Niger - Development (Economic Recovery) Credit Project

Document of The World Bank FOR OMCAL USE ONLY G ,Z Report No. P 6264-NIR REPORT AND RECOMMENDATION OF TIE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 18.2 MILLION TO THE REPUBLIC OF NIGER 0eo fiz Ad February 28, 1994 MICROGRAPHICS Report No: P- 6264 NIR Type: PR This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA franc (CFAF) US$1.00 = CFAF 592 (January 31, 1994) CFAF 1 million = US$ 1,687 (January 31, 1994) SYSTEM OF WEIGHTS AND MEASURE: METRIC Metric U.S. Equivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) I square kilometer (km2) = 0.39 square mile (sq mi) 1 hectare (ha) = 2.47 acres (a) I metric ton (t) = 2,205 pounds (lb) 1 kilogram (kg) = 2.2046 pounds (lb) FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS BCEAO Banque Centrale des Etats de l'Afiique de l'Ouest (Central Bank) GON Government of Niger NIGETIP Public Works and Employment Project PESAP Public Enterprise Sector Adjustment Program PFP Policy Framework Paper SAL Structural Adjustment Program UEMOA Union Economique et Monetaire Ouest Africaine (West African Economic and Monetary Union)  FOR OFFICAL USE ONLY REPUBLIC OF NIGER ECONOMIC RECOVERY CREDIT (ERC) Table of Contents Page No. Credit and Program Summary i Part I: The Government's Economic and Social Program 1 A. Recent Economic and Social Development 1 B. The Decision to Change the Parity of the CFA 2 C. Macroeconomic Objectives and the Program for 1994 4 D. Structural Reforms 6 E. Social Aspects 7 F. Financing Requirements 9 Part II: IDA's Strategy and Operations 9 A. Country Strategy and Priorities 9 B. Foliow-up Operations to the ERC in 1994 13 Part III: The Economic Recovery Credit 13 A. Financing and Management of the Program 13 B. Procurement and Disbursement 14 C. Environmental Aspects 15 D. Project Implementation 15 E. Benefits and Risks 16 Part IV: Recommendation 17 Annexes Annex I Key Economic and Social Indicators Annex II Status of Bank Group Operations Annex HI Timetable of Key Processing Events Annex IV Government's Statement of Economic and Social Policies - English translation Annex V Matrix of ERC Actions This document has a restricted distribution and may be by recipients only in the performance of their official duties. Its contents may not otherwise be a,. .osed without World Bank authorization.  REPUBLIC OF NIGER ECONOMIC RECOVERY CREDIT (ERC) Credit and Program Summary Borrower: Republic of Niger Amognts: IDA Credit: SDR 18.2 million (US$ 25 million equivalent) Terms: IDA Credit: Standard with 40-year maturity Program Description: The African member countries of the Franc zone decided to devalue their currency, the CFA franc, effective January 12, 1994. The proposed credit would support the post-devaluation reform program as outlined in the Government's Statement of Economic and Social Policy and, more particularly, the measures aimed at minimizing the negative social impact of the devaluation in the short-term; and to provide the necessary fanancial assistance during the transition period in which follow-up operations are being prepared to support further structural and sectoral reforms. The Government's program has also obtained the support of an IMF Stand-by arrangement. The previous adjustment programs of the 1980s were supported by two Structural Adjustment Credits (SAL I and PESAP) as well as by the IMF Enhanced Structural Adjustment Facility (ESAF). The Nigerien Government has already taken a series of key macroeconomic and structural measures to regain and consolidate competitiveness. The ERC is designed to support the implementation of these measures in 1994. The major measures art (i) the devaluation of the CFA Franc from 50 CFAF to 100 CFAF/1 FF; (ii) tax measures to increase fiscal revenue; (iii) a substantial program of social measures to attenuate the effects of the devaluation on vulnerable groups, including increasing significantly in real terms current expenditure for health and education; (iv) prudent demand management policies to reduce absorption by the public sector and limit wage increases; and (v) reduction of external tariffs. Estimated Disbursements: Due to the urgent nature of the operation, the entire US$25 million would be disbursed in a single tranche shortly after effectiveness. There is no separate staff appraisal report.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC RECOVERY CREDIT TO NIGER 1. I submit for your approval t&e following report and recommendations on a proposed Economic Recovery Credit to Niger for the eqcuivalent of US$25 million (SDR 18.2 million) in support of an emergency recovery operation designed to provide the financial and technical support needed as a follow-up to the parity change of the CFA franc. The credit would be at the standard I)A terms, with a maturity of 40 years. 2. A 12-month stand-by arrangement, to be replaced by a three-year arrangement under the enhanced structural adjustment facility of the IMF, for the equivalent of SDR 18.596 million (38.5% of quota) is expected to be considered on March 4, 1994. A Country Assistance Strategy (CAS) will be circulated to the Board shortly, and the Third Policy Framework Paper (PFP) will be ready at the beginning of FY95. PART _: THE GOVERNMENT'S ECONOMIC AND SOCIAL PROGRAM A. Recent Economic and Social Developments 3. Since the downturn of its uranium prices in 1981, the economy of Niger has suffered continual setbacks. The setbacks were mainly the result of the deterioration in Niger's terms of trade, the continual depreciation of the Naira of Nigeria since 1986, poor economic management, as well as recurrent droughts. Losses due to the deterioration of the terms of trade between 1987 and 1992 have been estimated at 10% of real GDP. The competitiveness of Niger's modem industries has been seriously eroded by the depreciation of Nigeria's Naira and other partners' and competitors' currencies, and the resulting thriving informal border trade, smuggling and custom fraud. As a result, the Nigerien economy still remains in a deep slump. Over the period 1985-92, real GDP growth has remained very low, on average 0.25%. Per capita income has declined by 3.4% per year since 1980 and as a result, Niger's fast growing population (3.2%) is becoming one of the poorest of the world. The formal sector (28.4% of GDP) comptises a relatively inefficient public sector and a small modem private sector in rapid decline owing to the decrease in competitiveness. The informal sector is fast growing. Uranium exports amounted to 80% of total exports until the end of the 1980s, and some 70% thereafter.  