, and monitoring benchmarks. These actions were set out in a Chart included in the President's Report. Following are the main actions, not necessarily in the order stated in the Chart. 10. Public Finance. To bring the finances of the public sector under control, the Government was cxpected to take the following actions during 1980 to 1985: (a) eliminate the overall budget deficit; (b) reduce the share of salaries in total expenditures; 1/ See Annex 1: Declaration on Economic Policy. - 3 - (c) freeze expenditures on materials and supplies; (d) repay Government arrears; (e) increase the share of public investments to be financed from net public savings to 15% in 1980/81 and to 25% in 1984/85. The last objective was also stipulated in the IMF's EFF agreement, in which a quantitative target of CFAF 4 billion was set for a current budget surplus, equivalent to 15% of planned public investments. 11. Investment Program. In order to improve the effectiveness of public investments, the Government undertook to: (a) increase the share of directly productive investments from 43% to 55% of the total investment program; (b) set a ceiling on investments in the Fourth Plan (July 1980 to June 1984); (c) introduce minimum rate of return standards for public investments; (d) establish a project identification, preparation and evaluation unit. 12. Parastatal Sector. To partially correct the inefficiency of most parastatals, the Government committed itself to: (a) return some parapublic activities to the private sector; (b) introduce "contrats-plans" between the Government and individual state enterprises, which would set their medium-term objectives and give them some autonomy in their daily operations. 13. Prices and Producers Incentives. As a partial correction for the over-valued exchange rate, which Senegal was unable to change due to its membership in the Western Africa Monetary Union, the Government undertook to: (a) introduce a 10% export subsidy on 5 industrial products considered to be supply-elastic;2/ (b) increase basic import duties from 5% to 15%. 14. To correct serious distortions in agricultural producer and fertil- izer prices, the Government agreed to a series of studies on liberalizing prices for domestic and export crops as well as for fertilizer. It also agreed to ease price controls on urban food (although no explicit reference 2/ Textiles, footwear, fertilizers, canned fish and agricultural machinery. -4- to it was made, this probably implied the review of the subsidized price of rice, which would need to be increased if the rate of import duty were raised). 15. Agricultural Institutions. In order to initiate reforms of the inefficient and bureaucratic agricultural institutions, the Government agreed to undertake a number of tests and studies on a new cooperative structure rooted in village groups; on strengthening of regional rural development agencies; and on agricultural credit. 16. External Debt. To reduce the heavy external debt burden, the Government agreed to take the following measures: (a) impose ceilings on external commercial borrowing; (b) not to undertake external commercial borrowing for projects unable to finance the debt service from their own cash flow. Detailed ceilings on external borrowing were agreed upon under the IMF's EFF. 17. Monetary Policy. To limit domestic credit expansion, the following actions were agreed upon: (a) monthly credit ceilings were set, limiting credit expansion to 8Z in 1980; (b) prior approval would be required for credits above the equivalent of US$350,000. Specific credit ceilings were determined for the first six months of the IMF's EFF program. C. Expected Impact of Program 18. The Government's structural adjustment program was designed to prepare the ground for a sustained revival of the economy. It was expected that after two years (1982 and 1983) of stabilization and recovery from the disastrous effects of drought and adverse export prices, GDP would grow at some 4 percent annually. It was also assumed that the share of consumption could be reduced from 100 percent of GDP in 1980 to 86 percent by 1985. Commodity exports were expected to increase by more than 12% a year in real terms. The exceptionally high share of imports to GDP (42 percent in 1979) was to be reduced by 1985 to the mid-1970 level of 37 percent. 19. More important than these macroeconomic projections was the overall expectation that the Government's program would constitute a comprehensive and concerted effort at reforming the country's economic policies and insti- tutions thus providing the basis for sustained development over the medium and long-term. Although the President's Report identified some of the risks involved in such a comprehensive program and some of its weaknesses (paras. - 5 - 92 to 96), it nevertheless accepted the Government program and its macro- economic projections as a reasonable basis for the structural adjustment loan and credit. D. Disbursement Conditions 20. The Bank Group supported the structural adjustment program with a loan of US$30 million and an IDA credit of SDR 22.9 million.J/ A total of US$40 million of the Loan/Credit was to be disbursed after