Niger - Structural Adjustment Program Project

Document of The World Bank FOR OMCIAL USE ONLY C iQ. /6 o -AfLz Reprt No. P-4185-NIR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 18.3 MILLION AND A PROPOSED AFRICAN FACILITY CREDIT OF SDR 36.6 MILLION TO THE REPUBLIC OF NIGER FOR A STRUCTURAL ADJUSTMENT PROGRAM January 23, 1986 Tbb document ba a roictd dbutmm an my be msW by mdpients ony in the perfuamce of tbd ofchddud If cotmt ma a OIdmwe be dboe wb Woeld Bank uthertonro..  CURRENCY EQUIVALENTS Currency Unit - CFA Franc (CFAF) i/ US$1.00 = CFAF 437 (1984 average) CFAF 385 (December 1985) CFAF 1 billion - US$2.3 million (1984 average) US$2.6 million (December 1985) I/ The CFA Franc is tied to the French Franc at the rate of CFAF 100 - FF 2. SYSTEMS OF WEIGHTS AND MEASURES (METRIC) I metric ton (m ton) = 2,205 pounds (lbs.) ABBREVIATIONS AND ACRONYMS BCEAO Banque Centrxle des Etats de l'Afrique de l'Ouest BDRN Banque de Developpement de la Republique du Niger CA Centre d'Approvisionnement CM Centre Multiplicateur CHMAN Centre des Metiers d'Art du Niger CNCA Caisse Nationale de Credit Agricole COPRO- -NIGER Commercialisation des Produits de Premi&re Nicessite INRAN Institut National de Recherche Agronomique du Niger LDP Letter of Development Policy LEYMA Compagnie Nationale des Assurances NIGELEC Soci&t& Nigirienne d'Electricite NITRA Societe Nationale de Transit OFEDES Office de l'Exploitation des Eaux du Sous-Sol OLANI Office du Lait du Niger ONAHA Office National des Amenagements Hydro-Agr_coles OPT Office des Postes et Telecoimunications PVN Office des Produits Vivriers du Niger RINI Societe Riz du Niger SNC Societi Nigirienne de Cimenterie SNCP Societe Nationale des Cuirs et Peaux SNT Societe Nationale de Television SNTN Societe Nationale de Transports Nigiriens SONARA Societie Nigerienne de l'Arachide SONICERAM Societ& Nigerienne de Ciramique SONICHAR Societ4 Nigerienne d'Exploitation de Mines de Charbon SONIEN Societe Nigerienne pour les Energies Nouvelles SONIDEP Societe Nigerienne de Distribution des Produits Petroliers SONIFAME Societe Nigerienne de Fabrications Metalliques SONITAN Societe Nigerienne de Tannerie SONITEXTIL Societe Nigerienne de Textiles SONUCI Cirance Tmmobiliire SOPAC Sociite de Papiers et Cahiers SOTRAMIL Transformation et Commercialisation du Mil UAB Usine d'Aliments du Betail UNCC Union Nigerienne de Credit et Coop6ration VETOPHAR Projet de Pharmacie Vetrinaire FISCAL YEAR October 1 - September 30  FOR OMCIAL USE ONLY TABLE OF CONTENTS PAGE Credit and Program Summary i-ii PART I - THE ECONOMY 1 A. Economic Performance in the 1970s 2 B. The Economic Crisis in the Early 1980s 3 C. Recent Economic Developments 5 D. Structural Problems of the Economy 6 PART II - THE STRUCTURAL ADJUSTMENT PROGRAM A. Objectives and Approach 8 B. Public Resource Management 8 C. Reform of the Parastatal Sector 14 D. Agricultural Policy 21 E. Program Development in Other Areas 26 F. Effects of the Structural Adjustment Program 27 PART III - THE PROPOSED CREDIT A. Credit History 32 B. Relationship Between the Proposed Credit and Policy Reforms 34 C. Benefits and Risks 34 D. Credit Amount 37 E. Disbursement and Procurement 38 F. Monitoring of Actions 39 G. Cooperation with the IMF and Other Donors 39 PART IV - OTHER BANK GROUP OPERATIONS IN NIGER 39 PART V - RECOMMENDATIONS 41 Tables: 1. NIGER - Economic Structure and Performance, 1975-1983 4 2. NIGER - Characteristics of Major Parastatals 15 3. NIGER - Scenarios With and Without Structural Adjustment 28 4. NIGER - External Capital Requirements, 1986-90 30 5. NIGER - Matrix of Policy Actions to be supported under SAC I 35-36 Annexes: I. Social and Economic Indicators 42 II. Status of Bank Group Operations in Niger 48 III. Supplementary Data Sheet 50 IV. Letter of Development Policy 51 V. Use of IMF Resources 81 This document has a resiced distnbution and may be used by recipients only in the perfomance of | thew ocial duie Its contents may not otberwie be disloosed without World Bank aut ion.  NIGER FIRST STRUCTURAL ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Niger Credit Amounts IDA: SDR 18.3 million (US$20 million equivalent) African Facility: SDR 36.6 million (US$40 million equivalent) Terms: Standard Program Description: The proposed credit would support the first phase of the Government's structural adjustment program which aims at increasing the efficiency of resource use in the Nigerien economy and strengthening the country's resource base for future econcmic development, as well as improving the public finance position and the balance of payments. The first phase of the structural adjustment program focuses on areas in which inefficiencies are most acute and where policy improvements would have the greatest beneficial impact on the country's budgetary and balance of payments position: (i) public resource management; (ii) the parastatal sector; and (iii) agricultural policy. Reform measures in public resource management include the restructuring of current expenditures, preparation of a three-year rolling investment program, increased domestic resource mobilization through cost recovery, improved debt management, and institutional reforms. Parastatal reforms are being introduced in three key areas: revision of incentive policies to improve parastatal performance and stimulate private investment, reform of the institutional and legal framework for public enterprises, and restructuring of the sector through rehabilitation, privatization and liquidation programs. Reforms in agricultural policy concern a reorientation of the sectoral investment program, liberalization of cereals marketing, reduction of input subsidies, improvement of the agricultural credit system, and a reorientation of agricultural research policy. The program also includes studies to eventually extend the adjustment effort to such other areas as energy, forestry, livestock, industry and trade. The program is described in the attached Letter of Development Policy. Program Benefits: The policy reforms are expected to: (i) improve public sector resource management, in budgetary  operations and parastatal performance; (ii) reduce policy distortions that impede private sector economic activities; and (iii) strengthen the resource base of the economy, particularly in the agricultural sector, and hence the country's growth prospects and balance of payments position over the medium to long term. Program Risks: Niger's structural adjustment program has four major risks: (i) problems with respect to the timely and sustained implementation of the measures and follow-up actions; (ii) insufficient initial supply response by the private sector to provide an impetus to economic growth; (iii) uncertainty about the short-term success of efforts to strengthen the resource base of the country as approaches for improving the performance of the agricultural sector are still being developed; and (iv) disruption of the adjustment program because of deteriorating international economic conditions and climatic factors. Several elements in the adjustment program, however, reduce the risks. The Government has thus far shown a strong commitment to implement the reform program and ensure follow-up action, and the private sector appears willing to become more active. Financing Plan: IDA US$20 million equivalent African Facility US$40 million equivalent Estimated Disbursements: The credit would be disbursed in two tranches: US$40 million equivalent upon effectiveness (of which US$10 million equivalent from IDA), and the remaining US$20 million equivalent after a performance review to be held 6-9 months after effectiveness. 