2 4. Niger's social indicators paint a grim picture of the country's poverty profile. At present, 80% of the population lives in rural areas where food security and nutritional status are closely linked to rainfall patterns. However, with declining per capita incomes, poverty and malnutrition levels have at best remained constant and more likely have worsened in the 1980s. In addition, the large appreciation of the real exchange rate since the mid-1980s, which reduced severely the potential for export and import substitution, had an adverse impact on rural incomes in particular. 5. In 1992 and 1993, the fiscal position continued to deteriorate and substantial domestic and extemal payment arrears accumulated. The stock of debt increased substantially, and the net foreign asset position remained weak. The thin manufacturing base, as well as the uranium sector contracted cor.siderably with significant negative spillovers. In order to curb this deterioration, the authorities adopted a strengthened internal adjustment program in August 1993 and took key measures in September, including a decrease in public sector salaries by about 13% on average, as well as piecemeal protection measures against fraudulent imports. Despite these measures, the fiscal imbalances continued. The current budgetary deficit increased from 3.0% of GDP in 1991 to 3.9% in 1992 and 4.2% in 1993. In 1992, tax revenue decreased to a level hardly sufficient to cover the civil service wage bill and, in 1993, civil service salaries went up to four months in arrears (3.4 months on average at the end of 1993), while further arrears accumulated with respect to consumption of public utilities and government agencies. Scholarship payments were only CFAF 3.5 billion as against a budgeted CFAF 4.5 billion. External debt servicing fell to a minimum, and the counterpart funds towards foreign financed projects declined, resulting in excessively low levels of public investment. The balance of payments current account deficit, excluding official transfers remained at 7.5% of GDP in 1993, like in the previous two years. 6. Past structural adjustment efforts exerted by Niger with the support of IDA and the IMF received much needed concessional financing by both multilateral and bilateral donors. Reforms were implemented to improve public finance and debt management, liberalize the economy and foreign trade, reduce constraints on pricing and marketing in agriculture, strengthen the programming Lnd implementation of public investment, restructure the public enterprise sector, including agricultural sector agencies, rehabilitate the banking system and improve financial intermediation. Significant progress was achieved in the period 1985-89. However, economic conditions continued to leteriorate and the underlying decreasing competitiveness was compounded by adverse shocks. In parallel, the political situation evolved and the long transition period unr:' the installation of a democratic government in April 1993 caused the structural adjustment program to derail. B. The Decision to Change the Parity of the CFA Franc 7. The internal adjustment measures taken by the new Government should contribute to economic stabilization. However, the extent of the appreciation of the real exchange  3 rate and its adverse consequences had bec_mne so serious that these measures alone could not improve the competitiveness of Niger's economy and restore its financial viability. A major policy change was therefore necessary. 8. The Government of Niger, jointly with the other member countries of the CFA zone, decided to strengthen its adjustment strategy by changing, as of January 12, 1994, the parity of the CFA franc from 50 to 100 CFAF per FF. With the realignment of its currency, the Government of Niger has adopted an adjustment program for 1994-96 during which it aims at (i) achieving a rate of real GDP growth of 3.9% in 1994, and 4.2% the next two years; (ii) rehabilitating public finances and achieving primary surpluses in the Govemment's budget; (iii) increasing substantially the investment-to-GDP ratio; (iv) sustaining the improvement in external competitiveness through resuming structural and sectoral reforms, and a return to a low inflation after transitional period; and (v) reducing poverty and reorienting its public expenditure priorities in favor of human resource development. 9. With a good potential for the development its agriculture, Niger stands a good chance for accelerated growth through export expansion (cowpeas, onions, livestock), and food crop development, sustained improvements in living standards, and poverty alleviation. Prospects for uranium exports are unfavorable given the world market situation; the devaluation, together with on-going reforms in the sector, will permit, however, to restore the financial viability of the sector. The supply response in the much damaged modem manufacturing sector will take time. There is, however, a potential for a quick response of informal and small-scale enterprises in a number of import substitution activities. 10. International experiences suggest that devaluations in low-inflation countries can effectively bring about real depreciations as it leads to only a temporary increase in the inflation rate. The history of low inflation in the CFA zone, which is largely due to the supra-nationality of monetary policy--a unique situation in the world--confers an important advantage and lends higher probability that the devaluation, provided it is accompanied by appropriate fiscal policies, will be able to restore lasting competitiveness while allowing the currency to resume its role as a nominal anchor of macroecononic policy. 