Benin - Third Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6573-BEN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED TRIRD STRUCTURAL ADJUSTMENT CREDIT OF SDR 25.8 MILLION TO THE REPUBLIC OF BENIN APRIL 27, 1995 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.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1.00 = CFAF 529 US$1.00 = SDR 0.64 ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BCEAO - Banque des Etats de l'Afrique de l'Ouest BMF - Minimum Presumptive Tax (Benefice Minimum Forfaitaire) BOAD - West Africa Development Bank CARDERs - Regional Development Organizations CAS - Country Assistance Strategy COTEB - Textile Company CPI - Consumer Price Index ESAF - Enhanced Structural Adjustment Facility EU - European Union FIAS - Foreign Investment Advisory Services FNI - National Investment Fund (Fonds National d'Investissement) GDP - Gross Domestic Product ICB - International Competitive Bidding IFC - International Finance Corporation IGR - General Income Tax (Impot Gdneral sur le Revenu) IMF - International Monetary Fund IPTS - Tax on Wages and Salaries (Impot Progressif sur les traitements et les salaires) MIGA - Multilateral Investment Guarantee Agency PIP - Public Investment Program PFP - Policy Framework Paper SAC - Structural Adjustment Credit SAF - Structural Adjustment Facility SCO - Onigbolo Cement Company SITC - Standard International Trade Classification SITEX - Textile Company SOE - Statement of Expenditure SONACOP - Petroleum Company SONAPRA - Cotton Company SONAR - National Insurance Company SONICOG - Palm Oil Company SSS - Savd Sugar Company TFU - Single Property Tax (Taxe Fonci&e Unique) TPU - Single Professional Tax (Taxe Profesionnelle Unique) UEMOA - West African Economic and Monetary Union UNDP - United Nations Development Programme VAT - Value Added Tax FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY REPUBLIC OF BENIN THIRD STRUCTURAL ADJUSTMENT CREDIT TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY .................................................... ii 1. THE ECONOMY ..................................................... 1 A. Background .....................................................1 B. Recent Economic Performance .....................................................2 C. Poverty ..................................................3 D. Medium Term Prospects ................................................4 II. BENIN'S ADJUSTMENT PROGRAM ....................................................5 A. Macroeconomic Framework .................................................... S5 B. Private Sector Incentives .....................................................6 Tax and Trade Reform .....................................................6 Regulatory Framework .....................................................8 Public Enterprises ....................................................9 C. Improved Public Services .................................................... 10 Current Expenditures .....................................................11 Public Investment .....................................................11 Public Administration Reform .................................................... 12 III. THE PROPOSED STRUCTURAL ADJUSTMENT CREDIT ........................................ 13 A. SAC m Program and Link to CAS .................................................... 13 B. PovertyImpact .................................................... 13 C. Credit Amount and Proposed conditionality .................................................... 14 D. Procurement, Disbursement, Financial Management and Auditing .............................. 15 B. BenefitsandRisks .................................................... 16 IV. BANK GROUP OPERATIONS .................................................... 17 V. COLLABORATION WITH IMF AND OTHER DONORS .............................................. 17 VI. RECOMMENDATION .................................................... 18 ANNEXES Annex A: Social ndicators Annex B: Key Economic Indicators Annex C: External Financing Requirements, 1992-1997 Annex D: Status of Bank Group Operations Annex E: Policy Matrix Annex F: Supplementary Credit Data Sheet Annex G: Letter of Development Policy 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.   - 11 - REPUBLIC OF BENIN THIRD STRUCTURAL ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Beneficiary: Republic of Benin Amount: SDR 25.8 million (US$40 million equivalent) Terms: Standard IDA terms with 40 years maturity Description: The proposed operation would support implementation of key accompanying measures designed to strengthen the supply response to the devaluation of the CFA franc and to consolidate reforms initiated since 1990. In particular, the devaluation has provided Benin the opportunity both to accelerate reforms that were constrained by the previous overvaluation - such as lower import tariff protection and privatization of previously uncompetitive enterprises - and to generate a greater supply response from the measures taken since 1990. The