1986 1987 -US$ million equivalent- Annual 20 40 - IDA 5 15 - African Facility 15 25 Cumulative 20 60 - IDA 5 20 - African Facility 15 40 Appraisal Report: This is a combined President's and Appraisal Report. Map: IBRD 19400  INTERNATIONAL DEVELOPNENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND A PROPOSED AFRICAN FACILITY CREDIT TO THE REPUBLIC OF NIGER FOR A STRUCTURAL ADJUSTMENT PROGRAM 1. I submit the following report and recommendation on a proposed development credit for SDR 18.3 million (US$20 million equivalent) on standard IDA terms to the Republic of Niger to support the first phase of the Government's structural adjustment program. It is proposed to supple- ment this credit with a credit of SDR 36.6 million (US$40 million equiva- lent) from the Special Facility for Sub-Saharan Africa (the African Facility), established by Resolution No. IDA 85-1, of May 21, 1985. PART I - THE ECONOMY 2. This section is based on the findings of an economic updating mission which visited Niger in August 1984 and subsequent structural adjustment missions. Annex I contains country data. 3. Niger is a vast landlocked country with a population of six million concentrated in a narrow band of arable land along its southern border. It is among the poorest countries in the world, with a per capita CNP of US$190 in 1984 and, like other Sahelian economies, it faces formid- able natural constraints to sustained economic growth. The economy is dominated by the rural subsistence sector and by the uranium mining sector which, since the mid-seventies, has been the country's principal foreign exchange earner and an important source of government revenues. Despite its meager resource base, Niger has traditionally been self-sufficient in food production (except during the Sahelian drought periods) and a minor exporter of livestock and crops. Highly favorable market conditions for uranium in the late seventies fueled the development of the modern sector and propelled the public sector into a dominant position in the economy. Since the beginning of the eighties, however, Niger's economic performance has deteriorated sharply, reflecting a weakened uranium market and renewed drought conditions. The country once again has to rely heavily on the subsistence rural sector and, at the same time, overcome the financial imbalances and structural weaknesses in its economy which are the legacy of the uranium boom. 4. Niger is a member of the West African Monetary Union, which operates a common central bank (BCEAO). The Central Bank issues the common currency of the member countries, the CFA Franc, whose full convertibility into French Francs at a fixed rate of 100 CFAF = 2 FF is guaranteed by France. BCEAO maintains at least 65Z of its foreign exchange reserves in the Union's operations account with the French Treasury which provides member countries with automatic overdraft facilities. The countries of the Union have a common interest rate structure. The Monetary Union thus imposes a discipline over monetary and balance of payment policies of the  - 2 - member countries which constrains their use of some macro policy instruments. A. Economic Performance in the 1970s 5. During the first half of the seventies, Niger exhibited the features of a resource-poor Sahelian country. Economic performance was dependent on a limited nutber of crops (millet, sorghum, groundnuts and cowpeas) and livestock, both of which were severely constrained by poor soils and unfavorable climatic conditions. This was dramatically illus- trated when a devastating succession of droughts, beginning in 1972, led to a sharp decrease in crop production and a decimation of the country's livestock herd. As a result, real gross domestic product declined, falling in 1973 to some 15% below its level at the end of the sixties. Crop and livestock exports also fell by nearly one-third between 1972 and 1975, and a corresponding reduction in the country's total exports was avoided only by the growing importance of uranium exports. Throughout this period, the rural sector continued to dominate the economy, accounting on average for around one-half of GDP and three-quarters of export earnings. Investment during the period was a modest 12-15% of GDP. nearly all of which was financed by foreign sources since the economy was not able to generate significant domestic savings. 6. During the second half of the decade, Niger's economic perfor- mance improved dramatically due to two factors which appeared to indicate a permanent improvement of the resource base but proved to be short-lived. First, growth of the rural sector accelerated due to favorable weather conditions and a successful herd rehabilitation program. Crop production increased sharply and, by the end of the decade, Niger was even producing a small grain surplus. Second, buoyant world demand led to a marked rise in the country's uranium production and in associated government revenues. Investment increased considerably, reaching nearly 28Z of GDP in 1980, with over two-thirds being financed by domestic savings made possible by the boom conditions. As a result, real GDP grew at a high average rate of 7.5% per annum and export volume at 10% per annum. Although outstanding debt more than trebled and sizeable budget and external current account deficits began to emerge at the turn of the decade, optimistic predictions for the country's longer-term growth prospects suggested these were within sus- tainable limits. 7. The uranium boom brought with it fundamental changes in the economy. First, the modern sector began to play a more significant role. Its share in GDP rose from around 27% in 1975 to 36% in 1980 due chiefly to the growth of the uranium industry, which by 1980, the peak year of production, accounted for 13% of GDP and 80% of export receipts. The modern private sector outside the uranium industry, however, remained small. The private sector expansion that did occur during the boom period was, moreover, concentrated in service activities -- construction, trans- port and commerce - whose fortunes were highly dependent on conditions in the uranium industry and the size of the Government's construction program. 