11. In order to guarantee the success of the devaluation and reach its development objectives, the Government of Niger is aware of the need to accompany the change of parity with measures designed to: (i) pass-through the benefits of the devaluation to rural producers; (ii) reduce absorption by Government, adjust taxation and external tariffs and limit wage increases; (iii) address the political and social dimensions of the realignment strategy, and seek policy advice and technical assistance to manage the process; and (iv) accelerate the structural reforms necessary to support the supply response. The Government's policies are summarized in the "Statement of Economic and Social Policies" shown in Annex IV.  4 C. Macroeconomic Objectives and the Program for 1994 12. Macroeconomic Goals. The main objectives are to achieve a real GDP growth rate of 3.9% in 1994, to be increased to 4.2% the following years; limit inflation to some 37% in 1994, 7% the following year, and less than 3% by 1996, which would allow to achieve and maintain a real depreciation of some 40% in domestic currency terms; limit the worsening of the current account deficit of the balance of payments to 16% of GDP in 1994 (from 7.5% in 1993), and reduce it to some 12% by 1996. The projected increase in the B.O.P. current account deficit in 1994 is due to the expected decrease in uranium export revenue and a large increase in capital good imports linked to the public investment program. The value of uranium exports is projected to fall by US$27.4 million in 1994, or 17% of their value in 1993. 13. In order to ensure the attainment of positive growth in per capita income, the program provides foc an increase in investment from 5.7% of GDP in 1993 to 15.5% in 1996. This rapid increase is necessary because of the low levels of investment in recent years and the large public investment requirements in economic and social infrastructure, and it reflects the investment response which is expected in the private sector. 14. Public Finance. The Government has taken specific measures to ensure that the current budgetary deficit, on a commitment basis and excluding grants, does not exceed CFAF 48.4 billion (5.7% of GDP) in 1994, to be reduced to 2.1% of GDP the following year. The overall fiscal deficit (excluding grants) will be limited to 9.0% of GDP (CFAF 77 billion) before being reduced to 6.0% in 1995. External payments arrears, estimated at end-December 1993 at CFAF 102 billion (at the new parity), will be eliminated by end- 1994. The program provides also for the cash settlement of domestic payments arrears for CFAF 17.5 billion (out of an identified stock of CFAF 35 billion), while the remaining will be settled trough issuance of government securities. In the event that budgetary aid exceeded the amount anticipated, the cash settlement of domestic arrears would be increased accordingly. The Government will establish an inventory of all arrears at end- 1993 and proceed to their formal regularization. 15. Revenue and taxation. The realignment of the exchange rate should result in a significant increase in government revenue, especially customs revenue. In addition, the Government has taken a number of tax measures, in accordance with the recommendations of an IMF technical mission, which should have a considerable impact on revenue, particularly beginning in 1995. The total impact of these measures is estimated at CFAF 11 billion already in 1994, or 25 percent of actual tax revenue in 1993. They include (i) a significant reduction in exemptions, (ii) a strengthening of the tax administration and the effectiveness of its audit activities, (iii) a simplification of the tax system, (iv) a reinforcement of anti-fraud measures, and (v) enhanced collection efforts. Concerning the VAT, the existing three rates (10%, 17%, and 24%) will be replaced by a single rate of 17%, consistent with the proposed harmonization of the VAT within the UEMOA; the number of exempted products will be reduced as much as possible, and  5 coverage of the VAT will be extended to public utilities (electricity, water, transportation) after the companies concerned have been restructured. The Govermnent will ensure that its actions are consistent with the initiative to harmonize tax policy within the West African Economic and Monetary Union (UEMOA). Overall, it is expected that the ratio of budgetary revenue to GDP rise from a low 7.6 percent in 1993 to 11. I percent in 1996. 16. Wage Policy. A strict discipline in wage policy is essential to limit inflation, achieve the necessary real depreciation and restore competitiveness. The civil service wage bill will be limited to CFAF 44.3 billion in 1994, representing an increase of 14.2% over 1993. To achieve this objective, the size of the civil service will increase only slightly from 38,738 to 39, 080 by end-1994, taking into account the priority requirements in the education, health sector, and tax administration. Salaries have been realigned at their pre- September 1993 level, and will be raised by a maximum of 10% after March 31, 1994. The overall amount of scholarships will be limited to CFAF 4.8 billion, and a rigorous selection process will ensure that only the most deserving students receive support. 17. Price Polices. The Government will continue its policy of free pricing and wil! not introduce ptice controls beyond the current exception for petroleum products and public utilities (water, electricity, telecommunications). a. Petroleum prices have been modified to reflect import price increases. In order to dampen price hikes, however, taxes have been lowered on gas-oil, which is important in itidustry and transport, and have been eliminated on kerosene--an essential consumer good--for a 3-month period.. b. Water and electricity rates will be frozen until mid-April, and will be readjusted thereafter, taking into account increases in import costs and the restructuring measures envisaged for these sectors. 18. External Tariff The realignment of the exchange rate makes it necessary to adjust external tariff. The following measures have been taken soon after the devaluation: (i) doubling of standard values, schedule values, and minimum administrative values (these values are to be eliminated in the forthcoming tariff reform; para. 24); (ii) 50% cut on cumulative taxes and duties for essential goods, and intermediate goods; (iii) transitional clauses were applied exclusively to imports not yet cleared through customs, but already paid at the old exchange rate; (iv) ad hoc exemptions have been eliminated, except those related to projects, diplomatic privileges and special conventions. 