Government's overall adjustment program is outlined in the PFP distributed to the Executive Directors in April 1995. The proposed SAC III would support the Government's efforts to maintain a substantial real depreciation through appropriate macroeconomic policies, assure a strong supply response to the devaluation, and improve the delivery of essential public services required for higher growth in the medium-term. The adjustment package proposed under the operation consists of an acceleration of fundamental policy reforms in two areas. First, the proposed SAC IL would support improved incentives for private sector development through further simplification and rationalization of foreign trade taxation, a deeper restructuring of domestic indirect and direct taxation, additional changes in the regulations governing commercial activity, investment and the labor market, and public enterprise divestiture. Second, it would support improved management of public resources and delivery of public services by restructuring current expenditures, improving public investment programming and execution, and reorganizing key ministries. The Government's Letter of Development Policy is attached as Annex G. Benefits: The proposed credit would support policies designed to accelerate broad-based income growth and increase the availability and quality of basic social services. With regard to income growth, one of the most important impacts of the devaluation and accompanying measures should be a sustained increase in the demand for labor, which is the most important asset of the poor. The proposed operation would support restoration of internal and external financial equilibria through its impact on the budget and external trade. It would support implementation of the accompanying measures - including tax, trade and regulatory reform - required to realize the opportunities for improved competitiveness and accelerated growth offered by the devaluation of the CFA franc. The proposed restructuring of public expenditures and associated resource management reforms would increase the availability of essential health, education,  and infiastructure services, which are expected to be particularly beneficial for the poorest segments of the population. Estimated Disbursement: The credit would be disbursed in two tranches of US$20 million each. The first tranche would be disbursed immediately after effectiveness. The second tranche is expected to be disbursed nine months later, subject to satisfactory fulfillment of the specified conditions. Retroactive financing for up to 20 percent of the credit amount would be permitted for eligible imports made not more than four months prior to credit signature. Staff Appraisal Report: Not applicable Map: Not applicable  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT TO THE REPUBLIC OF BENIN 1. I submit for your approval the following report and recommendation on a proposed Structural Adjustment Credit (SAC III) to the Republic of Benin for, SDR 25.8 million, the equivalent of US$40 million. This credit would be on standard IDA terms, with an amortizafion period of 40 years including a grace period of 10 years. The proposed operation would support implementation of accompanying measures designed to strengthen the supply response to the devaluation of the CFA franc in January 1994 and consolidate reforms initiated under previous operations. These measures are an integral part of the Government's overall reform program outlined in the medium-term Policy Framework Paper (PFP) which will be distributed to the Executive Directors in May 1995. Benin's adjustment efforts are supported by the IMF through a three year ESAF, under which the third annual arrangement is expected to be approved in May 1995. Significant support is also provided by the European Union (EU), the African Development Bank and bilateral donors including France, Germany, Japan, the Netherlands, Switzerland, and the United States. I. THE ECONOMY A. Background 2. Benin adopted an adjustment program in 1989 in response to an economic and financial crisis enendered by almost two decades of state domination and mismanagement of the economy. The first phase of Benin's adjustment program (1989-90), supported by SAC I and an IMF SAF arrangement, focused on reducing macroeconomic imbalances and initiating market liberalization. Key objectives included reducing the fiscal deficit, initiating a public enterprise divestiture program, and managing the crisis engendered by the collapse of the state-owned banks. Implementation of the program was severely hampered by political disturbances in 1989 which led to a breakdown of the public administration and a dramatic decline in government revenues. The economic crisis was accompanied by a period of sociopolitical turmoil culminating in the naming of a transition government in March 1990. Considerable progress was realized in 1990, particularly with regard to public enterprise divestiture and restoration of a functioning banking system. 