8. Second, the public sector grew rapidly. The increased foreign exchange earnings and budgetary resources resulting from the expansion of uranium production, coupled with substantial government borrowings, sup- ported escalating public recurrent expenditures and a large public  investment program. By 1979/80, government recurrent expenditures had risen to 9Z and public investment to 192 of GDP, the latter accounting for over two-thirds of total investment. A large part of the recurrent expenditures supported a rapidly expanding civil service with increasingly favorable wages and benefits, and provided subsidized services to the urban population. Many of the public investment projects were undertaken without sufficient attention to their economic viability, the appropriateness of their design, the implementation capacity of government agencies, and future recurrent financing and maintenance needs. A dozen new public enterprises were established during the boom period, bringing the number of parastatals to over 60. By the beginning of the eighties, parastatals accounted for 11% of GDP and 50% of employment in the modern sector. Poor management and inappropriate government policies, however, led to large operating losses in many public enterprises, thus increasing their financing needs. 9. Finally, as a result of the two changes discussed above, the rural sector became less dominant in the economy, although its continued importance accentuated the dualistic structure of the economy. Crop and livestock production increased substantially but did not keep pace with the growth of the modern sector; by 1980, the share of the rural sector had fallen to 43% of GDP and 20% of export proceeds. Moreover, the sector developed few links with the modern economy and its growth potential continued to be limited by the overutilization of soils, the extension of cultivation into marginal areas due to population pressure, a secular reduction in rainfall, and the lack of technological improvements suited to Niger's rainfed agriculture. B. The Economic Crisis in the Early 1980s 10. The favorable economic performance ended abruptly in 1981 (see Table 1). Real GDP stagnated in 1981 and 1982, and then declined by 3% in 1983. A weakened world demand for uranium, which resulted in a 22% reduc- tion in Niger's uranium production between 1981 and 1983 and a fall in the US dollar price, was the principal cause of the economic contraction. The mining sector's share of GDP fell from 13% in 1980 to 8% in 1983, which was close to its pre-boom level. The decline in mining activity and subsequent cutbacks in the government's investment program resulted in a substantial decrease in construction and public works activities and reduced the share of the modern sector to 30% of GDP, just above its pre-boom level. Rural production, though unaffected by the shrinkage of the modern sector, also stagnated because of a period of serious drought starting in 1982, although output value initially increased as a result of substantial increases in official prices of the principal cash crops. 11. The slowdown in economic activity was accompanied by the emer- gence of sizeable fiscal deficits. Budgetary revenue, which had peaked at 13% of GDP in 1980/81, fell to 10% of GDP in 1982/83. This rapid deterio- ration reflected the heavy dependence of revenues on the modern sector and on international trade, both of which declined relative to GDP over this period. Reduced revenues, however, were not immediately matched by a cutback in public expenditures. Expecting a quick recovery of uranium prices, the Government continued to implement its ambitious Five-Year Development Plan by relying increasingly on commercial foreign borrowings  - 4 - to finance investment projects. An expanding wage bill and the growing interest obligation of tlae external debt placed increasing demands on the Government's current budget. Initial cutbacks were principally in mainte- nance and materials expenditures which led to a more rapid deterioration of the existing capital stock and inefficiencies in the delivery of public services. The budget deficit averaged 9Z of GDP over the 1980/81-1982/83 period. Two-thirds of the accumulated deficits were financed through external borrowings. The financing demands of the public sector led domestic credit to expand at an average of 15% per annum between 1980 and 1983. Moreover, financing the growing parastatal deficits by public financial institutions led to near-bankruptcy of the banking system. TABLE 1: NIGER - ECONOMIC STRUCTURE AND PERFORMANCE 1975-1983 1975 1980 1983 ---(percent)- - GDP growth ( in real terms) 0.6 4.9 -2.6 Rural sector/GDP 49 43 46 Mining sector/GDP 6 13 8 Modern sector/GDP 27 36 30 Investment/GDP 20 28 14 Public Investment/GDP 9 19 10 Government expenditures/GDP 13 20 17 Budget deficit/GDP -1 -6 -7 Sbare in export earnings: - agriculture/livestock 53 20 22 - uranium 47 80 78 Current Account Deficit/GDP -1 -12 -4 External debt outstanding and disb./GDP 16 a/ 35 54 Debt service/Exports 9 a/ 22 34 b/ Public debt service/Revenues 11 11 45 b/ Memorandum Item GDP (Current CFAF billion) 156 536 675 a/ Public debt only. b/ Scheduled payments. Source: Bank calculations based on government data.  -5- 12. The financial imbalances in the public sector were accompanied by sizeable deficits in the external current account. Including official grants, the current account deficits averaged 9% of GDP during 1980-83. The U.S. dollar value of uranium exports, which accounted for about three-quarters of export receipts, decreased at an average annual rate of 13% while other exports (mainly agricultural products) decreased by 5Z annually. Current account deficits were nonetheless reduced due to a more rapid decline in imports. The financing of these and earlier deficits, however, forced the country to accumulate a heavy foreign debt which reached CFAF 361 billion in 1983 (54% of GDP), of which 77% was public or public-guaranteed debt. 1/ As a result, debt service payments rose sharply. The debt service/exports ratio increased from 22% in 1980 to 34Z in 1983 while the public debt service/public revenues ratio increased from 112 to 45% during the same period. C. Recent Economic Developments 13. Faced with rapidly deteriorating economic conditions, the Govern- ment took drastic action in 1983 to reduce the domestic and external financial imbalances. Demand management measures were introduced in the 1982/83 budget including a freeze in wages and salaries, cutbacks in supplies and investment expenditures, and tighter control on foreign borrowings. These measures were the first steps in the Government's stabilization program which was subsequently supported by three IMF Standby arrangements, the last of which was approved in November 1985. The stabi- lization program is designed to: (i) improve the tax effort; (ii) limit the growth of current expenditures; (iii) reduce and restructure investment expenditures; (iv) reduce the Government's domestic arrears; (v) improve the financial performance of parastatals; (vi) restrain foreign borrowing; and (vii) decelerate domestic credit expansion. The program also includes initial steps to liberalize pricing and marketing policies, reduce the size of the parastatal sector, and reorient public investment towards directly productive sectors. Debt rescheduling agreements were reached with the Paris Club in November 1983, 1984 and 1985, and with the London Club in early 1984. 