19. Monetary Policy. The Government will implement a prudent credit policy, consistent with the program targets. Money supply would increase in 1994 by less than 15%. With a targeted rise of CFAF 5 billion in net foreign assets of the banking system, net bank credit to the Government will rise by only 11%, and credit to the economy by 30% during 1994. The outstanding central bank advances to the Government would be brought within the statutory ceiling in 1994. Credit and financial intermediation will  6 continue to benefit from the reform of monetary policy instruments undertaken by BCEAO, including the pursuit of a more flexible interest rate policy and indirect regulation of credit through the introduction of reserve requirements and a broadening of the role of the inter-bank money market. To tighten temporarily monetary and credit conditions, the Central Bank's discount rate was raised from 10.5% to 14.5%, effective January 18, 1994. The rehabilitation of the banking system will continue with the closing and liquidation of the Caisse Nationale de Credit Agricole (CNCA), the speeding up of the restructuring of the Banque Islamique du Niger (BIN), the Meridien BIAO, the Banque Commerciale du Niger, and the Nigeria International Bank-Niamey. D. Structural Reforms 20. The Government is currently preparing a comprehensive program of structural reforms which will be outlined in the Fifth Policy Feamework Paper (the Fourth Policy Framework Paper was considered by the Executive Director on September 11, 1990). For the restored competitiveness of the economy to effectively lead to the resumption of self- sustained growth., the Government is determined to accelerate essential structural reforms, concerning in particular the liberalization of the economic system, the functioning of factor markets and private sector promotion, public investment programming and implementation and human resource development. 21. Public Investment. Measures will be taken to strengthen the planning, programming and implementation of public investment. The three-year rolling public investment program will be reactivated with the support of the Bank and project selection will be consistent with sectoral development strategies. Priority will be given to infrastructure projects in direct support of productive sectors, human resource development and employment creation. 22. Agricultural Policy. The Government will continue to avoid restrictions on agricultural prices, and will pursue efforts to liberalize the operations of the Riz du Niger (RINI), and limit the role of the Office des Produits Vivriers du Niger (OPVN) to the management of food security stocks. Rice farning has immediately benefited from the parity change, with increases in already high import prices. Actions have been taken through the government extension services to inform farmers of the benefits they can draw from the exchange rate realignment and make sure that the increases in export proceeds are fully passed through to the producers. The Government intends to encourage private investment, including in small-scale irrigation, and promote the expansion of agricultural credit for investment and commercialization. The scope of government intervention will be limited to ensuring appropriate land tenure legislation, environmental protection, food security, rural infrastructure, as well as research and extension services, training and education. A legal framework and an action program are being prepared to organize rural communities and empower them for resource management and socio-economic development at the local level.  7 23. Industrial Policy will be centered on the promotion of exports on the regional market and the development of small and medium-size enterprises for import substitution througk improvements in competitiveness and productivity. Accordingly, the most important measures concern the regulatory framework and the elimination of bottlenecks throttling supply response. With respect to the labor market, the Government is committed to repeal the regulations regarding prior authorization in hiring and firing, so as to provide flexibility for such a strategic factor market. Concerning public enterprises, some measures will be accelerated. They concern conducting independent audits in some enterprises (NIGELEC, ONPPC, SONIDEP, CNSS), the liquidation of COPRO-NIGER, and restructuring actions in a number of other enterprises. Also, the cross debts of the public sector will be identified and a timetable establ: ied by the end of April 1994 for their settlement. The reforms in the Uranium sector as well as in the electricity company (NIGELEC) will be implemented in accordance with the agreed timetable. 24. With respect to trade, the realignment of the ex'.hange rate is an opportunity to reform the system of external protection with the objectives of simplifying import and export procedures, harmonize effective protection, reduce custom fraud and increase tax revenue. Active preparation of the trade reform has begun with the support of Bank staff and the Government is committed to introduce it at the end of April 1994. 25. Regional Integration. Together with the devaluation, a major step towards regional economic integration was taken by the seven Heads of State of the UMOA in Dakar with the signing of the Treaty transforming the UMOA into an economic and monetary union (UEMOA). This improves the prospects for agricultural and manufacturing development in Niger, like in the six other UEMOA countries', by increasing the potential for intra-regional trade on a market of nearly 60 million persons and permitting economies of scale. Moreover, the strengthening of the Union institutions and the proposed mechanisms to ensure the convergence of fiscal policies and the harmonization of economic and sectoral policies among the seven countries increase the likelihood for them to maintain viable macroeconomic frameworks. E. Social Aspects 26. The realignment of the exchange rate is a fundamental element of the Government's strategy to reduce poverty, particularly in the rural areas, where the large majority of the population lives. The immediate rise in producer prices of export crops and livestock as well as the much improved competitiveness of food crops on the domestic market, particularly rice, will lead to an increase in real incomes of the rural population and a reversal in the rural-urban terms of trade which had been distorted for a long time. In the longer term the general economic recovery, resulting from the restoration of competitiveness, is expected to create new employment opportunities and benefit all social groups. In