effectiveness to finance eligible imports, while the remaining US$20 million was to be dis- bursed after a performance review to be held before March 31, 1981. The conditions for release of this second tranche were specified as follows: (a) implementation of agreed measures on "quasi devaluation," raising import duties to 15%, and introducing a 1OZ export subsidy for 5 major manufactured products (see para. 13 above); (b) adoption of an investment program in line with agreed criteria (see para. 11 above); (c) general satisfactory progress on other components of the SAL program. III. PREPARATION AND DESIGN OF THE PROGRAM A. Staff Work in Preparation and Design of the Program 21. Considerable staff work was expended on the reparation of this SAL. It followed a great deal of analytical work on the economy, on major sectors, as well as on specific projects. In addition, the Bank supplied technical assistance (through a Parapublic Sector Technical Assiscance Project, approved in 1978) to help improve the efficiency of parastatals. Bank technical assistance was also provided to simplify the complex indirect tax system. 22. Bank staff work directly related to the preparation of the FAL began by the end of 1979.4/ Following previous discussions between Govern- ment officials and Bank management, Bank staff assisted the Government in formulating an "Economic and Financial Rehabilitation Program" (PREF), which was announced by the Prime Minister in a Statement to the Nation in December 1979. The Bank also encouraged the Government to request special assistance from the INF, which led to negotiations and subsequent approval of an EFF agreement in August 1980. Throughout most of 1980, Bank staff prepared the SAL program, which was appraised in March 1980 by a Bank mission, and 3/ Equal to US$30 million at the time of Board Approval. 4/ See Annex 2. - 6 - negotiated later in Washington. The Bank staff assistance was instrumental in preparing the "Declaration on Economic Policy by the Government of Senegal" of October 1980, which provided the basis for the SAL approved by the Executive Directors in December 1980. 23. Bank staff thus made great efforts in preparing the SAL program. While most of the staff work concentrated on macroeconomic issues, consider- able time was also spent on formulating directions for reform in the critical agricultural sector. Notwithstanding these efforts by Bank staff, a number of weaknesses in the program design have emerged, some reflecting technical aspects while others relate to the assessment of political and social condi- tions. The following major weaknesses are reviewed which subsequently proved to be detrimental to a successful completion of the program. 24. Technical Weaknesses. At the time of program preparation, Bank and Fund staff, as probably also Government officials, were not fully aware of the magnitude of Senegal's financial difficulties. Baseline data on public savings, external debt, finances of parastatals and their indebtedness were faulty. A short time after SAL approval, the data were reviewed by foreign auditors and consultants financed by the Bank and the Government and major revisions had to be made. Although imprecise baseline data on economic and financial indicators are not uncommon in developing countries, in the case of Senegal the variance proved to be unusually large, and the quantitative targets set in the SAL and EFF became unrealistic soon after approval (even disregarding the effects of the severe drought). Thus the target to increase the share of public investments to be financed from net public savings to 15% in 1980/81 and 25% in 1984/85 proved to be unattainable, since the Treasury's arrears were found to be much higher than previously reported. Similarly, the external debt was underestimated by 20%, mainly because bank loans guaranteed by the Government were not registered with the Ministry of Finance (PCR, para. 17). This omission, in addition to other adverse factors, brought the scheduled debt service burden to about 25% of the export earnings in 1981, while the EFF and SAL required the debt service ratio not to exceed 15% of export earnings. 25. In setting the quantitative targets for the SAL, insufficient attention was paid by Bank staff to the possibility of bad weather and to its implications for the country's overall economic and financial performance. The macroeconomic projections underlying the SAL were based on a ten-year average of crop results. Actual rainfall, however, was significantly less than average in recent years. Poor rainfall or drought have severe effects on several key economic and financial variables including Government revenues, Government expenditures for agricultural subsidies, finances of major parastatals, and external finance requirements. No sensitivity analysis of the effects of poor rainfall or drought on key economic variables was made during the preparation of SAL. Nor did the quantitative targets set in the SAL program take into account the possibility of bad weather. In any event, as stated in the PCR: "because the poor 1979/80 agricultural season was followed by a very serious 1980/81 drought, the short-term