14. Despite the impact of the drought on public expenditures and the balance of payments, which required some modification of initial targets, implementation of the stabilization program thus far has been satisfactory. Niger has made considerable progress towards reducing its domestic and external imbalances. In the first two years of the program (1983/84- 1984/85), the budget deficit and the deficit in the external account were both reduced significantly to about 5% of GDP. Domestic credit was contained while capital inflows and external debt relief were significantly higher than initially projected. The reduction in the budget deficit principally reflected a nearly 50% cutback in investment (mainly infra- structure) expenditures. The Government's attempt to limit current 1/ Of the public or public-guaranteed debt outstanding at the end of 1983, about 36% consisted of multilateral credits (of which 15% from IDA), 36% of bilateral loans (mainly from France and Saudi Arabia), 25% of loans from private lending institutions (mainly in France and the U.S.), and 3% of suppliers credits.  - 6 - expenditures was less successful and did not improve their structure as operations and maintenance continued to be cut. The performance of several parastatals did improve, however, and their financial position was strengthened, thus reducing their demand on the government budget. On the revenue side, the downturn in economic activity led to a reduction in revenue collection in spite of the new tax measures taken. The reduced deficit in the external current account was due almost entirely to the 27% reduction in imports brought about by expenditure reductions. 15. Real GDP in 1984 is estimated to have fallen for the third successive year. The 16% decline in 1984 is even sharper than that of previous years due primarily to the continued drought conditions which resulted in a 30-40% decline in food crop production and a loss of about 40% of the livestock herd. The reduced level of public expenditures and the closure of the Nigerian border since early 1984 also had a negative impact on GDP. The outlook for 1985 and 1986 is somewhat better. GDP is projected to recover some of its earlier decline and grow at an average rate of about 6%, due mainly to a strong recovery of the rural sector following the recent abundant rainfall. D. Structural Problems of the Economy 16. The ability of the country to achieve acceptable fiscal and external positions and to establish the foundations for future growth is highly constrained by the structural weaknesses in the economy which emerged as a result of the uranium boom, and by the country's narrow resource base. Inefficiencies in public resource management and the large and inefficient parastatal sector have contributed to the downturn of the economy. In addition, the small modern private sector, the weak agricul- tural base and the underdeveloped human resources have further limited the growth of the country. These issues have to be addressed more vigorously than they have been in the past if sustained improvement in economic performance is to be achieved. 17. Inefficient Public Resource Management. The underlying structural issues in the area of public resource management in Niger are the dominant role of the public sector in the economy and the low efficiency of public sector intervention, both with regard to resource mobilization and to expenditure. During the uranium boom, the Government used the public expenditure program as the primary instrument for allocating financial resources in the economy and for generating economic growth. As a result, the financial and managerial resources of the public sector were severely strained and serious inefficiencies developed in resource allocation. Public investment became biased towards infrastructure and building projects, which doubled their share of the investment program during the boom period, while agricultural investment suffered from a lack of viable projects, unsatisfactory project design and a shortage of domestic counter- part funds. Moreover, an imbalance developed between funds allocated to new investment and to efficient use of existing investment. This problem was aggravated by the structure of recurrent expenditures which favored personnel and subsidies over operation and maintenance. The rapidly increasing interest burden which resulted from the expanded public debt exacerbated the structural problems associated with recurrent expenditures. In addition to a weak domestic revenue base, cost recovery for public services was insufficient.  -7- 18. Large and Inefficient Parastatal Sector. Public enterprises dominate large segments of modern production and commercial activities. They have proliferated into uneconomic activities and have acquired privi- leges which discourage private sector investment. Many parastatals have incurred substantial operating losses and have been unable to make finan- cial contributions to their investment programs. Government regulatory policies in the areas of pricing, procurement and employment have been a principal cause of their poor performance. Excessive government inter- ference in management, lack of qualified personnel at all levels and inadequate accounting practices have also negatively affected their perfor- mance. 