addition, the restoration of viable public finances will allow to increase 'Benin, Burkina-Faso, Cote dlvoire, Mali, Senegal and Togo.  8 expenditure in the social sectors and improve the access of the population to essential social services. In the short term, however, price increases resulting from the impact of the devaluation on import costs will be felt before new employment opportunities appear in the urban areas. To minimize this negative impact on the most vulnerable groups, the Government has adopted a series of accompanying measures. (i) Custom duties and taxes have been eliminated for a period of three months to limit the price increases of products (rice, sugar, kerosene) that make up a significant part of .he consumption basket of low-income households; (ii) Adequate supply of free essential drugs in public health facilities is being provided with the assistance of external donors and actions are being taken for ensuring the supply of low cost generic drugs in private pharmacies; (iii) Steps have been taken to supply the markets with essential foodstuffs (cereals, sugar, cooking oil) at subsidized prices, if the need appears to break speculative commercial practices; (iv) Budgetary appropriations for social expenditures, in particular in the areas of primary education and primary health services have been increased substantially in real terms in the 1994 Budget and the Government has undertaken to redeploy staff from central ministries to health facilities and primary schools in the interior and rural areas. 27. An amount of CFAF 10 billion (US$ 17 million) is explicitly budgeted to cover the cost of the measures above. This amount is subject to review according to the needs now being evaluated by the Niger authorities and available external financing. 28. In addition, (a) Special programs, nutrition in particular, targeting the poorest social groups will be put in place with the assistance of non-governmental associations (NGOs) and donors, including IDA. (b) The ongoing labor-intensive programs, primarily in the areas of civil works (roads, urban infrastructure -- NIGETIP), rural infrastructure (Small Rural Operations Project), education and health, will be increased, with the assistance of IDA and other donors.  9 F. Financing Requirements 29. After taking into account the commitments already made for project loans, the gross external financing requirements for 1994 will amount to CFAF 201 billion. These requirements will be covered by exceptional financial assistance from multilateral creditors and bilateral creditors, and debt relief operations. The exceptional financing already identified for 1994 totals CFAF 51 billion, including the proposed IDA credit. The financing gap for 1994 stands at CFAF 150 billions. This gap is expected to be covered by debt relief of CFAF 108 billion, and by an additional financial aid of CFAF 42 billion. PART II: IDA'S STRATEGY AND OPERATIONS A. Country Strategy and Priorities 30. A full Country Assistance Strategy (CAS) is under preparation. The last CAS was discussed by the Executive Directors on April 21, 1992. The following paragraphs outline the principles which will guide future Bank interventions and provide a context for .he present operation: (a) Country's Potential: Niger's economy remains relatively undiversified with only one major export commodity, uranium and limited natural resources. Growth is highly dependent upon rainfall patterns in the absence of widespread irrigation, and the price of uranium. In the face of such constraints and uncertainties, Niger's growth prospects continue to depend critically on the Government's ability to maintain a viable macro-economic framework and to design and implement a reform program which would open up potential new areas of growth and which donors can support (section c below). In the longer term, Niger's development potential will depend on the following factors: (i) human resource development which is necessary for the country to have a skilled and productive labor force; (ii) investment in critical sectors, notably human resources (education in particular), agriculture and natural resources management and economic infrastructure; (iii) mobilizing domestic savings and improving the efficiency of resource use in the public and private sectors through policy reform; and (iv) consistent with point (iii), a sustained improvement in the competitiveness of the economy through efforts to lower domestic production costs and an improved environment conducive to private investment. (b) Ownership and Consensus Building. It will be difficult for the Nigerien society to transform itself by changing the nature of the relationship between the state and the private sector unless strong efforts are made at strengthesiing the quality of our dialogue with the civil society at large (Government, NGOs, trade unions, businesses, etc.). This would allow the Bank to be a facilitator of change  l0 by acting as a catalyst promoting internal debates aimed at reaching consensus and generating ownership of development programs. (c) Sources of Growth (i) Supply Response from the Rural Sector: In both the short and long- terms, the agriculture sector is likely to remain the most important sector in terms of employment and it is there that the supply response is expected at first. Thus, an essential component of our strategy is to promote structural reforms which should lead to expanded production of export and food crops such as: subsistence cereals, cowpeas and onions, higher value vegetables, and livestock products. Much of Niger's potential here would lie in taking advantage of its geo-economic position vis a vis Nigeria, through trade. (ii) Supply Response from the Private Sector: In the long term, the private sector should become one of the principal sources of sustained growth. The informal sector is highly integrated with the economy of Northern Nigeria, and is relatively diversified. The magnitude of the informal sector activity in Niger is imperfectly understood since most trade with Nigeria takes place unofficially. The formal private sector is relatively small but contributes a disproportionate level of government revenue. Policy constraints such as labor legislation have taken their toll. The private sector could actively participate in the development of such sectors as tourism and services, small scale mining and the production of small scale agricultural implements in addition to agriculture (see above). Thus, a central focus of the assistance program should be on the promotion of competitiveness through regulatory reform to make the economy more responsive to opportunities and create the conditions for rapid economic growth. It should also be on helping design incentives to encourage the informal sector to enter the formal sector. (iii) Increased and Improved Public Investment: The last four years have witnessed a steep decline in public investment. Thus, an important component of our strategy in the short to medium terms would be to help increase the investment rate especially ensuring that investments are redirected towards the social sectors, to agricultural services and to the maintenance and rehabilitation of existing infrastructure in preference to new works. These investments should also help generate employment as part of efforts to alleviate poverty.  (d) Five Ncessau Actions to Sustain Succcss: (i) Human Resources Development. Niger ranks among the bottom five countries in the world for all social indicators. Improving significantly the situation underlined by these indicators is a sine qua non condition of development. Signiflcant and sustained improvement is crucial for both long term growth within Niger and, in the absence of employment opportunities at home, to improve the chances for migrants to find gainfil employment in the coastal countries. The key issue on the agenda in the development of human resources are: (a) to lower the growth rate of population from its current level of 3.2%; (b) to improve the coverage of primary health care; and (c) to increase the level and quality of basic education. Human resource development is thus the central focus of our partnership with Niger. In education, emphasis is on strengthening primary education, by restructuring expenditures towards the primary level and increasing the enrollment rate. Concerning higher education, the emphasis is on reducing costs of student services and scholarships and using the savings to improve primary education as well as the quality of education and research activities. In health, the emphasis is on strengthening primary care, developing strategies for dealing with STDs, and on developing a coherent approach to the provision of low-cost essential drugs. (ii) Population Growth and the Status of Women: Faster growth will not contribute significantly to poverty alleviation unless the Government is able to slow down rapid population growth. Thus as mentioned above, a central focus of Bank activities in Niger will continue to be on population, including through improvement of the status of women. Particular emphasis will be given to improving the quality and availability of adequate health and family planning services and to addressing low female enrollment and literacy rates. (iii) IProvision of Adequate Infrastructure: Regardless of structural reforms, the growth of exports, particularly to Nigeria and the other UEMOA countries, and the private sector in general and the rural sector in particular, will only be possible if the infrastructure bottlenecks are removed. Thus, Bank activities in the provision of adequate infrastructure services are an essential support to the GON's efforts in the promotion of the private sector and the agriculture sector. (iv) E'nvironment, Agricultlire and Natural Resources Management: Rapid population growth, shrinking cultivable land and soil degradation may culminate in a crisis of unmanageable proportions in agriculture. Increased urban populations will require better sanitation and  12 environmental services. But even as the country becomes moie urban, agriculture will remain a key economic artivity. The natural resource base is threatened by environmental degradation, thus undermining the livelihood of 80% of Niger's population. Thus, another component of our strategy is to slow down or to reverse present environmental trends, maintain or increase existing levels of per capita production to help achieve food security, and provide a source of economic growth. Central to our activities are: (a) environmental management; (b) food security; (c) an adequate incentive structure for farmers; and (d) efficient delivery of public services (extension, research, etc.). (v) Institutional Development and Capacity Building. At the policy level, the scarcity of reliable data, poor coordination, and the absence of a proper policy-making process have in the past hindered the design, implementation and monitoring of reform packages. For example, the budget is not often used as a policy instrument and sector ministries do not, generally, have the required planning and programming capabilities. Although national expertise is often available (university, research centers), it is rarely used systematically. Implementation performance under investment projects continues to be mixed. The recent emergence of a new, democratically elected Government and of new actors in the policy dialogue has improved matters somewhat but much remains to be done to improve their analytical capacity. In light of the foregoing, a major component of IDA strategy is to support efforts at developing a comprehensive long-term institutional development strategy which includes specific actions in capacity building. 31. Until now, Niger was in 'core' mode since, in the absence of sustained actions on the adjustment front including a depreciation of the real exchange rate, the economic prospects were poor. As a result, IDA lending had shifted from one that included quick- disbursing to one that only included investment financing with an emphasis on population and human resources, agriculture (including natural resources management), infrastructure maintenance and rehabilitation (NIGETIP) and capacity building. During this transition period, the Bank continued encouraging dialogue with the country and promoting the role of the private sector. The Bank also made available technical and material assistance to help the Government put its financial house in order (including the mobilization of revenues). The opportunity presented by the realignment of the CFAF, and the commitment of the new Government, justify planning a commensurate program of financial support for macro and sectoral adjustment operations as an important component of our strategy for Niger in the coming years. Nevertheless, we remain cautious in the conmnitment of scarce IDA resources.  