economic policy package was obsolete almost from the beginning" (PCR, para. 16). - 7 - 26. Weaknesses in Assessment of Political and Social Factors. The SAL program did not sufficiently take into account some of the major political and social constraints, which later on affected the implementation of the program. The transition of leadership from President Senghor to President Diouf in January 1981, although anticipated, and notwithstanding the fact that the latter served for 10 years as Prime Minister under Senghor, was followed by a period of political consolidation. This led to compromises on major economic issues and reluctance to take unpopular measures, such as increasing the subsidized price for imported rice - a major element in cor- recting local price distortions. 27. The Bank staff also underestimated the significance of the opposi- tion to the agricultural component of the SAL program. Although staff were fully aware of their inability to have a fruitful dialogue in this important area, they did not regard these differences as detrimental to the Govern- ment's ability to correct important price distortions in the agricultural sector, and to initiate agricultural reform. 28. The President's Report indeed identified some of the political and social risks in the SAL program. For example, the report states that the program requires an "unusual degree of determination on the part of political leaders" (para. 128). It continues to say that "Social risks are implicit in the impact of changes resulting from measures in the areas of fiscal, price, investment, and agricultural policy that aim at improving conditions in the rural areas while restraining urban consumption. A corollary is, therefore, the possible erosion of the present consensus around the government program because of the position of the urban elite and trade unions." (Para. 130). 29. Similarly, weaknesses of Government administration caused diffi- culties in carrying out a :omprehensive reform program during a short time span. In particular, the Ministry of Rural Development suffered from a weak administration, and was unable to overcome opposition from certain para- statals and particular interest groups, which muscled strong political support. Again, these difficulties were referred to briefly in the President's Report (para. 120). B. Cooperation with IMF 30. During the preparation of the SAL and the Fund's EFF, full coopera- tion between the staffs of the Bank and the Fund was achieved. Basically, the Fund's performance criteria and the SAL program were mutually reinforc- ing. Although compliance with EFF performance criteria was not made a condi- tion for SAL disbursement, the Bank, when considering the release of the second tranche, took into consideration the Government's inability to meet the EFF criteria. C. Dialogue with Government 31. During the period of SAL preparation, close cooperation was estab- lished between Bank staff and the Ministry of Planning (which was in charge of negotiations), the Ministry of Finance and the Prime Minister's Office. - 8 - As stated earlier, the Bank staff was unable to have a fruitful dialogue on agricultural reform, partly because of the political weight carried by far- mers' interest groups. This proved to be detrimental to the effectiveness of several key elements of the program. D. Overall Assessment of rrogram Design 32. A closer review of the SAL content leads to the conclusion, even without the obvious benefit of hindsight, that despite the efforts made by the staff in preparation of the SAL, the first in Western Africa, the program was overambitious. Even if the severe drought of 1980/82 had not occurred, one might doubt that the political, social and administrative structures of Senegal were sufficiently strong to implement in a short time span a compre- hensive program, with far reaching economic and social effects.5/ A more limited program (not necessarily a SAL) concentrating on a few key measures for which sufficient political and administrative support could have been obtained, might have had a reasonable chance of success. IV. PROGRAM IMPLEMENTATION 33. The PCR contains a detailed and balanced evaluation of SAL program implementation (paras. 16 to 30). For that reason, the following will state briefly the major achievements and shortcomings of the program. It will first concentrate on components where the program achieved satisfactory results, and then on those components where results were disappointing. 34. On the whole, the Government complied with the conditions on public investments (para. 11). The previously prepared investment program, which was overextended, was revised and the share of "directly productive" proj- ects was increased to 55% of the total program. In May 1981, the Government presented to the Bank a list of projects which conformed to the agreed crite- ria. The Bank considered this list still to be too large and in turn offered to help prepare a "core" investment program. This smaller program was pre- sented to a donors' conference, organized by the Bank, which met in Paris in October 1981. The Government subsequently did not execute several previously prepared projects which had been eliminated from the "core" program because of their low returns. The notable exception, however, were two large irriga- tion projects serving areas in Mali, Mauritania and Senegal, which were supported by bilateral donors. Despite these improvements, however, serious institutional weaknesses remained in investment planning, and in project pre- paration and implementation by the technical ministries, parastatals and the Ministry of Planning. 