19. Small Modern Private Sector. Niger's modern private sector is very poorly developed. Its industrial sector is small by any standards, being handicapped by the limited size of the market, the lack of a raw material base and the landlocked pos-tion of the country. In addition to these impediments, government regulatory and incentive policies have not been conducive to the development of viable activities in the industry and trade sectors. Pricing and marketing controls have contributed to dam- pening private initiative. Investment incentives have focused more on promoting investment per se than on the longer-term economic viability of projects. As a result, investment projects often have not been in line with the country's comparative advantage, have used capital inefficiently and have provided only limited employment opportunities. Moreover, incen- tives have discriminated against export and small-scale industries, and have given the Government excessive control over private investmen, decisions. 20. Weak Resource Base. Niger's economic growth has been and will remain limited by its meager resource base, landlocked position and rapid population growth. The subsistence agricultural sector will remain the mainstay of the economy for the foreseeable future although, in its present form, it cannot be expected to create significant surpluses. Apart from the vulnerability of the sector to the vagaries of the weather, it is handicapped by the continued degradation of soils and of the environment. Modern technical packages suitable for Niger's rainfed agriculture have not yet been developed and irrigation development is plagued by high cost. The deterioration of existing irrigation perimeters and other infrastructures has also hampered productivity. Moreover, pricing policies for agricul- tural inputs and products have distorted incentives for cost-effective production. Over-exploitation of land has also led to declining soil fertility and to desertification wnich result in heavy losses in agricul- tural production. 21. The human resource base of the country is extremely underde- veloped. Primary education enrollment rates have been declining and, at 23%, are among -he lowest in the world. Only 8% of the population (0.5% of women) is literate, which makes introduction of any innovations in the rural areas very difficult. Basic health services are poor due to finan- cial constraints and inefficient allocation of budgetary resources. The high population growth of ,.O% per annum puts additional pressure on the  country's resource base and further increases the budgetary burden of providing basic services. PART II - THE STRUCTURAL ADJUSTMENT PROGRAM A. Objectives and Approach 22. To accelerate economic growth while keeping budgetary and exter- nal imbalances at sustainable levels, the Government of Niger recognizes that its current stabilization efforts have to be complemented with an adjustment program aimed at overcoming the structural problems in the economy outlined above. The objectives of structural adjustment and financial stabilization are mutually supporting as improvements in the use and allocation of resources will be pursued within the overall limits of a sound financiAl framework, i.e., the stabilization program will set the demand management targets for the economy and the structural reform program will ensure that these targets are met through policies that maximize supply responses and, therefore, growth. This will be achieved by: Ci) increasing the efficiency of existing investments; (ii) improving policies for more efficient future investment; and (iii) establishing improved policies for strengthening the country's human and physical resources. 23. Since the preparation and implementation of such a comprehensive adjustment program require several years, the Government has opted for a phased approach, addressing the most urgent structural problems rapidly while reform measures in other areas are being developed. The first phase of the structural adjustment program focuses on policy reforms in areas in which inefficiencies are most acute and where policy improvements would have the greatest beneficial impact on the country's budgetary and balance of payments position: (i) public resource management; (ii) the parastatal sector; and (iii) agricultural policy. This focus is appropriate. Bud- getary policy is the major economic policy instrument available to the Government under the arrangements of the West African Monetary Union; and agriculture is the key sector for future growth and development of the country given the dim outlook for Niger's uranium industry. The program is outlined in the Government's Letter of Development Policy (Annex IV) and described more fully below. The preparation of specific reform measures in other sectors is also an integral part of the first phase of the Government's program. To this end, the Government is undertaking studies to identify and prepare reform measures for energy, forestry, livestock, financial sector, industry and trade to be implemented in subsequent phases of the adjustment program. B. Public Resource Management 24. As mentioned earlier, the role and size of the public sector in Niger needs to be reduced in line with more limited resource availability. In addition, a more efficient use of budgetary resources will be required to better utilize existing investments, expand essential services and strengthen the basis for future economic development. To this end, spe- cific reform measures have been designed to restructure government expendi- tures.  -9- Structural Issues 25. Expenditures. Analysis of the recent evolution of Niger's public expenditures indicates that reductions in the government budget deficit have mainly been achieved through cuts in investment expenditures which, having peaked at 19% of GDP in 1979/80, fell to 5% of GDP in 1983/84. To the limited extent that current expenditures have been affected, cuts have come primarily from the already underfunded categories of materials and supplies, including counterpart financing for foreign-financed projects. These developments have resulted in a number of structural imbalances in the government expenditure program: (i) a high share and rapid growth of personnel expenditures; (ii) inefficiency in the delivery of public ser- vices; (iii) inadequate maintenance; and (iv) poor matching of investment expenditures with development needs. 26. During 1979/80-1983/84, the government wage bill grew at nearly 9Z per annum representing over one-third of current outlays. The rapid growth of personnel expenditures, despite a general wage freeze, has been due primarily to the Government's employment polices. The majority of students enrolled in higher education receive gover.ment scholarships and are entitled to enter the civil service upon completion of training; once in the civil service, periodic promotions and complementary training are automatic. In addition, these policies have resulted in a top-heavy personnel structure (44% of total staff are top-grade civil servants) which has created a severe imbalance between central administration and opera- tions in a number of important ministries. 