13 B. Follow-up Operations to the ERC in 1994 32. The Economic Recovery Credit represents an exceptional response to a historic decision. In particular, its design and conditionality reflect two constraints: (i) the need to provide a timely first response to the measures taken to accompany the devaluation; and (ii) the absence of any other quick-disbursing instrument to do so. The ERC is the first element of the response planned by IDA to ensure the necessary conditions for a favorable supply response following the devaluation. Then, our plans include both quick disbursing adjustment operations to provide the necessary financing in support of strong reform efforts, and investment operations aimed at developing human resources, employment creation, capacity building and agricultural development. The first subsequent adjustment operation will be a Human Resources SECAL (hybrid). This operation, which is expected to be presented to the Board in May 1994, will aim at consolidating and furthering the many actions government has recently been taking to increase school enrollment and to improve the quality of education. The second adjustment operation is a Second Structural Adjustment Credit which will be aimed at picking up where the past adjustment operation (PESAP) was derailed. It would focus on incentives and policy reforms for the private sector, public resource management, and public enterprise reform. 33. IDA also intends to accelerate the implementation of existing projects and provide supplementary credits. A first step toward income creation is a planned supplement to NIGETIP (Public Employment Project) which would effectively double the output of NIGETIP over the next year with a substantial impact on employment. The supplement would accelerate the provision of basic urban services. NIGETIP would be expanded to secondary urban centers. A supplement is also planned for the Small Rural Operations Project (SRO) which would be aimed at addressing infrastructure needs in rural areas as well as exploring support for export promotion activities in rural areas. PART m: THE ECONOMIC RECOVERY CREDIT A. Financing and Management of the Program 34. It is proposed that an Economic Recovery Credit in the equivalent of US$ 25 million be allocated to Niger on IDA standard terms. The objectives of the credit are: (i) to support the Government's program, outlined in the Government's "Statement of Economic and Social Policies" dated February 28, 1994, and, more particularly, the measures aiming at minimizing the negative social impact of the devaluation in the short- term; (ii) to provide the necessary financial assistance during the transition period in which follow-up operations are being prepared; and (iii) to support the policy dialogue between the Government and IDA. Due to the urgency of the operation, it is proposed that the credit be disbursed in one tranche upon effectiveness. The Government's ability to consolidate the early gains from the devaluation and respect its financial program requires that budgetary support be made available rapidly. There is no condition of effectiveness, except for the legal opinion and ratification of the Credit Agreement.  14 B. Procurement and Disbursement 35. Procurement procedures have been designed to permit rapid use of funds while ensuring efficiency and accountability in the process. Simplified international competitive bidding (ICB) would be required for eligible imports by public agencies and by the private sector exceeding US$ 5 million. Procurement by public agencies for items costing below the threshold will follow standard government practices found to be acceptable in the past. Eligible imports below the threshold by private entities would be procured in accordance with normal commercial practices, and wherever possible, quotations from eligible suppliers from at least two countries would be sought. Single source purchasing would be permitted for proprietary equipment or where compatibility with existing equipment requires standardization. Contracts valued less than US$5,000 would not be eligible for financing under the credit. Procurement documentation will be maintained for ex-post review by the Bank. The documentation may consist of: (i) a brief description of procurement procedures; (ii) and evaluation summary giving number of bids received; (iii) a comparative statement of prices received; (iv) dates of contracts and payments; (v) a copy of the contract; (vi) a copy of the invoice; and (vii) any other documentation required by disbursements. 36. The proceeds of the credit would be used to reimburse 100% of the foreign exchange cost of eligible general imports. On an exceptional basis, to allow for timely disbursements, no limitation is placed on petrol or food imports. Public and private sector imports would be eligible, except for: (a) Negative list; (b) Imported Goods already financed under bilateral or unilateral credits. 37. The Government will establish a Special Account at the Central Bank (BCEAO) to facilitate disbursements. The authorized allocation for the Special Account would be CFAF 6 billion (about US$ 10 million equivalent). This account would be replenished regularly on the basis of fully documented withdrawal applications in excess of US $ 500,000 or on the basis of statements of expenditures (SOEs) for expenditures below that amount. The Borrower would indicate on the SOEs the nature and origin of the goods, as well as the payment date, and would maintain all relevant supporting documentation (invoices, evidence of shipment, customs declarations, evidence of payment) for review by Bank supervision missions. Expenditures under the IDA credit would be in accordance with normal IDA rules. The proposed date of eligibility would be set in light of the Government's renewed internal adjustment efforts in August 1993. In order to permit timely disbursements in the amount needed to keep the program on track, the total amount of the credit would need to be eligible for use for retroactive financing. Given Niger's disbursement patterns, the selection of August 2, 1993, as the cut-off date for retroactive  15 financing would provide timely effective access to the credit proceeds. Exceptional retroactive financing would thus meet an essential objective of the operation. C. Environmental Aspects 38. The project would be consistent with IDA policy and would follow acceptable IDA procedures. In conformity with IDA policies for adjustment operations, no environmental rating has been assigned. D. Project Implementation 39. The Ministry of Finance and Plan is the Government's organization responsible for coordinating and implementing the proposed project. It will undertake its work under the guidance and supervision of an Interministerial Committee which has been established to prepare a structural adjustment program and a policy framework paper. The Committee is chaired by the Minister of Finance and Plan. Bank staff will coordinate with the IMF to ensure adequate monitoring of key economic policies and indicators. The Government will arrange for an audit report by an auditor acceptable to the Bank to be provided within four months after the end of the fiscal year of the Borrower. 