Somalia - Second Agricultural Sector Adjustment Program Project

Doc_mt of The World Bank FOR OMCIAL USE ONLY RepotNo. 12435 PROJECT COMPLETION REPORT SOMALIA SECOWN AGRICULWTRAL SECTOR ADJUSTMENT PROGRAM (CREDIT 2030-SO) OCTOBER 29, 1993 MICROGRAPHICS Report No: 12435 Type: PCR Agriculture and Environment Operations Division Country Department II Africa Regional Office This document bas a resticted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otberwise be disclosed without World Bank authorization.  CUIEN.CY EQUIVALENTS 1989 US$ I = So.Sh. 377 (Official rate in April 1989) 1990 US$ I = So.Sh. 2577 (Official rate in October 1990) ABBREVIATIONS ADC Agricultural Deveiopment Corporation AfDF African Development Fund ASAP Agricultural Sector Adjustment Program CIP Commodity Import Program CSBS Commercial and Savings Bank of Somalia ENC National Commercial Agency CiOS Government of Somalia IDA International Development Association IMF International Monetary Fund MNP Ministry of National Planning MOF Ministry of Finance NGO Non-Government Organizations ONAT Tractor Hire Agency SAU Social Action Unit SOMPET National Petroleum Agency GOVERNMENT FISCAL YEAR January 1- December 31  FOR OFFICL USE ONLY THE WORLD BANK Washingtn D.C. 20433 U.SA OfHe of O GotoMWner OPetallOna Evaluaftin October 29, 1993 MIEMORANDUtM TO-H iiitC-UTV13 M)RECMRS WMS 1 PRESIDW Subject: Project Completion Report on Somalia - Second A-ricultua Sector Program (Credit 203O.SO) Attached is the Project Completion Report on Somalia Second Agricultural Sector Adjustment Program (ASAP). There is no Part IL Disbursement began in August 1989. The Somali Government was overthrown in January 1991. The project was stopped in March 1991, when all IDA operations were suspended because of civil war. Ovly 49 percent of the credit had been disbursed. the second ASAP was a SAL in evezything but name. Closely coordinated with the Fund's program, its key objective was achievement of balance in a liberal foreign exchange market. Hence, it allocated foreign exchange through weekly quasi auctions. The ASAP's adjustment program also included targets for taxes, fiscal deficit, and money supply increase. None of these targets were met The ASAP's sector program was equally ambitious. The ruling party had introduced "scientific socialism" following its coup d'etat in 1969. The resulting collection of public enterprises, public marketing companies, pervasive price controls and administrative allocation of credit was to be swept away, mostly through tne adjustment measures programmed in the second ASAP. The PCR-more than adequate in describing the ASAP, its goals and implementation- characterizes the project outcome as inadequate achizvement of macroeconomic reform and an adequate achievement of structural change." This is too positive. The social action program was a "point of light" in assisting NGOs working with the poor. But second tranche conditions were not met. The action plans for grain marketing and land-tenure legislation never got beyond the planning stage. The tariff reform was vitiated by substantial backsliding. The attempt to lralize and privatize exporting (hides, bananas, frankincense and myrrh) accomplished little. Most export activity remained in parallel markets. Banking became a scandal when the only commercial bank-a paras atal-issued a large number of "cashier checks" without assets to cover them. It went bankrupt, but not before it had increased the money supply by more than halE Inflation in 1989 was 300 percent. The lesson to be drawn from this experience is an old one: the World Bank needs to assess with care the political feasibility of adjustment projects and the absorptive capacity of domestic institutions. Tbe project is rated unsatisfactory and unsustainable; the impact on institutional development was negligible. Since country conditions preclude field work, a desk audit is planned. Attachment 4C II Tri dom baa r*trted adsbution au may be used by eplents only In the perMrmance of thdr oficil duties. Its content may net othawise be dicosed without World Bank auhorization.  FOR OMCIUL USE ONLY PROJECT COMPLETION REPORT SOMALIJA SECOND AGRICULTURMAL SECTOR ADJUSITMN PROGRAM (CR.2030-0) TABLE OF CONTENTS PREFACE ..................R. i EVALUATIONSUMMARY ..................., iii PARTI EVALUATIONFROM BANK'SPERSPECIE .. 1 A. ECONOMIC AND SECTOR BACKGROUND .1. TheFikstAdjustmentProggm (ASAP1 .. I Renewed Govenment Commiment to Continue Adjustment Program .. 2 StatusofDiaoguewiththe.MF.. . 3 B. SECOND AGRICULTURAL ADJUSTMENT PROGRAM (ASAP ) . . 3 Objectives .. 3 Conmponents .. 3 Policy Actions Envisaged under the Program ....................... 4 lmplemet on .............................. ..o. 5 Conditionaity. 9 Procurement and Disbursement .11 C. THEDMPACT OFASAPR .12 i1troduction.12 GovenumentCommitment .13 Govenment Perbrman and Economic Development .13 IDA Performance .15 D.LESSONSLEARNED ........................................ 16 PART U - PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .... 17 PART m -STATTnICALINFORMATION ..... 18 CradftData .... 18 St" of Covenants .... 20 StausofSewndTneConditions .... 22 Monthy CAurency Sales .... 25 Comoity Aris ..... 26 Training ..... 27 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.  PROJECT COMPLEnlON REPORT SOMALIA SECOND AGRICULTURAL SECrOR ADJUSTMENT PROGRAM (CR.2030-SO) PREFACE This is the Project Completion Report for the Second Agricultural Sector Adjustment Program in Somalia, for which Credit 2030-SC in the amount of SDR 54.2 million (US$70 million equivalent) was approved on June 1, 1989. The closing date was January 31, 1992, but the project, together with all other IDA operations in Somalia, has been suspended since mid-March 1991. As of the date of the last disbursement on March 7, 1991, about 49 percent of the credit had been disbursed. SDR 21.7 million was canceled because the second tranche conditions were not met. The African Development Fund (AfDF) also provided cofinancing of FUA (US$25 million equivalent). The PCR was prepared by the Agriculure and Environment Operations Division, Country Department II of the Africa Regional Office. Part II, Project Review from the Borrower's Perspective cannot be obtained because of the current political and security situation in Somalia. A draft has been sent to the cofinancier for comment. Preparation of this PCR is based, inter alia on the President's Report, the Credit Agreements, supervision reports, correspondence between the Bank and Borrower, and internal Bank memoranda.  - iii- PROJECT COMPLEIION REPORT SOMALIA SECOND AGRICULTURAL SECTOR ADJUSTMENT PROGRAM (CR.2030-SO) EVAWATION SUMMARY Introduction 1. The Second Agriculturl Sector Adjustment Program (ASAP II) was a follow up on the fir sectr adjusUme program. ASAP nI was first appaised in September 1987. Tlis appraisal was suspended when the Government of Somalia (GOS) abandoned the foreign exchange auction systm estalished under ASAP I and revalued the So.Sh. In July 1988, following a period of economic and financial decline, the Government decided to resume the adjustment program. With technical assistance from the Bank and the IMF, it adopted a comprehensive policy package aimed at reducing fnancial imlances, moderating inflationary pressures, improving export competitiveness, and set the stage for the reformulation of maconomic and structral policies in a medium-term context. lhese were implented satisfactorily. IDA decided to proceed with the proposed ASAP II credit since it was judged that the Government had taken ownership of major changes in macroeconomic and sectra policy. The agricultural sector was the main focus of the Government's adjustment program since it domind the economy of the country, acounted for nearly 60 percent of GDP, 95 percent of exports, and about 80 percen of employment. Objectives 2. Ihe objectve of ASAP II was to support the Government's adjustment program and policies with a particular focus on agriculture. The economic policy reforms and the Government's stated strong commitment to these refms were the basis for the ASAP II credit. It was aimed at helping to achieve and sustain economic stabilizaton; increase private sector participauon in supplying and distributing inpus and sevices; strengthen key agricultural institutions; provide foreign exchange for the import of much needed agriculatral and industrial inputs as well as other goods and services; improve monitoring of impots through trade verification; aLd ameliorate the impact of adjustment programs on vulneable groups. Implementaion 3. The period in which ASAP II was implemented was marked by serious polidcal turmoil and a renewed civil war in the north. Faced with incresing challenges from opposition groups, GOS lost control of certain territories and economic sectors to the eten th many of the essential reform measures could not be implemented. In January 1991, the Government was overhrown, and the coy tossed into chaos. 4. a i c Perfoce. GOS established a foiiign excbange allocation system for private sectr imports financed by donor-funded commodity assistance programs. However, a munber of evens prevented the development of a flexible and realistic exchange rate regime. The main reasoDg for failure were: the uncotrolled issue of "cashier's checks" by the official Commercial and Savings Bank of Somalia (CSBS), which eventually led to Its collapse, an expansion in money  - iv - suppiy that caused tigh inflation, and a deepening of the political crisis. The Government did not achieve program revenue targets for FY1989. At year end, the Government collected ony about 5.3 percent of GDP in revenues, against the program target of 7 percent, due to its failure to implerent amounced tax increases and a deterioration in tax administration. On the expenditure side, there were large extra-budgetary expendiures. The share of the economic and social sectors in ordinary budget expenditures also fell short of the program target. GOS and IDA we-re able to sort out differences on the Public Investment Program, but a few disagreements remained, mainly concerning the economic viability of rehabilitating the Mogadishu Petroleum Refinery. The Government's performance in monetary policies was also poor. The credit -ad monetary targets agreed with the IMP were largely overshot. Inflation on an end-yeas basis was estimated to be 300 percent for 1990. 