27. The expansion of the wage bill, in combination with cuts in expenditures for supplies, has also exacerbated imbalances between outlays for personnel and for supplies, thus reducing the ability of public agen- cies to deliver services efficiently. At the end of the 1970's the sup- plies/wage bill ratio was around unity but by 1982/83 it had fallen to 1:2. This deterioration has either disrupted services or raised unit costs to abnormally high levels. The education and health sectors are prime exam- ples of the latter; these two sectors now account for over half of civil service employment and the increasing share of their budgets devoted to salaries has led to rapidly increasing costs per student and per patient. 28. Another structural issue related to recurrent expenditures concerns insufficient funding for maintenance of existing facilities. The problem is best illustrated by the transport sector where under-funding of both periodic and routine maintenance has led to premature degradation of the road network, thus necessitating costly rehabilitation. A similar problem exists for irrigation and water supply schemes, health and education facilities, and administrative buildings. Until the Goverment can meet the operating and maintenance costs of existing projects or transfer these costs to beneficiaries, it will be difficult to justify new infrastructure projects. 29. Fundamental imbalances have also emerged in the composition of capital expenditures vis-a-vis the development needs of the country. During the uranium boom, the availability of foreign financing became generally a more important criterion for project selection than economic viability. As a result, large external debts have been incurred for projects of little relevance to the long-term develoument of the country. The design of certain projects has also been inappropriate with respect to  - 10 - service standards and choice of technology. For example, the Government has devoted excessive expenditure to the construction of paved roads relative to less costly gravel roads which are more appropriate to the level of traffic. Finally, there has been a problem of matching public expenditures with the Goverrnment's stated equity goals. Infrastructure and social sector projects have favored urban over rural populations and higher-level over basic services. For example, in the health sector only about 10% of resources were allocated to rural dispensaries - where 10 million consultations take place annually - while the bulk of resources were devoted to urban hospitals. In education, expenditures on primary education have stagnated resulting in a decline in the enrollment ratio, while expenditures on secondary and higher education have expanded rapidly, despite the fact that the current number of graduates already exceeds the needs of the modern sector. 30. Resource Mobilization. The steady decline of government cevenues since the onset of the economic crisis reflects two weaknesses in tne revenue system. First, tax revenues are highly dependent on international trade and modern sector activity, both of which have declined relative to GDP. Second, non-tax revenues are derived primarily from the Government's share in the profits of parastatals and mining enterprises, which have fallen sharply in recent years. As part of its stabilization program, the Go)vernment is addressing these weaknesses by introducing measures to broaden the revenue base and improve the buoyancy of the tax system. However, despite the measures already taken and those to be implemented -- including the introduction of a value-added tax - the short-term prospects for increasing tax revenues are severely limited by the current structure of the economy. Additional resources will need to be mobilized if essential investments are to be made and efforts to improve the basis for long-term development are to be strengthened. 31. The need for additional resources beyond those which can be mobilized via the tax system highlights the potential role of cost recovery measures, particularly user charges, to finance goods and services provided by public agencies. Few data are available on revenues from user charges in Niger, but the large transfer payments to consumers through the budget and the increasing claims of the operating agencies for financial support cf their programs suggest that they are minimal. Direct transfers to consumers alone amounted to 18% of public current expenditures in 1983/84, mostly for health and education programs as well as fringe benefits for civil servants. The present distribution of these benefits is, moreover, highly skewed towards higher income groups living in urban areas. For example, in the health sector the poorer income groups bear a dispropor- tionate share of costs. They pay for drugs while civil servants and other wage earners receive free drugs at urban facilities. Similarly, emphasis on higher education and the provision of scholarships tends to benefit a select group of the population without adequate consideration of their relative ability to pay. 32. There will also be a continuing need for Niger to mobilize supplementary external resources. However, Niger's external debt position is critical and will remain so for the rest of the decade. Successful debt reschedulings in recent years have permitted net capital flows to remain positive, but have involved substantial costs in terms of higher moratorium interest rates and future debt service obligations. The need for addi- tional external resources while facing these substantial debt service  - 11 - obligations requires action on two fronts. First, further debt resched- uling is essential in the short-term, although its implications for debt service obligations in the early 1990s need to be monitored very closely, since excessive rescheduling to permit short-term increases in public expenditures would only create an aggravated crisis in subsequent periods. Second, a more prudent borrowing policy is necessary to assure that the structure of the debt is improved in the medium-term. Such a policy needs to focus not only on the terms and conditions of new borrowing but also on the choice of projects financed with external resources. 