40. The policy measures to be taken under the proposed credit are detailed in the Governments Statement of Economic and Social Policies (Annex IV). As conditions of negotiations, the Govermnent agreed to the following actions which have already been taken: a) Realignment of the exchange rate, fixed at 100 CFAF for 1 FF effective January 12, 1994; b) Adoption of a number of tax measures to increase tax revenue, based on the recommendations of the December 1993 IMF technical mission; c) The civil service wage bill has been limited in the revised 1994 Budget to CFAF 44.3 billion (representing an overall nominal increase of 14% over 1993); d) Administered prices (petroleum products, water and electricity) have been set as specified in the Government's Statement of Economic and Social Policies (paragraph 16 of Annex IV); e) Free agricultural producer pricing has been maintained and restrictions on rice marketing have been eliminated; f) With respect to the customs tariff the measures specified in paragraph 18 above have been taken; and  16 g) Allocation in the revised 1994 Budget of CFAF 10 billion (US$16 million) for social safety net measures, including: * elimination of tariffs on rice and sugar for three months; * freezing the price of Kerosene for three months and limiting the increase in the price of gas oil to 30%; * ensuring proper supply of free essential drugs in public health facilities; * supplying the markets with essential foodstuffs (cereals, sugar, cooking oil) at subsidized prices to break speculative commercial practices; * increasing significantly in real terms current expenditure for health and education and ensuring the availability of free essential drugs in public health facilities. h) Increase the Central Bank discount rate from 10.5% to 14.5%. E. Benefits and Risks 41. Benefits: The proposed project would aid the Government in managing the transition following the currency realignment, assisting it in restoring macroeconomic equilibria and meeting the immediate social needs of the post-adjustment period. Human resource development efforts would be accelerated by increasing the availability to basic services and by increasing opportunities for employment creation in both rural and urban areas. Among the 13 CFA countries, Nigers economy is probably the one which has most suffered from the overvaluation of its real exchange rate, because of its proximity to, and traditional trade relations with Nigeria and its limited resource base; much damage to the modem manufacturing sector has already been done. The devaluation is an essential prerequisite for economic recovery and poverty reduction, and its positive impact on agriculture and on the financial viability of the uranium sector is already felt. 42. Risks: Short-term costs, particularly the decrease in urban standard of living, may put the new democratic Government in difficulty with the opposition party and various interest groups such as students, labor unions, and civil servants. It may also generate tensions within the coalition of parties in power. However, important remedial measures, including exceptional financial assistance by donors, have been put in place to address these risks. Furthermore, the devaluation, coming after a prolonged crisis, has injected a sense of urgency into the debate on economic reform. The success of the devaluation in provoking an investment and supply response in the medium-term will depend on the determination of the Government in implementing these reforms.  17 PART IV: RECOMMENDATION 43. I amn satisfied that the proposed credit would comply with the Articles of Agreement of the International Development Association and recommend that the Executive Directors approve it. Lewis T. Preston President Washington, DC February 28, 1994 Attachments  Annex I Page 1 of 5 Niger: Table 1: Social Indicators Niger: Priority Poverty Indicators Meat Se,. regie^,Ano gr J 25-30 13-20 S Id Se- U(RJ of Y*WW y-w n maa Sake. LO,- Licame IndJeaLor 'WAWe 2.e ago (MV4 hmova group POVERTY Uppc povty lne locl or. HCedzcount index % o pop. Lowv povcty line loc1 s. _ _ _ _ _ r HeAdoouu indx %otpop. .. _ _ _ - _ GNPpercapits USS 170 230 300 350 350 1,610 SHORT TERM LNCOME INDICATORS ulld wtn m local cr. _ _ _ _ _ UasldiUDad Ju wages Ruml lrms of trde * _ _ _ _ Coumer price index 1997-iC' 22 39 8S Lowe inDom- - - - - Food ' _ _ 91 _ _ UTban - _ Rural ^ _ SOCIAL LDICATORS Public expend. co bic SOCavim %of GDP _ _ - anas e roUi ntcOs primuy %schoolagepop. 11 20 29 70 113 100 Male is 25 37 76 122 106 Famsle * 7 14 21 60 106 98 Moraity lag mnaulit aoLlivebirths I1O 161 126 104 70 40 Lind, 5 -onalit* 320 177 98 53 k=MmiLtioc Measlez % srapup _ 27 40 73 70 DPT ' _ S 35 81 74 Ciild mailmition (undcr5) 49 - - - Life expency Toul yCan 37 40 46 St 63 67 F:emaJ/aJles emio 1.09 1.08 1.09 1.06 0.95 1.08 Total frtflity ratc bin pr wommn 7.2 7.3 7.4 6.4 3.7 3.5 MaJra rnonality rate 100,000 live births - - .. Population growth rate Irfant mortality rate Primary enroUment (p!rmeTe) (thoLu oflivebi) (pd) 6 - * 250 120+ 5 ~~~~~~~200 100 150~~~~~~~~~8 3 ~~~~~~~~~~~~~~~~~~~~60 100 0~~~~~~~~~~~~~~~~~~~~2 mid 60s zcid70c U= mid 70u mid7s on mid 6O mid 70s mi Low income  Annex I Page 2 of 5 Niger: Table 2: Social Indicators Niger Resources And Expenditures moo" . 25-10 Z1-20 ,'e . Unkt of ,pu y-w m.st Sahm La"be fnldwor rc' go _ go (nr) Jc hs,eob poa HUMAN RESOURCES Populadon (mre1991) thousands 3,736 4,704 7,911 4S8S932 3,127,265 773,203 A-e de;oap-decY rs