35. A second major component where compliance with the agreed action program was, on the whole, satisfactory was the parastatal sector (para. 12). The Government indeed reversed its previous policy of relying on parastatals to manage key economic activities. Several medium and small-size parastatals 5/ See the following Chapter IV. - 9 - were returned to the private sector. The very large parastatal marketing agency, ONCAD, was abolished and replaced by a smaller body - SONAR. With existing parastatals, the Government signed "contrats-plans." These set out in detail the parastatal's medium-term objectives and program and provided it with some operating autonomy, lessening the too frequent central Government interference. By May 1984, four parastatals out of ten mentioned in the SAL program, had signed "contrats-plans" with the Government. In each case, these "contrats-plans" were reviewed by Bank staff. A useful instrument in encouraging the preparation of "contrat-plans" was the release of counterpart funds to finance agreed operations. The process of preparing the "contrats- plans" proved to take longer than originally envisaged. It benefited from the Bank's TA program (see para. 53). 36. On prices and producer incentives, compliance with SAL conditions was partially successful. The quasi devaluation measures were implemented as planned in 1981. Import duties were increased from 10% to 15%, and an export subsidy of 10% for five major industrial exports was introduced. The res- ponse to the export subsidy in boosting non-traditional exports was generally favorable (PCR, para. 22). 37. The only exception was the subsidized price of rice which was, how- ever, increased by 31% in February 1982 and again by 24% in August 1983 (PCR, para. 23). The higher price level has eliminated the need for rice subsidies in the fiscal year 1983/84, although the present price may not be sufficient to encourage substitution of domestic millet for imported rice. 38. With respect to fertilizer, the SAL program required only studies on fertilizer composition and prices. The studies were made, and the Bank's recommendations to differentiate prices according to components, and to double the price of fertilizers, were implemented in 1983 (para. 48). 39. Implementation of the short-term macroeconomic measures (public finance, monetary policy, external debt) was not satisfactory. The quantita- tive targets agreed upon in both SAL and EFF (see paras. 10, 16, 17) were not met. The failure of the Government to achieve these objectives can be attri- buted to the effects of the severe drought during 1981/82 and to weakness in- herent in the actual targets set (see paras. 24 and 25). Whether the inclu- sion of short term macroeconomic targets in the SAL program which to some extent overlapped with EFF performance criteria, was justified, is a question discussed later (paras. 65 and 66). 40. In subsequent years, the expansion of bank credit was generally in line with targets agreed under the IMF stand-by (which had replaced the EFF). On public savings, some improvements took place in 1982 and 1983, although serious problems remained in controlling the public sector deficit, mostly due to high expenditures as well as deficits of parastatals and the Price Stabilization Board. Similarly, the balance-of-payments situation improved somewhat in 1982 and 1983, resulting mainly from a recovery in groundnut and phosphate export volumes, but the substantial deficit could still only be financed by recourse to external borrowing. - 10 - 41. The agricultural reforms agreed under the SAL program consisted mostly of a number of tests dealing with institutional improvements, as well as of studies on various aspects of credit and pricing. Several of these tests and studies were accomplished. However, Government policies in key areas particularly for fertilizer and groundnut seeds, were inconsistent with the broader reform objectives (PCR, paras. 28-30). The sudden reversal of a new seed liberalization policy agreed upon with the Bank and the cancellation of prior commitments to farmers, led to the Bank's decision, after full con- sultation with the Government, to cancel the undisbursed part of the SAL in June 1983. In this connection it was further agreed that the dialogue on policies would be pursued within the context of the Bank's operations in specific sectors until the Government and the Bank agreed that another broad SAL-type operation was appropriate. V. IMPACT OF SAL 42. The expectations about the economic impact of the Government'sre- form program, supported by the large multi- and bilateral aid programs in- cluding the SAL, were briefly summarized in para. 18. In the event, the country's economic performance in 1981 was worse than expected, mainly as a result of two consecutive drought years. In 1981, GDP declined by 0.8% and domestic savings were negative; the deficit on current account increased to 24% of GDP. Since 1982, however, the economy has recovered from the setback of 1980 and 1981. GDP grew at an average rate of 10% per annum during 1982 and 1983 and domestic savings became positive. The deficit on current account as a percentage of GDP was reduced to 15% and 17% respectively in 1982 and 1983, from the exceptionally high level of 24% in 1981. 