5. Agricultural Pice Polcy and Marketing. In January 1989, GOS enacted the necessary legislation to implement its decontrol policy for hides and skins, frankincense and myrrh, veterinary drugs, equipment and services. However, the over-stretched administration was not able to put in place the machinery for licensing and control of the newly liberalized sectors and to attract private sector participants. The effects did not begin to be felt untl 1990, but a considerable proportion of trade flowed through informal channels. On grain marketing, an IDA supervision mission reviewed an action plan for combining the Agricultural Development Corporaion (ADC) and National Commercial Agency (ENC) into a new National Grain Agency, and found it acceptable. GOS also prepared a satisfactory action pian to improve food aid management. 6. ansportation, Insurance and Ftnanchl Services. GOS implemented its decontrol policy in maritime ttansport, financial services and the insurance industry. In shipping and financial services, private sector interest expanded quickly. One group was a banking license and others had prepared well advanced plans to establish private banks. 7. Public Sector Management. To improve policy analysis and planning in agriculture, technical assistance was provided to the Central Statistics Department in the Ministry of National Planning (MNP). The assistance, executed by Statistics Sweden with a matching grant from the Swedish Government, was a contiuation of the support started in ASAP I. Local and international training was given to local staff, but their return rate was disappointing. 8. Land Tenure. The Ministry of Agriculture presented the Bank with an action plan for policy and adminisive reform in irrigated lands. It outlined future policy, defined the laws which would need to be drafted, and the timetable and substance of the consultation process. The next step was further technical assistance from a legal expert to draft the revised land law. This was not completed before the Government collapsed. 9. Social Dimensions of Adjustment To alleviate the impact of adjustment on vulnerable groups, GOS formed a SocW Action Committee comprising a wide range of Govermnent insttutions and donor representatives. A Social Action Unit (SAU) was formed under the MNP. The unit was to formulate policies and review proposals submitted by non-Government organizations. By the end of 1990, the SAU had received 40 project proposals, out of which four had been completed and two were being implemented. Impact 10. Increasing cvil unrest in norther Somalia and a total absence of control on credit from the banking system created a crisis of confidence for the government in terms of its ability to control  political events and money supply during implementation of ASAP II. On the other hand initial progress on structural change was good and there were some improvements in respect of the budget deficit. The government's performance was therefore mixed, but the overwhelming impact of the continued poor macroeconomic performance outweighed the very important achievements on structural change and the budget. Lsons Learned 11. The lessons learned are summarized as follows: X Political Commitment and Constraints. The experience with most adjustment programs is that they fail unless there is a strong commitment by the government to the objectives of the program. The experience with ASAP II is that the lack of wider support for commitments undertaken by the Minister of Finance and the Governor of the Central Bank was a major factor behind the poor implementation record. Efforts were later made by the Finance Minister and the Bank to open consultations with representatives of other economic minsries on the content of the economic program. This appeared successful, but the civil war had spread by that time, making it impossible for the Government to carry out the program despite its growing commitment. With hindsight, it is clear that the re-emergence of the civil war in the norti was a major impediment to the satisfactory implementation of ASAP a because of the constraints it placed on the budget and exports. 3 Structural Change not Sufficient without Improved Economic Policy and Political Stabyli. The results of ASAP I can be summarized as an inadequate achievement of macroeconomic policy reform and an adequate achievement of stuctural change in the economy. The lesson is that the structural adjustments, while carried out in accordance with the program, could not benefit the econmy as a whole without reform in general economic policy and political stability. In other words the enabling environment for growth following the structural changes was not present. For example structural changes such as decontrol of shipping services, as well as the improvement of livestock handling facilities by other donors, to provide incentives for livestock exporters to increase their activities had little effect while the exchange rate regime was not conducive and there was a considerable lack of security which increased the uncertainties for traders and also increased their costs. * Weak Government Institutions. A chronic problem in Somalia during the implementation of both ASAP I and ASAP U was the weakness of the institutions of govenment responsible for the implementation of reform. This weakness was reflected in the pervasive inability of government institutions to implement monetary and fiscal policies, and to take prompt follow-up action on Government decrees announcing policy changes. The lesson is that the Bank should be cauious about assuming that government institutions are able to implement complex policies. Strengthening of institutional capacity to implement policy reforms should be a long-term goal of our lending program in these countries. * Ineffective Balance of Payyment Support. Balance of payment support, with its associated budget support, cannot be effective if it is a substitute for a deteriorating ability of government to mobilize domstic resources.  PROJECT COMPLETION REPORT SOMALIA SECOND AGRICULTURAL SECTOR ADJUSTMENT PROGRAM (CR203-SO) PART I EVAWATION FROM BANK'S PERSPECTIVE A. ECONOMIC AND SECTOR BACKGROUND The First Adjustment Prom (ASAP I) 1. Somalia is among the poorest counties in the world. At the beginning of 1980, the cuntry was facing an economic and financial crisis dc trized by high inflation, sgaion in production and exports, negativ domestic savings, depleted foreign exchange reservts, and growing exutna d-btservice obligations and arrears. To address the senous economic and financial crisis, Somalia undertook policy reform programs during 1981-1983 and 1983-1987. The reform included adjustment of the exchange rate, fiscal and monetary restrai; establishment of a free market for foreign exchange; and significant liberalization of domestic agricultural pricing. The programs were supported by IMP Stand-by Arangements. 2. Ihe agricultural sector was the main focus of the Government's adjustment program since it dominaed the economy of the country, accne for nearly 60 percent of GDP, 95 percent of exports, and abtut 80 percent of employment In the 1980s, the Government took a number of steps to improve the overall policy environment for agricultural production. The First Agricultural Sector Adjustment Progm (ASAP 1), a precusor to the second program, was approved by the Board for IDA fiancing in June 1986. It was intended to support policy reform in the economy with a pardcular focus on the agricultural sector, to strengthen a number of institutions in the agriculture and planing ministries, to assist the Government to develop and enlarge participation of the private sector in the economy including an improved supply and distribution of agricultural inputs, and to fnance the import of inputs and other goods for the economy. 3. The ASAP I credit (Cr. 1711) 1/, while supporting the government's policy reforms, provided funds for a foreign exchange auction which allowed traders to bid for foreign exchange for a wide range of imports. Under the then prevailing system, three main exchange rates were being used: the official exchange rate, the auction mte and the free market rate. Unification of these three exchange rates in an enhanced auction embracing most transactions was the key element of an IMF Stand-by Arrangement and Stucual Adjustment Facility approved in June 1987. The foreign exchange auction system was very well prepared and managed. It provided an important source of foreign exchange available to traders at a market determined rate and in a non- 1/ The IDA credit was in the amount of SDR 26.4 million, with cofinancing from an African Facility Credit (A20-SO) of SDR 28.7 million.  -2 - discriminatory fashion for importing a wide range of goods. The success of the auctions encouraged other donors to contribute funds to the auctions. 4. However, program implementation came to an abrupt halt in September 1987 when the Govenment canceled the auction because it considered devaluation of the So Shilling in the auction had been too steep. The Government fixed the exchange rate at US$I = 100 So.Sh. Itis represented a 37 percent appreciation of the So.Sh. in loca currency terms from its level at the last auction in mid-Septembe 't97. An export retention scheme was put in place which allowed exporters to retain 40 per.. .