33. Finally, the issue of distortions in the tax system and their effect on future growth needs to be addressed. Data are not currently available to assess the extent and full effect of such distortions, but two areas warrant study in order to prepare reform measures. The first is the import tax structure which favors import replacement activities over exports, results in disparate and excessive levels of effective protection and encourages capital intensive production. A related problem concerns the fiscal incentives provided under the Investment Code which aggravate the distortions occasioned by the import tax structure and increase the impediments to export activities. Reform Program 34. The principal reform measure in the area of public resource management is the preparation, by the Government, of a three-year budget program (1985/86-1987/88) which reflects policy improvements under the structural adjustment program in four important areas: (i) restructured recurrent expenditures; (ii) formulation of a rolling investment program; (iii) expanded domestic resource mobilization and increased efficiency of the revenue system; and (iv) improved external debt management. Two additional measures adopted by the Government, i.e., the preparation of comprehensive sectoral strategies and the strengthening of financial and economic management capabilities in the Ministries of Planning and Finance, have been the key to the formulation of these reforms. The 1985/86 budget was adopted in September 1985, along with a budget framework for 1986/87 and 1987/88 which consists of expenditure and resource mobilization targets to be reviewed annually in light of past performance and new developments. The annual review will be used not only to finalize the following year's budget, but also to extend the budget program by another year and thus institutionalize the process of planning on a rolling multi-year basis. 35. Restructured Recurrent Expenditures. The three-year budget program reflects an alteration in the structure of recurrent expenditures in three important ways: (i) increased allocations for operation and maintenance; (ii) a freezing in personnel expenditures in real terms; and (iii) reduced transfers to consumers (see LDP, Attachment 2). The Govern- ment is reviewing the operation and maintenance needs for public infra- structure, and is committed to significantly increase this category of expenditure for existing facilities and to make adequate provisions for the oper__ion and maintenance of new infrastructure. As a first step, the budget program includes an increase in real terms in expenditures for materials and supplies over the 1985/86-1987/88 period. As a complementary measure, the Government has transferred the maintenance of small  - 12 - infrastructure, such as small-scale irrigation and educational facilities, to beneficiaries. 36. Recognizing that the rapidly growing public wage bill must be curtailed and that the structure of public employment is directly related to efficiency issues, the Government is currently undertaking, with IDA assistance, a study of the civil service system which will form the basis for a comprehensive reform program. The first phase of the study is to be completed by September 1986. In the meantime, the Government has frozen personnel expenditures in real terms. Moreover, a decision has been taken to discontinue, as of fiscal year 1985/86, new hirings of several categories of staff to contain civil service employment. 37. The three-year budget program prescribes a 3X annual reduction in real terms in the level of direct subsidies. To this end, additional cost recovery measures have been introduced for public services in the health, education, irrigation and water supply sectors, as outlined below. Para- statal reform measures will also substantially reduce the transfers to public enterprises (see Section C below). 38. Rolling Investment Program. The introduction of a three-year rolling public investment program constitutes a major improvement in investment programming. Agreement has been reached between the Governmeat and IDA on the size and broad sectoral composition of a program for the period 1985/86-1987/88, taking into account the public sector's implemen- tation capacity and the likely availability of domestic and external resources. The three-year program foresees total investments of 275.5 billion CFAF on a commitment basis, with the annual investment program growing from 80 billion CFAF in 1985/86 to 103 billion CFAF in 1987/88. This represents a gradual increase in the rate of planned public investment from 9.7% of GDP in 1984/85 to 11% of GDP in 1987/88. The investment program will be reviewed by IDA on an annual basis. 39. The structure of the investment program is based on sectoral strategies prepared by the Government and a thorough reassessment of the economic justification of ongoing and newly committed projects. The composition of the program (see LDP, Attachment 4) reflects an increased focus on productive sector investments, human resource development programs to ease Niger's long-term development constraints, and rehabilitation of existing infrastructure. The share of the productive sectors will increase from 381 of investment expenditures in 1984/85 to 45% in 1985/86-1987/88. Rural development investments will grow particularly rapidly, passing from 26Z of investment expenditures in 1984/85 to 38% in 1985/86-1987/88. Social infrastructure programs will increase steadily throughout the three-year period, rising from 25% in 1984/85 to 31% in 1987/88. Within this category, expenditures will be reoriented towards programs responding to long-term development needs. Education and health programs will therefore increase substantially, from 4.6Z and 1.7%, respectively, of investment expenditures in 1984/85 to 72 and 4% in 1987/88. Transport and communication infrastructure, on the other hand, will decline from 32% of investment in 1984/85 to 20% in 1987/88. In addition, periodic maintenance will receive priority over new construction projects.  - 13 - 40. In the context of the three-year investment program, the Govern- ment has reached agreement with IDA on a number of large projects which are currently being implemented or contemplated. In the agricultural sector, the Government has decided to reorient the "national productivity pro- jects", a process which has already begun with the restructuring of the IDA-financed Maradi II Project. The Government is also committed to a re-evaluation of large new projects in agriculture (Keita, Irhazer) to ensure their economic viability. In the transport sector it has been agreed that, given the high level of recent road construction, priority will be given to periodic maintenance in order to avoid the need for major rehabilitation investments in the future and to keep transrort costs from rising due to deteriorating infrastructure. New road construction, in particular the Zinder-Agadez road project and the "Route de l'Unite", will be substantially reduced compared to original plans. Finally, recognizing the need to concentrate investment in productive sectors, the Government is committed to substantially reduce its planned investment in a national stadium which is financed by concessional aid. 41. Domestic Resource Mobilization and Cost Recovery. The Government aims to improve the efficiency of resource mobilization by