43. The direct impact of SAL disbursements was too small to have dis- cernible effect on the overall trends of GDP growth and balance of payments. The US$40 million disbursed in 1981 under the first tranche formed only 10% of the total gross capital inflow in that year (about US$390 million) while the undisbursed second tranche of US$20 million was more than replaced by additional aid from bilateral sources (see para. 47). 44. Of much greater importance was the impact of the policy dialogue with the Government and effects of specific components of the SAL program. During the preparation of the SAL, the Prime Minister (who became President in January 1981) took an active part in giving direction to the change in Government policies, as expressed in the PREF and in the Declaration on Economic Policy (para. 22). The subsequent preparation of specific action programs was supported by the Ministers of Planning and Finance. While there were delays in implementation and some agreed actions (especially in the important agricultural sector) were not carried out, there have been tangible changes in several areas which if sustained, should have a significant impact on Senegal's development. First, the public investment program has been streamlined and its project composition has been improved. Second, a gradual reform of important parastatals has been initiated which in turn contributed to the reduction of public sector deficits and to an increase in public savings. Third, the quasi-devaluation measures con- - 11 - tributed to an increase and diversification in exports, as well as to a reduction in the current account deficit. VI. SAL MONITORING AND TECHNICAL ALSISTANCE A. Monitoring of Program Implementation 45. The SAL included a detailed monitoring schedule related to each of the measures that had been agreed. The first supervision by Bank staff took place in January 1981, a few weeks after SAL approval by the Executive Directors, and continued at regular intervals throughout 1981 and later years. The Bank's monitoring system proved to be a useful early warning system, identifying difficulties in program implementation and suggesting actions to be taken to overcome such difficulties. Since the SAL and EFF programs were complementary and to some extent overlapping, monitoring of the implementation provisions was divided between the Bank and the Fund. The Fund monitored the macroeconomic aspects, such as quasi-devaluation measures, . domestic credit, government finance and external debt. The Bank monitored the investment program, the producer incentive system, parastatals and agricultural reforms. As was the case during the preparation of the program, - Bank and Fund staff collaborated closely during the implementation stage. As stated earlier, although there was no formal cross-conditionality in the respective programs, both the Bank and the Fund took into consideration compliance with the other's program. 46. The Bank supervision mission of January 1981 recorded satisfactory progress on the investment program. But it also noted the lack of progress in public finance and on agricultural reform. Although the mission expected that the two specific conditions for the release of the second tranche would be met - namely an adequate investment program and the quasi-devaluation measures - it recommended not to release the second tranche at that time. The reasons for the postponement were the unsatisfactory state of public finance and lack of progress in the agricultural sector. The decision of the Fund taken by that time to suspend the EFF also affected the Bank staff's recommendation not to release the second tranche. 47. The mission communicated its assessment to the Government as did the Fund when it cancelled the EFF. The Bank staff recommendation to post- pone the release of the second tranche apparently did not cause great concern with the Government, due to its relatively small amount (US$20 million) al- though Government officials were aware of the negative effect this might have for further SALs. The Government probably expected that the shortfall of funds from the second tranche would be compensated by additional assistance from bilateral donors which was not conditional upon economic performance. Indeed, such assistance was subsequently provided and the Bank staff made efforts to ensure that its own position on SAL conditionality would not jeop- ardize Senegal's efforts to increase the flow of aid from other sources. Some of the implications of the Bank's attitude in this respect are discussed later (para. 62). - 12 - 48. During 1981 