*t of their foreign exchange earnings. Early in 1988, following the directives of the Party, the Government declared its intention to reintroduce price controls on a large numbor of imported and domestically produced goods. Disbursements from ASAP I and the IMP program were suspended and it became clear that a fundamenal reason for the devaluation of the exchange rate in the context of the auction had been major breaches of the credit ceiling previously agreed with the IMP. During late 1987 and the first half of 1988, impors were drsically reduced due to a decline in external financing and the diversion of exports to the unofficial market as the real effective exiage rate appreciated once again After the Government imposed price controls over a wide range of goods in February 1988, inflation accelerAed and shortages of essential goods became widespread. In addition the balance of payments came under extreme pressure and externa payments arrears accumulated. 5. Responding to the deterioration in the economic and financial situation, the Government resumed the adjustment program in July 1988. The Government, with technical assistance from the Bank and the Fund, adopted a comprehensive policy package aimed at reducing financial imbalances, moderating inflationary pressures, improving export competitiveness, and set the stage for the reformulation of macroeconomic and stmctual policies in a medium-term context. The key measures taken at that time included a devaluation of the exchange rate, the lifting of price controls, a tight fiscal stance, and a sharp increase in interest rates. The Fund mission that visited Somalia in November 1988 found the authorities had implemented the measures contained in the policy package and ina results were positive. The fiscal deficit was substntially lower and inflation decelerated in the last quarter of 1988. Later that year disbursement from ASAP I was resumed. 6. Despite interruptions in macroeconmic policy, at completion in 1989 ASAP I had achieved most of its objectives in respect of agricultural policy. However, since the overall macroeconomic program was off track at various times, the expected growth and investment in the economy did not materialize. Therefore overal the achievements of ASAP I were unsatisfcory. Renewed Government Comnitment to Continue Adjustment Progm 7. ASAP II was first appraised in September 1987. TIhs appraisal was suspended when the Government abandoned the foreign exchange auction system during the appraisal and revalued the So.Sh. Afer the Government resume the program, based on the developments described in para. 5, it was decided to proceed with the proposed ASAP II credit since it was judged that thd Government had taken ownership of major changes in macroeconomic and sectoral policy. 8. As indicated above, the Government changed considerably its approach towards development policy around mid-1988. The policy package adopted in July 1988 included strong actions on the exchange rate, foreign exchange allocation system, ntere restate sre, new expenditure and revenue targets, and commimen to make suctur changes in industry and  -3 - agriculture. In January 1989, the Government announced new and more sweeping reforms aimed at the removal of remaining goverment monopolies in trade and services. Liberalization policies with respect to trade in hides and skins, frankincense and myrrh, removal of restrictions on the importation of veterinay drugs, and removal of monopolies on banking, insurance and maritime transportation were on the agenda for policy dialogue between the Government and IDA. The Government had demonstrated its commitment to policy change and this paved the way for firther deepening of the reform process. Stats of Diloge with the IMF 9. Somalia's adjustment programs were supported by IMF Stand-by Arrangements initiated In early 1985. A new 20-month Stand-by Arrangement was approved by IMF on June 29, 1987 for SDR 33.15 million. Under this stand-by arrangement, only the initial purchase of SDR 5.53 million was made. Due to acumulation of arrears to the Fund, Somalia was declared ineligible to use the general resources of the Fund on May 6, 1988. 10. Throughout the period of uncertnty between September 1987 and June 1988, Bank and Fund staff mahitined an active dialogue with the Government. A number of Bank/Fund missions visited Mogadishu and exchanged views with the authorities on issues regarding the need for change in economic policies. Based on broad understandings reached with the Fund, the Government adopted a policy package. In early March 1989, a second PFP covering the period 1989-1991 was prepared by the Government and discussed and agreed with Bank and Fund staff. This new PFP provided the basis for AS*.r U and it was also expected to lead to a Fund monitored program for Somalia. II. For implementation and monitoring of ASAP II, the IMF was consulted on the system for foreign exchange allocation envisaged under the program. B. SECOND AGRICULTURAL ADJUSTMENT PROGRAM (ASAP 1) Objectives 12. The objective of ASAP II was to support the Government's adjustment program and policies with a pardcular fous on agriculture. The economic policy reforms and the Government's statd strong commitment to these reforms were the bass for the ASAP H credit. It was aimed at helping to achieve and sustain economic stabilization; increase private sector participation in supplying and distributing inputs and services; strengthen key agrcultal institutions; provide foreign exchange for the import of much needed agricultural and industrial inps as well as other goods and services; improve montorng of imports through trade verification; and ameliorate the impact of adjustment programs on vulnerable groups. Componens 13. 'Me components to be fnanced by ASAP II are shown in Table 1.  -4- Table 1: Components of ASAP It Credit Components IDA AfDF Total Imports of Goods Public and private sector enterprises 44.5 17.0 61.5 Fuel im by SOMPET 2/ 16.5 5.0 21.5 Imports of Inputs by Governmt Ministries 1.0 3.0 4.0 Social Action Program for Vulerable Groups 2.7 - 2.7 Technical Assisace Ministry of Finance and Revenue 4.1 - 4.1 Ministry of National Planning 0.6 - 0.611 Ministry of Agriculte 0.6 - 0.6 Total 70.0 25.0 95.0 1/ Excludes about US$0.5 million of parallel financing from the Govement of Sweden. 2e The National Petroleum Agency Policy Actions Envisapi under the Program 14. The policy actions under ASAP II were both macroeconomic and sectoral. It was ppaent that policies aimed at improved performne of the agricultural secor would have only limited success unless they were backed by an appropriate macroecnomic policy environment The key macroeconomic objectives of the program were: (a) raising the rate of growth of real GDP to almost 5 percent in the medium term (b) reducing progressively the eal curren account deficit; and (c) conainig the rate of inflation to about 39 percent by end-1989, 20 percent by end-1990, and 13 percent by end-1991. 15. To achieve these objectives, the Government was to carry out the following macroeconomic policy actions: (a) exeral policies - mainta flexible and realistic exchange rate policy to ensure competitiveness of the economy, and promote and diversify exports; (b) fiscal policies - reduce budget deficit, carry out tax reforms, establish an import verification system, conduct public expenditure review, increase sbare of expenditres on mantenance and social services wiile reducing those on foreig repretaton; (c) monetary policies - esue that real interest rates are positive, prepare audit and action plan to address financial problems of the government-owned Commercial and Savings Bank (CSBS) and strengthen the monitoring and supeavision procedures of the Centra Bank. 16. Sectral policy actions were: (a) agricultural price policy and marketing - decontrol prices and marketng of hides and skins, fankincense and myrrh, veterinary drugs, equipment and services, agree on an  5- action plan for the reorganization of public sector enterprises involved in processing and marketing of agricultural products, and improve food aid magement; (b) tnation, insrace and financial services - decontrol maritime transport, the ban system, and insurmce industry; (c) public sector management - improve policy analysis and planning in agriculture, update anmually the three-year rolling public investment program, improve cost recovety for public agricultur investment projects; and (d) land tenure - agree with IDA on an action plan to improve land tenure policy and administation for irrigated lands. lIuplemutatlon 17. The proam was approved by the Board in June 1989 and became effective on August 2, 1989. The perod in which ASAP II was implemented was marked by serious political turmoil and a renewed civil war in the north. Faced with increasing challenges from opposition groups, GOS lost control of certain territories and economic sectors to the extent that many of the essentl reform measures could not be implemented. In irnuary 1991, the Government was overthrown, and the country tossed by militias of opposing clans into chaos from which it has not recovered at the time of the writing of this report Since March 1991, IDA has suspended JI its operations in Somalia, including ASAP II. The second tranche of SDR 21.7 million was canceled because the conditionalities for release were not met. (a) Macroeconomic Reform 18. Extnal Podes. The main action was the implementation of a flexible and realistic exchange rate. GOS took a major step by devaluating the So. Sh. by 44 percent in foreign currency terms in June 1988, and pegging it to a basket of currencies of the country's main trading partners. To rationalize the use of foreign exchnge resources, a temporary system was put in place for the allocation of private sector imps financed by donor-finded commodity import programs (CIP). GCS established the system as described in the President's Report: at the beginning of each month, the authorities announced the amount of foreign exchange available. Importers submitted their requests for foreign exchange allocation to the Central Bank, accompanied by a nonrefimdable fee in domestic currency equivalent to 10 percent of the amount requested. Requests were honored on a prorata basis. The system approximated an auction in that the price of foreign exchange rose when demand exceeded supply. At the same time, GOS made weekly adjustments to the official exchange rate. 19. The foreign exchange allocation system started immediately after the project became effective. In September 1989, the official exchange rate was So. Sh. 566 per U.S. dollar, about 65 percent of the free market rate or 85 percent of the rate vt the foreign exchange allocations. Around that time, a Bank supervision mission also discovered an increase in the issue of the CSBS's *cashier's checks" which were strongly suspected to lack backing of funds. The issue of a substantial number of such checks were the main reasons for the rapid devaluation in the foreign exchange auctions which led to the Governmet's decision to cancel tie auctions in September 1987. When this happened again under ASAP II, IDA and the M raised the problem as a major issue with the Govenmment. 