introducing cost recovery measures and reducing distortions in the tax system. In conjunc- tion with the adoption of its 1985/86 budget, the Government has taken specific measures to recover a greater share of the costs of public services from clearly identified beneficiaries. This will allow a continu- ation and expansion of a minimum number of basic services for the majority of the population despite increasing budgetary constraints. The new cost recovery measures are also likely to improve the efficiency with which public services are used. The measures already taken include: (i) a reduction in scholarships; (ii) an improved application of existing hospital fees; and (iii) the introduction of user charges for school supplies, irrigation, provision of potable water and medical evacuations. Additional cost recovery measures are being prepared for implementation in the 1986/87 budget year. To that effect, the Government has initiated a study, to be completed in June 1986, to evaluate the scope for further cost recovery taking into account the ability of beneficiaries to pay, collection costs and the nature of the user charge most appropriate for the kind of service provided. 42. The Government has also started preparations for an improvement in the efficiency of the tax system. A value-added tax will be introduced in early 1986. Moreover, a study is being conducted on trade policies and industrial promotion and incentives policies, including a review of the Investment Code. On the basis of this study, which is expected to be completed in October 1986, fiscal and trade reform measures will be prepared for implementation during subsequent phases of the structural adjustment program. 43. External Debt Management. The Government is committed to continue its prudent debt management policies introduced under the stabili- zation program. In its structural adjustment program, the Government will, during the 1986-88 period: (i) refrain from contracting any new loans on non-concessional terms; (ii) aim at obtaining concessional funding on terms and conditions comparable to IDA's and, as a minimum, obtain maturities exceeding twelve years on all new concessional assistance; and  - 14 - (iii) examine, in consultation with IDA, all proposed borrowing by para- statals. In 1986, the Government is committed to organizing a donors conference with assistance from IDA and other institutions. A multi-year financial plan for Niger to support the implementation of the structural adjustment program and alleviate the country's debt service burden will be presented at this conference (see para. 120 below.) With regard to debt data administration, the Government is committed to strengthening its debt monitoring system and computerizing its debt management. To that effect, technical assistance from the IMF, and the IDA Economic and Financial Management Improvement Project (Credit No. 1493) will continue to strengthen relevant services in the Ministries of Planning and Finance. 44. Sectoral Strategies. As a basis for formulating specific mea- sures to effect structural changes in the budget, the Government has prepared comprehensive sectoral strategies for rural development, water supply, energy, road infrastructure, telecommunications, education and health (see LDP, Attachment 3). Preparation of these sectoral strategies by government working groups involving all concerned agencies represents an important procedural reform in and of itself, since no consistent basis existed previously for making expenditure decisions. The strategy state- ments are the first step in the Government's effort to formulate sectoral objectives, translate these into realistic and appropriately balanced programs for recurrent and investment expenditures, and identify efficient cost recovery measures. 45. Institutional Reforms. Implementation of the public resource management component of the Government's structural reform program, partic- ularly the introduction of a three-year rolling investment program, neces- sitates complementary institutional reforms in the concerned ministries, most notably the Ministries of Plan and Finance. The Ministry of Plan I-dS begun to strengthen its investment programming system by improving the organization of its programming cycle and by introducing more rigorous procedures for the economic evaluation of investment projects. In partic- ular, better coordination with technical ministries should be forthcoming as a result of training being provided to the latter on programming tech- niques. Such training is the first step towards the creation of program- ming units in each of the technical ministries. The Ministry of Plan has also begun to strengthen its own capacity to supervise and monitor the implementation of investment projects in order to ensure their conformity with sectoral objectives and to provide information for the annual update of the rolling investment program. In the Ministry of Finance, steps have been taken to improve its financial planning department and to reinforce its budget preparation and fiscal administration. Overall, the economic and financial management capabilities of both the Ministry of Planning and the Ministry of Finance will continue to be strengthened under IDA's Economic and Financial Management Improvement Project. C. Reform of the Parastatal Sector 46. Reform of the parastatal sector is a critical element of the Government's structural adjustment effort. Because of its direct links to  - 15 - both the public and the private sectors, reform of the parastatal policy framework is paramount to improved public resource management as well as successful development of private initiative and growth of the country's modern sector. Structural Issues 47. The parastatal sector, in general, has performed poorly and its productivity is nearly one-third below that of the private modern sector. Many enterprises have incurred substantial operating losses, most notably SONICHAR (the coal mining and electricity company), OPVN (the cereal marketing agency) and NIGELEC (the power and water distribution company). Their deficits have been financed largely by government transfers and domestic and external borrowings which are guaranteed by the Government (see Table 2). As a result, at the end of 1983, public enterprises accounted for almost one-half of Niger's foreign debt and one-third of outstanding domestic credit. The situation is particularly severe in the domestic banking sector where a financial parastatal, BDRN, dominates. BDRN has financed operating losses of other parastatals; this has not only cut off credit to other sectors of the economy, but also poses a severe liquidity problem for the banking system as a whole. TABLE 2: NIGER - CHARACTERISTICS OF MAJOR PARASTATALS ---------