and thereafter, Bank staff continued to maintain its dialogue with the Government on issues related to SAL compliance. Since further progress was made on a number of SAL components - such as the invest- ment program, the producer incentive system, and parastatals - and Senegal complied with the new IMF stand-by agreement, the Bank formally extended the SAL closing date originally set for December 31, 1981. The more difficult aspects of these discussions with Government officials concentrated on two major agricultural inputs: fertilizer and seeds. On fertilizers, the Government accepted the Bank proposal to differentiate prices according to components, and to double the price of fertilizers thus reducing the element of subsidy. Distribution of fertilizer was transferred to the firm which manufactured it. The agreement on the new fertilizer scheme was made in a "contrat-plan" between Government and the fertilizer company, and approved by the Bank in February 1983. Agreement on this matter was apparently facili- tated by the Government's use of SAL counterpart funds from the first tranche to strengthen the fertilizer company. 49. In late 1982, and after several delays, the Government announced a new policy to discontinue the storage of groundnut seeds. However, in March 1983, the Government reversed its policy without consulting the Bank, pro- bably yielding to political pressure and reflecting uncertainty about reactions of farmers (see PCR, para. 30). The reversal on seed policy rein- stated the old system of subsidized central seed distribution, thus jeop- ardizing an important element of agricultural reform. This contributed to the decision in early April to cancel the undisbursed SAL funds. 50. After the second tranche was cancelled, the Bank's dialogue with the Government on structural issues continued, concentrating mainly on agri- culture. To this effect, Bank staff from the Agricultural Projects Division held discussions not only with Senegal authorities, but also with major bi- lateral donors (particularly France and USA). It also took an active part in the international conference organized by Senegal in 1983 on agricultural policies, in which major aid donors participated. B. Technical Assistance Related to SAL 51. Given the weaknesses in Senegal's institutional and administrative set-up which severely constrained the public sector's capability to implement the reforms agreed upon under the SAL, the program included several studies on key issues. These studies were financed by SAL funds and by separate technical assistance (TA) credits. The most important studies related to the structural adjustment program are briefly discussed below. 52. A TA credit was approved in August 1980 (Cr-1061-SE) to strengthen the capacity of the Ministry of Planning in investment planning and project evaluation. The TA provided under this credit achieved satisfactory results in improving the performance of the Ministry, particularly on project evalua- tion. The work done in the Ministry helped to prepare the "core" investment program which was presented to a donors' conference in 1981. At a later stage, the TA provided advice on the overall organization of the Ministry, and on government planning and budgeting procedures (PCR, para. 20). - 13 - 53. Using SAL resources the Bank also agreed to finance studies on the incidence of industrial incentives. After the closure of the SAL, the financing of these studies was transferred to the ongoing TA project. These studies will help to streamline the complex system of import duties, and to rationalize protection to domestic industries. 54. An important component of the SAL program was the reform of major parastatals, through the mechanism of "contrats-plans" signed between the Government and 10 parastatals, and approved by the Bank. The preparation of " contrats-plars" was assisted by the Bank through two TA projects for parapublic sector reform, the first approved in 1978 and the second in 1983. The second of these TA projects was designed to help prepare four "contrats- plans" a year, and to prepare the ground for a parapublic sector loan (PCR, para. 25). 55. In addition to formal TA projects, assistance was provided by regular Bank economic, sector and project missions. In work directly related to SAL preparation, a Bank economic mission helped the Government in drafting its Declaration on Economic Policy. Another economic mission assisted the Government in preparing the "core" public investment program previously discussed. The Bank's agricultural experts provided continuous advice on agricultural policies in general, and on policies related to fertilizer and seeds in particular. 