20. Othe factmo also afected exche rate movement: a deepening cisis of confidence in the political arena, the uruly credit operaons of the CSBS that finally led to its collapse, and an expaosion in money supply that caused high inflation. At the end of 1989, the margin between the  -6 - free market and official rates widened to more than 50 percent because the devaluation of the Somali Shilling in the free market continued at a higher rate than in the official market. The overvaluation meant that incentives to export through official channels deteriorated dramatically. Following discussions with the IMF and IDA, the Govennent took action to tighten credit policies and by the supervision mission of April 1990, the official exchange rate had stabilized at about 70 percent of the free market rate. Demand for the CIP funds, however, had slackened due to a cash shortage well as a restricted opportunity to take the imported commodities to other pars of the country affe-ed by civil unrest. There was also a growing cost in the use of the CIP funds relative to the free market because of their restrictions on the type and source of imports, in addition to procedural burdens. 21. Fiscal Polhices. The Government failed to achieve program revenue targets for FY1989. At year end, the Government collected only about 5.3 percent of GDP in revenues, against the program target of 7 percent. This was due pardy to the low level of imports through the CIPs and GOS's failure to implement fuel and other tax increases despite the wide-ranging adjustment measures it had announced. The administration of taxation also deteriorated in many areas, as evidenced in the sharp decline in the collection of fines and penalties. In addition, Parliament ratified a revision in the tariff structure, reducing the tariff on wheat and pasta. These rates resulted in a subsnal loss of revenues and discouraged the domestic processing of wheat. A contract for the import verification system was signed in September 1990 but implementation had barely started when the Govermnent fell two months later. 22. On the expenditure side, GOS's decision to close nine embassies was never implemented. 'Tere were large extra-budgetary expenditures, the accumulation of arrears to suppliers, payment of the fuel subsidy and a fuel distribution system which did not repay the National Petroleum Agency (SOMPET) for fuel supplies such that SOMPET was forced to obtain credit from the banking system. Most of the agreed recommendations of IDA's Public Expenditure Review mission (November 1989) were not satsaorily implemented. In FY1989, the share of the economic and social sectors in ordinary budget expenditures was 7 percent, far short of the program target of 15 percent. The revision in the 1990 budget came late and with insufficient detail, contrary to the understandings reached with the IDA mission. Expenditures were effected from a large contingency item outside the monitoring and control of the appropriate budget officers. On the Public Investment Program, a number of discussions were held between IDA and GOS to sort out differences. By the last supervision mission, a few disagreements remained, mainly concerning the economic viability of rehabilitating the Mogadishu Petroleum Refinery. 23. Monetary Policy. The Government's performance in this area was poor. The credit and monetary targets agreed with the IMF were largely overhot Inflation on an end-year basis was estimated to be 300 percent for 1990. The IDA supervision mission attributed this to the Central bank injecting large quantities of currency in circulation in order to respond to the pressures to finance the extrabudgetary expenditures, fuel price subsidies and the fuel importation and distribution agencies. 24. Another serious problem was CSBS's credit operations. From the start of the program, the operations of the CSBS, the only commercial bank in the country, had been chaotic. An audit of the CSBS was completed, showing a large number of non-performing accounts. After IMA took issue with the CSBS's circular checks used to finance imports at the foreign exchange allocations (para. 19), the Govermment agreed to withdraw from all CSBS branches the authority to extend loans. It also agreed to place expers provided trough tla/EC technical assistance to key m gria positions, and expedited the finalization of the audit report which was to contribute to the  -7 restructuring plan for the bank. GOS later agreed with the IMF and IDA on a Revised Program to dismantle the CSBS and establish a new bank, the Somali Commercial Bank. At the end of 1990, about half the staff of CSBS had been laid off, but the 20 percent payout to all large depositors and full payout to very small depositors had not been effected, although some influential account holders had been able to withdraw their deposits. The Somali Commercial Bank was established in July 1990, mainly with Government capital but with a clause in the bank's charter allowing the progressive sale of the Government's shares to the private sector. The new bank was beginning to gear up to provide the full range of banking services, such as lending and opening of letes of credit by the end of 1990. Tbe bank was closely supervised by the Central bank, which carried out regular monthly casb audits. At the same time, the Central Bank issued a banking license to a group of Somali investors who intended to establish a private bank. (b) Agricultural Prce Poliy and Marketing 25. In January 1989, GOS enacted the necesary legislation to implement its decontrol policy for hides and skins, frnUnce and myrrh, veterinary drugs, equipment and services. However, the over-stretched administraon was not able to put in place the machinery for licensing and control of the newly liberalized sectors and to attract private sector participants. The effects did not begin to be felt until 1990. A Government report on the effects of the liberalization measures showed significant evidence of private sector involvement, although a considerable proportion of trade flowed through informal channels. In the hides and skins subsector, virtually all the trade was in unprocessed products since they could be smuggled out of the country easily. The Somali Leather Agency, a publicly owned company, had considerable processing capacity which was lying idle. The reasons given were the rule allowing exporters to retain only 40 percent of their foreign exchange earnings, the increase in raw skin prices and the unavailability of processing materis. The small private sector gave similar reasons for the absence of processing. GOS agreed with donors on measures to encourage exports, such as by allowirg exporters to retain 80 percent of their foreign exchange earnings in order to encourage them to channel their trade officially.2/ 26. Improving the operadonal efficiency of public sector enterprises involved in processing and marketing of agricultural products was another reform area. An IDA supervision mission reviewed an action plan for combining the Agricultural Development Corporation (ADC) and National Commercial Agency (ENC) into a new National Grain Agency, and found it acceptable. Both enterprises were involved with grain and food trading and had been examined with the help of technical assistance financed from ASAP I. 27. GOS also presented for the Bank's review in August 1991 an action plan for the improved management of food aid. The objective of the plan was to maximize the value of food aid to the economy and consumers, and to coordinate the contribution of donors. Another objet-C-: was to establish the relationship between the management of food aid and food policy. The plan also set out the responsibilities of different ministries and the National Grain Agency in food aid management. Following discussions with IDA and some modifications, the plan was found acceptable by IDA. Z/ 'Me 80 percent retention was to take place in December 1990, the month the civil war spread to Mogadisu.  - 8 - (c) Tramportion, Insurance and Flanmcal So-vices 28. GOS implemented its decontrol policy in maritime transport, financial services and the insurance industry. In shipping and fiancial services, private sector intsw expanded quickly. At the final supervision mission, the Ministry of Transport had issued ten licemes to opere forwarding and shipping agency services. Three private groups with well advanced plans to establish a private bank had contacted the IFC and potenti foreign partns. Howver, IFC was not in a position to provide assistance until Somalia fully cleared its arrears. As mentioned in para. 24, one group had b =- issi'ed a banking license. In the insurance industry, while the law liberalizing the services was passed, no regulations for providing for formal registration procedures had been issued by MOF. In addition, an efficient insurance industry would require efficient banking services which did not exist in Somalia. (d) Public Sedor Management 29. To improve policy analysis and pinning in agriculture, technical assistance was prvided to the Central Statisdcs Depatmt in the Ministy of National Planning (MNP). The assistance, executed by Statistics Sweden with a matching grant from the Swedish Government, was a continuation of the support started in ASAP I. A supervision mission reported that the technical assistance was running well, and that the quantity and quality of the statistical output had improved, although the geographic coverage was reduced due to the inaccessibility of some parts because of civil unrest. Local and international training was given to local staff, but their return rate was disappointing. Only three out of eight who had gone for overseas training had returned. 30. On improving cost recovery, supervision missions found t the rental charges levied by the Tractor Hire Agency (ONAI), were adequate to cover costs. One of the missions recommeded that an audit of ONAT costs be undertaken so that they could be verified. This was not carried out before the Government collapsed. (e) Land Tenure 31. Following extensive consultations within the Government, the Ministry of Agriculture presented the Bank with a final action plan for policy and administrative reform in irrigated lands. It outiined future policy, defined the laws which would need to be drafted, and the timetable and substae of the consultation process. The plan had been approved by the Economic Commit of the Council of Ministers. The next step was fPrther technical assistance from a legal expert to draft the revised land law. This was not completed before the Government collapsed. ( Social Dimensions of Adjustmet 32. At the time of appraisal, it was expected that the Government's adjustment program would have short-term adverse effects on consumers, primarily by raising prices of food, water, transportation and other services. Such effects were likely to fall more heavily on the poorest urban populations who were benefitig from subsidized prices for food and services and whose incomes would not rise immediately. To alleviate the impact of adjusunent on vunerable groups, GOS formed a Social Action Committee comprising a wide range of Government insions and donor repreentatves. The commttee, responsible to MOF, establihed the int themes of the program: (a) the provision of essential social services to poor and vulnerable groups; (b) employmt creation for people laid off as a result of the adjustment program; (c) assistance to the poor and vulnerable  -9. groups to alleviate the impact of sharp increases in food prices and essential services as a result of the adjustment program. A special account was established in the Central Bank. A Social Action Unit (SAU) was formed under the MNP. The unit was to formulate policies and review proposals submitted by non-Government organizations (NGOs). 'Me supervision mission of December 1990 found that while good progress had been made, the SAU needed strengthening in order to formulate policies and strategies that would simulate project proposals from NGOs. Te -mission recommended the recruitment of a second expatriate. By the end of 1990, the SAU had received 40 project proposals, out of which four had beea completed and two were being implemented. Of the remaining projects, six had been approved or rommended for approval, seven rejece and the rest in various stages of appraisal. Plans had been finalized for a household expendiure survey and the AfDF had made a commitment to finance the surveys. However, it could not be carried out because of the Government's collapse. Condidonafity 33. Credit proceeds for the importion of goods and materials in the Program were to be disbursed in two tranches, $33 million (54 percent) for the first tranche and $28 million (46 percent) for the second tranche. The condidons for releasing the first tranche were met before negotiations. Additional conditions for effectiveness were also met and were as follows: opening of the Project Account, establishment of the Social Action Fund, and appointment of the head of the Social Action Unit. 34. Implementation oF i1rst Tranche Conditons. On the macroeconomic front, the Government implemented the following conditdons: (a) external policies - devalued the Somali Shilling and adjusted it weeldy to correct for relative rates of inflation with trading; alowed exporters to retain 40 percent of their foreign exchange eanings; and established a new foreign exchange allocation system; (b) fiscal policies - cut expendiures and reduced the budget deficit in the second half of 1988 and carried out studies on reforming the tax system; (c) monetary policies - simplified the interest rate structure, raised deposit rates to 40 percent and lending rates to 50 percent; and passed a law opening the banking system to the private sector. 35. The Government also enacted the following agriculural and instituional reforms to meet the first tranche conditions: (a) removed monopoly pricing and marketing arrangements of agricultural products, set support prices for grain at levels between import and export parity, with ADC as the buyer of last resort; and agreed to sell food aid at market prices; (b) announced legislation to decontrol: Oj all trade in hides and skins; (-d) all trade in veteinary drugs; Qii) aU trade in frakinen and myrrh; (Iv) bnking - pivate banks were allowed to be established;  - 10- (v) maritime shipping services; and (vi) insurance services. 36. Covenants. Annex 2 provides a summary of covenants and the extent of compliance by the end of 1990. Those covenant related to implementation of the program were discussed in previous paragraphs. In general, the Government was in compliance with most sectoral conditionalities but failed to implement agreed macroeconomic policies as political turmoil and the loss of Government control, such as in credit, revenue generation and expenditure allocation, resulted in shortfals from perfomace targets. 37. Second Trande Conditions. The Govermnent eaust the first tranche in January 1990 and requested IDA to release the second tranche. The conditions for its release were: (a) satisfactory progress in the implementation of the overall macroeconomic and sectoral policies; (b) agreement with IDA on the three-year public investment program covering 1990- 1992; (c) agreement with IDA on proposals for the public expenditur program to be included in the FY1990 Government budget; (d) based on a revised tariff structure for main imports ageed with IDA, the establishment and implementation of an import verification system satisfcory to IDA; (e) agreement with IDA on an action plan for the institutional development of ADC and ENC; and (f) agrement with IDA on an action plan to improve land tenure policy and administration for irrigated land. 38. Following two unsuccessful reviews of progress on the above conditions, IDA sent a letter to GOS on August 22, 1990 listng areas of significant departures from the program, namely: (a) limiting the increase in money supply during 1989 to about 28 percent; the Government permitted an increase of 130 percent; (b) strengthening of the inspection and supervision procedures of the Central Bank over the banking system. This was not done and, as a result, the CSBS incurred high unrecoverable debts and went bankrupt; (c) increasing the ratio of revenue to GIP to about 7 perce in 1989 and 10 percen in 1990. Actual performance in 1989 was 5.3 percent, and the first three months of 1990 showed a further deterioradon; and (d) a phased realiocation of Government expendiures by increaing the share of social and economic expenditures to at least 15 percent in 1989, 18 percen in 1990 and 20 percent in 1991. The actual share of ordinary budget expendi on socal and economic sectors in 1989 was only 7 percent and in the first quarter of 1990, only 4 percent The letter outlined the key actions that needed to be taken and gave GOS up to 90 days to complete them. In January 1991, following a review mission which found GOS's performance on  - 11 - macroeconomic and fiscal conditions unsatisfactory, IDA canceled the second tranche (SDR 21.7 million) from the credit. Procurement and Disbursement (a) Procurement 39. The proceeds of the IDA credit were used to finance imports as stipulated in the credit agreement: eligible commercial inputs outside the negative list and agricultural inputs by the Ministries of Agriculture, Livestock and Fisheries within a positive list. Procurement followed the guidelines under IDA credits. All procurement was handled by the Procurement Unit already established under ASAP I in MOF. The unit's performance was good. (b) Disbursement 40. Disbursemnt by Category. As stipulated in the credit agreement, disbursements were made for the total foreign exchange cost of eligible imports under full documentation, and the Government opened special accounts in US dollars with an international commercial bank to facilitate disbursement. The credit disbursement record at the time of project suspension is shown in Table 2. Since the special accounts cannot be reconciled at this stage, the exact amounts disbursed from each category are not known. Table 2. CREDfT DISBURSEMENT BY CATEGORY (SDR million) Category Allocated Actual 1/ 1. a. Imported goods and materials for public and private sector enterprises 34.4 8.6 b. diesel fuel and lubricants 12.8 0.0 2. Consultants' services and training 4.1 0.7 3. Goods, works and services 2.1 0.2 4. Goods to be imported by Ministries 0.8 0.2 Fund A 2J- Import of goods and materials (Cats. la and 4) - 16.0 Fund B - Social Action Program 0.2 Fund C - Technical Assistance _ 0.4 Total 54.2 26.3 11 SDR 21.7 million (US$ 28 million equivalent) was canceled from Category I because the second tranche conditions were not met. The balance of SDR 6.2 million has been suspended. 2/ The Funds are deposits ino special accounts.  - 12 - 41. Import of Goods. From August 16, 1989 to October 31, 1990, the amount sold at foreign exchange allocations totalled US$48.4 million. The contributions were from IDA, the Italian Goverment ai and AfDF. The IDA fimds came from the first tranche release and were exhausted by January 1990. The second tranche was not released. Most of the IDA funds (more than 70 percent) were used to finance food imports, 10 percent went to building materials and the rest to raw materials, equipment and spares for agriculture and industry and household items. 