56. A notable exception to this close cooperation between Government officials and Bank staff was the lack of systematic and in-depth analysis of agricultural institutions. The absence of Bank TA to the agricultural sector was certainly not due to the Bank's unwillingness to provide such assis- tance. It was caused by the Government's reluctance to involve the Bank in this sensitive area and more specifically by the lack of cooperation from the Ministry of Rural Development. A deeper involvement in, and understanding of, the agricultural institutions and policies would be a necessary precondi- tion for the Bank's operational support of this important sector. VII. DISBURSEMENT AND USE OF COUNTERPART FUNDS 57. The first tranche of the structural adjustment loan/credit (US$40 million) was disbursed soon after effectiveness. As mentioned before, the second tranche was eventually cancelled (para. 41). The loan/credit financed general imports, excluding petroleum, foodstuffs, armaments and luxury consumer goods. About US$650,000 of the loan was set aside to finance studies by consultants. No problems were encountered in processing disburse- ment requests. The first tranche was fully disbursed by September 1981. 58. The counterpart funds of the loan/credit were used for development expenditures of parastatals, mainly in the agricultural sector, based on specific agreements between the Bank and the Government. The use of counter- part funds to finance parastatals which had signed "contrats-plans" with the Government proved to be a useful instrument. Four important parastatals benefited from counterpart funds - SAED, SODEFITEX, ORLM and SIES. Although - 14 - the process of preparation of such agreements was slower than expected, which led to a slow rate of disbursement of counterpart funds, the Bank's insis- tence on such agreements as a condition for release of these funds was justified. 59. In summary, the technical arrangements regarding loan/credit disbursements worked well. Tranching and the allocation of counterpart funds served a useful purpose. VIII. CONCLUSIONS AND LESSONS 60. As a structural adjustment operation, Loan 1931-SE and Credit 1084-SE were not entirely successful. The Borrower was unable to fully implement the ambitious and complex reform program within a medium-term time frame, and major elements of the program - notably institutional and policy reforms in the important agricultural sector - were not realized. As a result, the second tranche was eventually cancelled. One of the factors that prevented the successful completion of the SAL program was the political environment within Senegal which presented major obstacles to far-reaching reforms perceived to affect established traditions and the relative well-being of different population groups in rural and urban areas. Other factors holding back major structural changes were institutional and adminis- trative weaknesses in the public sector as well as adverse economic condi- tions caused by factors beyond the control of the Government. 61. In a more limited sense, however, the SAL did have a significant impact on Senegal's economic institutions and policies. Thus, the operation was instrumental in establishing a close dialogue between the Government and the Bank, covering a broad range of national and sectoral development issues. T. hightened awareness among Senegal's political leaders and key administrators of the need for structural reforms, and assisted in working out detailed action programs in a number of crucial areas. More importantly, the SAL - in conjunction with the Fund's EFF and stand-by - led to a substan- tial ir.provement of investment programming, strengthened incentives for exports, provided the basis for a necessary realignment of key domestic prices, and initiated reforms in the important parastatal sector. 62. Several lessons emerge from the experience with this operation, some of which may have wider applicability and might be kept in mind for future SALs in Senegal or elsewhere. To begin with, it is quite evident that broad-ranging structural adjustment programs are a suitable instrument of Bank support only in those countries where the Government is firmly committed to such reforms, even under possible political or social constraints. Obviously, some degree of uncertainty on future political developments does exist in most cases, and such uncertainty cannot be avoided. However, the Bank has to make a judgement on the political feasibility of the structural adjustment program. In the case of the SAL to Senegal, social and political risks were briefly referred to in the President's Report (paras. 130 and 131), but even w4thout the obvious benefit of hindsight, it can be said that operational conc..asions were not drawn from this assessment and the risk was - 15 - underestimated. The PCR (para. 51) is quite specific on this point when it states: "The Bank was fully aware of political opposition that could be expected from urban population groups in response to the reduction in their living standards, and of the bureaucrats in response to the threat on their jobs. However, it had underestimated the opposition of the rural elite and had badly misunderstood the lack of cooperation on the part of the Minister of Rural Development with whom hardly any substantive discussion had taken place." 63. The political resolve of the borrower to adhere to the conditional- ity of a SAL can be weakened if alternative sources of finance are available to the Government. To some extent, this appears to have been the case in Senegal, which was able to receive additional assistance from bilateral donors without conditions on performance, at the time the Bank postponed the release of the second tranche. 