42. Imports of Fuels and Ministerial Inputs. No fuel was imported under ASAP II. Although a contract was signed, the fuel could not be delivered after the Government collapsed. Similarly, most of the imports by the Ministries could not be delivered. 43. Technical Assistance. The following technical assistance was recruited according to plan: (a) by the MOF for trocurement, import verification, and tariff review; (b) by the MNP for strengthening its statistcs department; and (c) by the Ministry of Agriculture for preparing the land tenure action plan and providing training in machinery rehabilitation. The only consultant not employed was the advisor to SC)'F on transition problems for enterprises during the adjustment process. (c) Colinancing 44. AfDF cofinancing of FUA 21 million (US$25 million) was to be released in two tranches - about US$13 million in the fist tranche and US$12 million in the second. The AfDF first tranche conditions were the same as the IDA credit's second tranche conditions. The funds were to be used for the import of goods and materias by private and public sector enterprises, fuels by SOMPET and inputs by the Ministries. In October 1990, AfDF released its first tranche although IDA considered the macroeconomic performance as unsatisfactory. FUA 7.0 million was deposited in a special account, of which US$846,000 was disbursed through the foreign exchange allocation. The Swedish Goverment also provided parallel grant financing of SEK 3.1 million (about US$0.5 million) for the statistics component in MNP. (d) Accounts and Audits 45. The audit report for the period August to December 1989 was submitted with three months' delay. The auditor found the project financial statements representative of the financial position of ASAP nI as at December 1989 and in conformity with generally accepted accounting principles. C. THE IMPACT OF ASAP II Introduction 46. Obtaining up front commitments to policy change along with evidence that the policies could be sustained, was one of the lessons from ASAP L Experience with ASAP II re-emphasized the importance of obtaining a strong commitment of the Government to critical policy issues before the negotiation of any fiue adjustment programs credits. On the other hand it has also underlined 31 The Italian Government supported the foreign exchange allocations with parallel grant financing. It was, stricty speaking, not a cofinancier of ASAP 11. All fiancial accounts of the Italian fiuds were kept separate from ASAP II.  - 13- the need to ensure that the commitment is clearly understood and accepted by the highest level of government, particularly if a country does not have a credible representative government. 47. Hopes were high at the start of ASAP 11 that all the necessary conditions for a successful adjustment program had been achieved. The GOS had produced a track record of sound monetary and fiscal management which had been monitored by the Fund and IDA for about nine months. The government had also decided and published a number of important policy changes before negotiations for ASAP U. 48. It was felt therefore that ASAP 11 was on firmer ground and that the program was sustainable. Despite a change in the Minister of Finance at the st of negotiations, assurances were received by the President of IDA from the Somali President that the program which had been agreed during appraisal would be implemented. Even though a number of important structural changes were achieved under the credit, the impact of the credit on the economy did not turn out as had been hoped. Overall, the impact of ASAP U was unsatisfactory. The following paragraphs will review the impact of ASAP II in terms of the government's commitment, the government's performance and economic development and IDA performance. Govermnent Commitment 49. The government had made explicit commitments to make corrections to economic policy and there were many senior ministers who supported this objective. Unfortunately soon after the commitments were made the secrity situation in northern Somalia deteriorated which resulted in considerable pressures on the foreign exchange resources and on the domestic budget. The result was that the political arm of the government provided little or no support to the senior ministers to achieve economic reform. The deterioration in security continued throughout the implementation of ASAP II. Hence strong actions which were required in areas such as credit control and increased allocations of the budget to the social sectors could not be taken because the commitment to economic reform at the political level did not exist. The fimdamental problem was that at the highest level of government the political survival of the regime was the main objective even at the expense of economic reform. Govermment Performance and Economic Development 50. Increasing civil unrest in northern Somalia and a total absence of control on credit from the banking system created a crisis of confidence for the government in tems of its ability to control political events and money supply during implementation of ASAP II. On the other hand, while initial progress on structural change was good, most of the measures were just beginning to be implemented at the time of project suspension. There were also some improvements in respect of the budget deficit. Ihe government's performance was therefore mixed, but the overwhelming impact of the continued poor macroeconomic performance outweighed the achievements on structural change and the budget. 51. While these pressures were being handled the government was also in the process of political change, mainly the 1obmation of a multiparty representative system. This process was, however, moving slowly and there was apparently little involvement of the general public or the various political factions in the process. A draft for a new constitution emerged towards the end of 1990, but confidence in the government had eroded to such an extent that questions were raised about whether a peaceful referendum on the draft could be held.  - 14 - 52. At the end of 1990, just before open warfare broke out in Mogadishu, the status of the objectives of ASAP n could be summarized as follows; * Econonic Growth. The first full year for the Implementation of ASAP 11 (1990) was a disappointing year for the economy. The agricultural sector was estimated to have grown by about 1.3 percent. The economy as a whole, however, was estimated to have declined by about 1.5 percent for the year, after stagnating in 1989 4/. The major reasons for the poor performance in agriculture had been lower than average crop production and insecurity in the main livestock producing areas. The other sectors of the economy suffered serious declines because of the lack of confidence. In addition, most of the resources transferred to the economy through the foreign exchange allocations did not generate employment in the productive sectors. * Credit and Monetary Policy. Throughout the implementation of ASAP I the government's lack of control over credit from the banking sector resulted in a lack of trust of the exchange rate and a collapse of the banking system. Agreed credit ceilings to the central governent and to paras had been exceeded by 22 and 40 percent respectively. Following the collapse of the CSBS, the country was left without functioning banking facilities. At the same time the lack of control over credit and monetary instruments had fueled inflation which on an end of year basis was estimated to have reached 300 percent One aspect on which the government's perfonmance continued to be sound, however, was the implementation of the foreign exchange auction. 3 Extwerl Sector. The absence of reliable banking services, the large gap between the official and market exchange rates (30 percent) and the limit of 40 percent retention of foreign exchange earnings by exporters negatively affected overall export performance, particularly of livestock exports, and gave rise to a growing informal export trade in most commodities, except bananas. This meant that official export receipts by the Central Bank did not increase in response to the ASAP H credit as had been anticipated. * Fisa Situation. The govermment's revenue performance was a major disapointment due to inadequate tax administration and a fail in official imports. It was estimated that by the end of 1990, total revenues would have fallen to about 4 percen of GDP. In regard to expenditures, the government had shown some capacity to control costs ane had achieved some improvements in the allocation of the budget to the social sectors. Nevertheless during 1990 it was at best about 13 percent. * Price Policy. The goverment had generally contiued to implement the decontrol of all domestic prices. The only major exception at the end of 1990 was the pricing of fuel which was still controlled by the government fuel distribution parastatal and the government backed cooperatives. Plans had, however, already been made by the then government to establish import parity pricing for fuel. a * Structural Measures. The removal of a number of structural constraints to growth in the economy was the most important achievement of ASAP II. The strctural measures included the decontrol of hides, skins, frankincense and myrrh marketing, deregulation of 4/ Source: IM  - 15 - banking, decontrol of veterinary drugs services and equipment marketing, liberalization of the insurance industry, and decontrol of shipping services. Progress had been made in all these areas. The accepance of free trade in the Somali economy was an established fact before the outbreak of hostilities. * Technical Assistae. All technical assistance components were satisfactorily implemented, although some with delay. The most important one was assistance to the Ministry of National Planning to continue to develop its capacity to undertake the preparation of national statistics and conduct analysis. The Ministry of Finance received full time assistance from one consultant and the import verification contract had been awarded and the consultant had bffn mobilized. The outbreak of hostilities put a halt to all this work. * Social Action Program. The government had established a social fund in the Ministry of Natiohal Planning which was aimed at assisting the poor and in particular some groups which were disadvantaged as a result of the adjustment program or not able to take full advantage of the program. Six micro projects had been approved by the social action program, fur of which bad been completed. However, because of the civil war, no evaluation of their impact was possible. * Second Tranche Conditions. The main thrust of the second tranche conditions was improved economic policy and institutional change. While the government did not meet the test for improved economic policy and hence the second tranche was not released, it did ahieve some institutional changes which are recorded earlier in this report. IDA Performance 53. At the start of the discussions of ASAP II with the government, IDA had insisted on achieving an explicit government commitment and *up front" conditions to the credit. This was done, and laid the groundwork for the fulfillment of structural changes envisaged in the program. In addition the government understood very well the macroeconomic conditions required for the program to be a success. This understanding resulted in an excellent dialogue with government officials and a high level of collaboration. 54. There was also a high level of collaboration between the Fund and IDA on the advice on and monitoring of the program and a high degree of cross support between the two institutions. Many of the IDA supervision missions were in tandem with a Fund mission and there was excellent cooperation and contnual consultation. Usually at least one member of the IDA supervision mission was also a member of the Fund mission. 55. A primary cause of the program's breakdown was the increasing level of political unrest and civil hostilities within Somalia which ultimately resulted in all out civil war at the end of 1990. IDA and the Fund might not have fully appreciated the ramifications of the onguing political turmoil and its degenerating impact on economic policy and its implememation. Government instittions, which had poor implementation capacity before the escalation of civil unrest, became further weakened, to the eat that they could not control the economy. The rampant release of credit without collatera by the sole commercial bank was an example.  - 16- D. LESSONS LEARNED 56. There were three main lessons from ASAP H. Tlese lessons build on those learned during the implementation of ASAP 1. The three lessons are related to political commitment to implementation, importance of achieving economic reform to create an enabling environment for getting the benefits from structural change, and the importance of having a competent civil service to implement policy. * Political Commitment and Constraints. The experience with most adjustment programs is that they fail unless there is a strong commitment by the government to the objectives of the program. The experience with ASAP I is that the lack of wider support for commitments undertaken by the Minister of Finance and the Governor of the Central Bank was a major factor bebind the poor implementation record. Effots were later made by the Finance Minister and the Bank to open consultations with representatives of other economic ministries on the content of the economic program. This appeared successful, but the civil war had spread by that time, making it impossible for the Government to carry out the program despite its growing commitment. With hindsight, it is clear that the re-emergence of the civil war in the north was a major impediment to the satisfactory implementation of ASAP I because of the constraints it placed on the budget and exports. e Stuctural Change not Sufficient without Improved Economic Poicy and Poltica Stability. The results of ASAP H can be summ_ized as an inadequate achievement of macroeconomic policy refom and an adequate achievement of structural change in the economy. The lesson is that the structural adjustments, while carried out in accordance with the program, could not b.nefit the economy as a whole without reform in general economic policy and political stability. In other words the enabling environment for growth following the stuctural changes was not present. For example structural changes such as decontrol of shipping services, as well as the improvemnent of livestock handling facilities by other donors, to provide incentives for livestock exporters to increase their activities had little effect while the exchange rate regime was not conducive and there was a considerable lack of security which increased the uncertainties for traders and also increased their costs. * Weak Government lItitutions. A chronic problem in Somalia during the implementation of both ASAP I and ASAP II was the weakness of the institutions of government responsible for the implementation of reform. This weakless was reflected in the pervasive inability of government institutions to implement monetary and fiscal policies, and to take prompt follow-up action on Government decrees announcing policy changes. Tbe lesson is that the Bank should be cautious about assuming that government institutions are able to implement complex policies. Strengthening of institutional capacity to implement policy reforms should be a long-term goal of our lending pro.am in these countries. * Ineffective Balane of Payment Support. Balance of payment support, with its associated budget support, cannot be effecive if it is a substite for a dteriorating ability of government to mobilize domestic resources.  - 17 - PART 11- PROJECT REVIEW FROM BORROWER'S PERSPECTIVE IDA was not able to obtain Part 11 from the Borrower due to the politica! and security situation in Somalia.  Annex I Page I of 2 PART III - STATISTICAL INFORMATION Credit Data (US$ million) Credit 1.Original Disbursed Can1g Cr.2030-SO 70.0 33.6 21.71/ Stage of Project Cycle Original Date Anal Dat Initiating Memorandum 08/1911987 Letter of Development Policy 04/30/1989 Negotiations 04/1989 Board Approval 01/26/1988 06/01/1989 Credit Agreement 06126/1989 Effectiveness 07/17/1989 08/02/1989 Credit Closing 01/31/1992 01/31/1992 CUMULATIVE CREDIT DISBURSEMENT (US$ million) IDA Fiscal Year Planned Actual Actual as % of Annual Cumulative Annual Cumulative Planned 1990 50 50 32.8 32.8 66 1991 20 70 0.8 33.6 48 .11 The credit balance of SDR 6.2 million has been suspended since March 1991.  19 Annex 1 Page 2 of 2 MISSION DATA Items MonthiYear No. of Weeks No.of Persons Report Date Preparation 05/1987 2 1 05/17/1987 Appraisal 09/1987 3 5 09/2311987 Supervision 07/1988 2 1 07/31/1988 Supervision 111988 3 2 1210911988 Supervision 02/1989 2 2 03/07/1989 Supervision 05/1989 2 5 05/31/1989 Supervision 09/1989 2 1 09/13/1989 Supervision 11/1989 2 2 12/07/1989 Supervision 04/1990 1 1 04/30/1990 Supervision 06/1990 2 2 06/19/1990 Supervision 12/1990 3 3 12/20/1990 BANK INPUTS (Staff Weeks) Items 1987 1988 1989 1990 1991 1992 1993 Preparation 4.5 15.8 _ Appraisal 27.4 28.2 Negotiation 9.1 Supervision 48.6 33.2 1.8 0.1 PCR _ .I_ 0.1 | Total 4.5 43.2 37.3 48.7 33.2 1.8 0.1  - 20- PROJECT COMPLETION REPORT Annex 2 SOMALlA Page 1 of 2 SECOND AGRKCULTURAL SECTOR ADJUSTMENT PROGRAM Status of Covenants Scti Cnant 2.01 (d) Special account shall be opened for Part Account was opened in August 1989 in D in a commercial bank on terms and the Instituto Bancario San Paolo Bank in _______ conditions satisfactory to IDA. Turin, Italy. 2.02 (b) Special account shall be opened and Accounts were opened in August 1989 in maintained for Part A and B in a the Instituto Bancario San Paolo Bank in commercial bank on terms and Turin, Italy. conditions satisfactory to IDA. 2.02 (c) Special account shall be opened for Part Account was opened in September 1989 C in the Central Bank of Somalia on in the Central Bank of Somalia. terms and conditions satisfactory to IDA. l 3.01 (a) The Borrower declares its commitment The Borrower confirmed its commitment and to the objectives of the credit. at effectiveness. However, the program Schedule 2 was significantly off track during the first year of implementation in respect to credit control and revenue generation. 3.01 (b) The Borrower shall implement the The Borrower was implementing the and project according to Schedule 5. project according to Schedule 5. Schedule S 3.02 The Borrower shall provide all All necessary assistance was provided. necessary assistance to consultants employed under the project. 3.04 The Borrower shall establish a The counterpart fund account was counterpart fund account in the Central established in August 1989. Bank. 3.05 (a) The Borrower shall establish and The Social Action Fund was established maintain a Social Action Fund. in June 1989. 3.05 (b) The Borrower shall maintain a Social Ihe Social Action Committee was Action Committee in the MNP. established in July 1989. 3.06 (a) The Borrower shall establish a Social The Social Action Unit was established in Action Unit in the MNP by 8/31/1989. July 1989.  -21 - Annex 2 Page 2 of 2 3.07 The Borrower shall carry out, submit A joint missiun from the AfDB and the to IDA, and act on surveys designed to SDA unit of the Bank visited Somalia in monitor the living conditions of the early May 1990 to plan for the surveys. households made vulnerable by the The AtDF had made a commitment to adjustment process. finance the survey through an AfDF l__________ _____________________________________ credit. 3.08 Ihe Borrower shall by 11130 of every A draft PEP was received and reviewed year submit to IDA for comment a by the Bank. The Borrower revised the three year PIP and thereafter update it draft in accordance with the IDA's annually. comments, but some disagreements remained at the end of 1990. 3.09 The Borrower shall prepare a plan of The Borrower established a food aid unit action for the future management of in the Ministry of Finance and Revenue, food aid by 3/30/1989. and appointed an expatriate and local staff to the unit. A plan satisfactory to IDA _________ ______________________________ was provided. 