64. Another lesson which can be drawn from this SAL experience is the need for some confidence in the baseline data if quantitative targets are agreed upon. A situation in which baseline data on key indicators prove to be seriously out of line shortly after the SAL is approved, makes such compliance criteria meaningless. In this respect the Bank could be faced with a serious dilemma. In several countries, data on key economic or financial indicators - such as public sector finances and borrowing commit- ments, domestic or external - might be incomplete and substantially inaccurate. Postponement of SAL agreement until statistical data are improved, might not be practical and could cause undue delays in taking measures which could improve a country's performance. On the other hand, setting precise quantitative criteria when a reasonable degree of confidence in baseline figures is lacking, might make such criteria obsolete from the start. A reasonable approach might be that in cases where baseline data on key indicators are known to be unreliable, the Bank should be careful not to set precise performance criteria, but might rather agree on actions required to achieve the desired results. Parallel Bank-funded technical assistance might be useful for improving statistics. 65. Finally, some observations can be made on Bank-Fund cooperation. SALs are usually considered at a time when the borrowing country faces serious financial difficulties - externally, internally, or both. In such a situation it is often difficult to implement programs of structural adjustment, unless measures are taken to stabilize these ibalances. It is therefore necessary that a SAL and some form of IMF support be negotiated in parallel, and that monitoring of the SAL takes into account performance under the IMF arrangement. However, while coordination and collaboration between the SAL and IMF program are imperative, overlapping of conditionality in both programs might not be useful, and might even lead to excessive complications in making a judgement whether a country is complying with the SAL agreement. 66. In the case of Senegal, cooperation with the IMF at various stages of the SAL and EFF was excellent, to a degree that some SAL conditions were - 16 - identical or very similar to the EFF performance criteria (paras. 10 and 30). When Senegal was unable to meet the EFF performance criteria, this also formed a breach of the measures agreed upon under the SAL, and put Senegal, at least technically, in default with the SAL program. However, inability of a Government to comply with IMF performance criteria, which are basically of a short-term nature, need not automatically lead to default of a SAL, which concentrates on medium term measures. In such cases, discretionary judgement could be used by the Bank as to whether failure to meet short-term IMF performance criteria undermines or weakens compliance with the SAL program. It may therefore be better not to include short-term performance criteria in SAL programs, especially if they overlap with IMF conditions. -17- ANNEX 1 Page 1 of 17 TRANSLATION TROM ORICINAL FRENCH Office of the Prime Minister Dakar, Senegal No. 0439/P([/SP Mr. Robert S. McNamara President World Bank Group Washington DC Mr. President: Please find attached to this letter the text of a Declaration of Economic Policy which the Government of Senegal has adopted as a structural adjustaent program covering the five-year period fron July 1, 1980, through June 30, 1985. This declaration outlines the economic and financial measures which the Government is taking, or is planning to introduce, in particular in the field of public finance, credit, balance of payments, prices, vages, investment and agricultural policy. The purpose of these measures is to correct the country's financial situation, and to lacrease its economic growth in real terms to a leve] which would substantJally surpass the rate of population growth; at the sam tis, these measures are intended to reduce Income disparities between the urban and the ruril populations. The Government of Senegal would like to obtain lang-tam finaneal assistance from the World Bank Group In suppors of this structural adjustment program. In this context, the Government would wish to enter Imediately Into agreements with the World Bank Group, under its structural adjustment leanding program, to obtain foreign exchange funds between July 1, 1980, and December 31, 1981, equivalent to US$60 million, of which US$30 -ill1on in the form of an IDA Credit and US$30 aillion as a Bank Loan. The Government would also wish to enter Into additional structural adjustment agreements with the Association and the Bank during the perio4 of economic and financial rehabilitation. The Government's request for structural adjustment lending is explained on one hand by the existence of structural problems which are preventing real economic growth and disrupting the balance of payments current account, and on the other hand.by the progressive worsening of Senegal's economic and financial situation following a cycle of unfavorable climatic