3.10 The Borrower shall submit to IDA for The Borrower prepared and submitted the review semi-annual reports on the first report to IDA in November 1989 implementation of the Program in and the second report in December 1990. respect of the involvement of the private sector in the businesses and trades of bides and skins, frankincense and myrrh, vetenary services, veterinary drugs and equipment, marine transport, commercial banking, and insurance. The fst report should be submitted by 11/15/1989. 4.01 The Borrower shali maintain adequate Records and accounts were established. records and accounts for the project, arrange for audits at the end of each year, and provide such information on the accounts and the audits as IDA may reasonably request. 5.01 Conditions of effectiveness re specified All conditions of effectiveness were met. in this section. The credit became effective on August 2, 1989.  - 22 - Annex 3 Page 1 of 3 PROJECT COMPLZMION REPORT SOMALIA SECOND AGRICULTURAL SECTOR ADJUSTMENT PROGRAM Status of Seownd Tranche Conditons Implementation of NMamic Pgogm Sa (as described inte Revised Progn a/ Baskina Resmcung of the commrcial banking Up to the end of 1990, th fiai sysem was stl sectO. in a state of transition fm the instiutional changes which had been made i 1989 and normal commercial banking activity bad only partially resumed. While positive steps wene taken, the 20 peret payout to ul lapge depositors of the fonrer govenment owned commecia bank had not been effected, although soum influential companies and individuals had been able to withdraw teir deposits hlere was only marginal progrm towa establishment of nw banks and restation of an efficient payment system Customers' confidence in the financial sector was very low. Credit/Mn i Implemention of monetary The credit and monetary targets ageed with the policy; expansion in domestic credit, and credit to IMF were largely overshot The credit ceilings for public setr entes, shall not exceed dte rte the cenWal government and the pubic enterprises up of 12 percent and 15 pecent, respectively, during to end September 1990 wene exceeded by 22 the last seven months of 1990; during the same percent and by 40 pent, epectively. Net period the Governmt will make net payment to the injecion of cash in ciruolation was So.Sh.45 billien banddng system to offset the large bonowing up to for the second half of 1990, compared to a program June. target of So.Sh. 10 billon. hIfation was about 30D percent for 1990. External Sector Implementation of a flexible Implementation of exchange rate adjustment systm exchange rate providing for (i) weeldy adjustments was generally satisfactory. The Goverment in the officisl exchange rate according to the effectively prevented a real appreciation of the inflation rate differenti betwee Somalia and its currency up to late 1990. However with the trading parters, and (ii) discrete adjutmnts to prolongation of the financial cnsis, the flow of avoid overvaluation of the Somli Shilling. d foreign exchange to the Central Bank emained wel below previous levels. Te Govanment did not take timely and adequate measues to effectively counteract the negative effect on export and mittce incnives. This resulted in a substatl setback for the 1990 export season for livestock. at This 'Revised Program' was contaied in the Letter of Intent from the GOS to the Managing Director of the IMP, dated June 3, 1990. It was also referred to in a letter from the Minister of Funance to the Director of AF2, dated June 13, 1990.  -23 - Annex 3 Page 2 of 3 Administo PnigcL.P&bhic nWg ses Sal of 11 Goverment had adjusted fMl, water and commodities impoed or produced by the electricity prices, but only in May 1990 was Government, such as fuel and sW, in accordance impt paity for gasoline achieved. At the end of with policies to en ralistic pricing. 1990, the prices of gasoline and diesel remained wel below cost at the market exchange rate. Maor fuel shonages gravly damed economic acfivity in 1990. Tax revenues on fuel products wer still collected on the basis of specific taxes, rather tha the agrd ad-valosem s Other prices, such as sugar, wero kept artificially low for the benefit of a selected group of traders. lhe Govenment adopted legal and administative measures to liberalize fuel import and distibution in December 1990. It had lso take desons to rmov govenmt controls from coopeations by mid 1991, and achieve increased accountability for public eantepisw. Rkvem Revene coeios of about So. Sh. 51 The revenue target was not rahed, the shortll bilion for the period Juay 1990 to September being So.Sh.10 billion. The growth in revenue 1990, equivalent to an anwlizd rate of nearly 6 receipts did not keep pace with inflation, and the pecent of GDP for 1990. ratio of menue to GDP for 1990 was no more tban 4 percent, a now record low for Somalia and lower tb any other African county. Exzpdj It was ageed in the 'Revised The share of the total ordinay expenditures Prog that acta Governme expeditus on allocated to social and economic sectors was 13 socia and ecoomic sects for the perod Janay peot at the end of September 1990. Mana 1990 to Septeber 1990 be at an aveag anmual of bWget expenditure wa generally satisfctory. rate of about 18 perent of the ordiary budge, and However, an apparntly sound fiscal stance of the approval of a supplemntay budget for 1990 to centnrl goverment was offset by large extra cover aU expenditures, includig outepa fnds, bW'ty expenditurs, the amulaton of arrea necessitted by tho Gov ment's com _itmts to suppliers, and by the cost of the fuel subsidy and under the Revised Pram. the inefficient fuel distribution system.  - 24 - Anox 3 Page 3 of 3 Conditions Under Sched 4 of Credit Ageemz 1. Fuwnish de tree year Public A draft PIP was submitted in 1989. It was revised in investment Program for 1990-1992, accordance with the IDA's comments. But differnces satisfactory to the Association. remained between the IDA and the Goverm t, in particular an proposed investmnts in the oil refinery. 2. Furish proposals, satisfactory to the Proposal were submitted. However, most of the agreed Association, for Public Expenditure eomdations of the IDA mission were not satsfactoily Program to be included in the Bor.wer's implemented. The budget allocations to eoonomic and social 1990 budget. sectors in 1990 were 13 percent against taget of 20 percent. 3. Based on a revised tariff schedule for he tariff adjustmts wem made and ratified by the the mai imports agreed with the Parliamet The contract for impost verificatioo was awarded. Association, establish and implement an However, the implementation of the revised tariff struce import verification system under trms remned unsatisfactory. For some items the tates were not and conditions satisfactory to the adjusted as agreed with the Bank mission. Tarff rates on Association. wheat flour, vegetable oil and rice wee m_inied at 4 or S percent, while the tariff raft on pasta was rduced to 20 percnt, or to half the level of the tariff an wheat. These ratew resulted in a substantial loss of revenus and a distortion in relative pries of wheat, wheat flour and past, which discouraged domestic processing of wheat 4. Furn a plan of action, safctory An action plan was received and teviwed by tie IMA. it was to the Association, for institutional judged sasactory and met the reuments of the seoond development of ADC and ENC. trnuche release. 5. Furnish a plan of action, satisfctory An action plan was received and reviewed by the IDA. It was to the Asscition, for imrving land judged saicy and met the requents of the second tenure policy and ai traion of tranche release. irrigated land. I  PROECT CUPLETION REPORT SUALIA SECOND AGRtCLLTURAL SECTOR ADJSM NT PRORM ONTLY URRENY SAES Oato Nonth Fwded by Auout Am.urt Requested hAumt Altocated Successful Average / Officfal leport Account Auction as X Offered Reqeted as X of Atloated as X of Appticants Effective Exchwe Exchense of lqwort Offered Requested Auction Rate Rate a/ Rate bl Account USt USS X USt X No. So Sh? SohiS$ So Sh/S .......................... ...................................................... ,........................................................................................................................................... 16/8/89 Aug.1989 IDA/ITALY 6,000,000 12,659,589.00 211 6,000,000.00 47 70 603.00 49 7 77 519/89 Sep.1989 IDATALY 6,000,000 8,500,000.00 142 6,000,000.00 71 65 646.00 s56 839 n7 11/10/89 Oct.1989 IDA/ITALY 6,000,000 15,000,000.00 2S0 6,000,000.00 40 90 746.00 597 1064 70 8/11/89 Nov.1989 IDA/ITALY 6,000,000 14,275.262.00 238 6,000.000.00 42 91 779.00 629 n.s. n.e. 7/12/89 Dec.1989 IDA/ITALY 6.000,000 7,087,266.00 118 6,000,000.00 85 83 983.00 879 n.a. n.a. 10/1/90 Jan.1990 NDA/ITALY 6,000,000 5,036,122.00 84 5,036,122.00 100 51 1,075.00 979 979 110 19/2/90 Feb.1990 ITALY 6,000,000 4,377,073.00 73 4,377,073.00 100 39 1,188.00 1058 1080 110 19/3/90 Mar.1990 ITALY 6,000,000 1,363,527.00 23 1.363,527.00 100 IS 1,261.00 1130 114A I10 2/5/90 May 1990 ITALY 4.000,000 2,240.333.00 56 2.240,333.00 100 1O 1,353.00 1268 n.e. n.a. 30/6/90 Jun.1990 ITALY 4,000,000 785,600.00 20 785,600.00 100 7 1,74S.00 1488 1505 116 3/9/90 JullAue.90 ITALY 4,000,000 2,030.634.66 51 2,030,634.66 100 17 1,982.66 1911 1997 99 30/10/90 Oct.1990 AfOF _,000,000 858,s12.00 n.e. 846,035.00 100 12 2,109.21 2s77 2287 92 31/10/90 Oct.1990 ITALY 4,000,000 1.693,512.00 n.a. 1,693,512.00 100 15 n.e. 2577 2287 n.e. Total 67,000.000 75,907,430.U 48,372,836.66 */ Monthly average rate. b4 En rate derived from the exchange rates for external accounts. n.a. a not available.  acobmomancTuW SaLP Aoeel SSOO1A0OUId4LUSIP0LBEfMAPAiSirOffiAY MonvAtc4aftr_ _f_ lft Urn uas urns Z u W& on usl; ust up un un un us$ us. un Awls, MIAL Y c00m tmsm" 46000.400-00 4? lB 15.60 - a" 14m - - m.QU *UA5 177.m 4A787 U t lM 76.Y too" ,P4,1 0006.00 7, ea - - *u45 SeXa4 - 950 rt8.U 4.73.00 31700 u0t .- I eIrn SMtM. #.oft= t8eoS S. mmoo.o 42 so s s* 21*6 Isf - I%W* i60W 4.211.*40 660.078 8 $ W.loo xkw&U &.00 14,*16W.0 0 8.,oe 48 a M _GM,0 2Mm 30.412 - .421 07.26 4.41211A 4)0.*0 SU119 I4 DmI0 eALV