3. Multi-party elections in February/March 1991 and installation of a new President and National Assembly in April 1991 were followed rapidly by a reinforcement of the economic reform program. The second phase of the adjustment program (1991-93), initiated by the newly-elected Government and supported by SAC II and IMF SAF/ESAF programs, focused on the reduction of the current budget deficit, widespread market liberalization, and further public enterprise divestiture. Implementation of the program was broadly satisfactory and Beni was one of the few CFA countries which maintained Bank- and IMF- supported programs in the early 1990s. The third and final tranche of SAC II was released in August 1994. 4. The proposed credit would support Benin's adjustment program as described in Part II of this report. The devaluation of the CFA franc in January 1994 removed a major constraint on the supply response to Benin's adjustment efforts. The proposed operation would, in addition to supporting  -2 - macroeconomic policies designed to assure maintenance of a real depreciation and consolidating past reforms, focus on the two most important elements for realizing a supply response to the devaluation and accelerating broad-based growth, namely reducing distortions to private sector incentives and improvmg public services. Barring unforeseen external shocks, such as a dramatic decline in world cotton prices, and assuming full implementation of the proposed reforms, Benin is not expected to require additional exceptional balance of payments financing. Given its relatively strong past adjustment performance, the successful devaluation of the CFA franc in 1994, and the reform measures proposed for 1995-96, the results of which are reflected in the projected financing requirements, additional adjustment lending for Benin beyond the proposed credit is not envisaged. Continued economic reforms in key sectors would be pursued primarily through sector investment operations. B. Recent Economic Performance 5. Pre-Devaluaton Adjustmcnt. Real GDP growth more than doubled from less than 2 percent per year in the 1980s to 4 percent per year during 1990-93. Inflation, as measured by the GDP deflator, remained below 3 percent through 1993. Gross domestic savings increased from an average of I percent of GDP in the 1980s to about 4 percent of GDP in 1990-93. Finally, despite considerable annual variations, gross domestic fixed investment averaged about 14 percent of GDP in both the 1980s and the 1990-93 period. The private sector share of investment rose, however, from a low of 36 percent in 1989 to 45 percent in 1993. 6. The increase in domestic savings was driven by higher government revenues and a reduction in public expenditures. In particular, government revenues grew steadily from less than 9 percent of GDP in 1989 to almost 13 percent of GDP in 1993, while expenditures declined from 20 percent to 18 percent of GDP. As a result, the overall budget deficit was halved from 10 percent of GDP in 1989 to 5 percent of GDP in 1993, and the current budget moved from a deficit of 5 percent of GDP in 1989 to a balanced position in 1993. 7. Despite a relatively strong adjustment program and improved fiscal performance in the 1990s, Benin's external position remained fragile as a result of an appreciation of the real effective exchange rate by 24 percent and a decline in the terms of trade of 43 percent over the period 1985-93. The internal adjustment process pursued by Benin was nonetheless relatively successful. Annual export revenues increased at an average rate of about 5 percent per year during 1990-93, and the current account deficit was contained at 8 percent of GDP in 1993. Official foreign reserves rose substantially as a result of large official capital inflows and reached the equivalent of 4.2 months of imports in 1993. 8. In relation to GDP, external debt disbursed and outstanding remained relatively stable, increasing from 66 percent in 1990 to 68 percent in 1993. The share of multilateral debt rose slightly from 47 percent of the total stock of debt in 1990 to 49 percent in 1993, reflecting the switch of most official bilateral aid to grants and the expansion of lending operations from multilateral institutions. Debt service has been reduced by Paris Club rescheduling. Taking into account the debt relief obtained or under negotiation, debt service paid during 1991-93 corresponds to less than 10 percent of exports of goods and non-factor services. 9. Post-Devaluaton Trends. Trends since the CFA franc devaluation are positive. Real GDP growth for 1994, originally projected at 2.2 percent, is estimated to have reached 3.4 percent, mainly as a result of the strong performance of the cotton sub-sector. The current account deficit (before grants) fell from 8 percent of GDP in 1993 to 3 percent of GDP in 1994, reflecting both a sharp decline in imports and  - 3 - increased export revenues. The overall balance of payments recorded a surplus of USS99 million, due to the improved current account and increased private capital inflows. Both the revenue and expenditure targets were met and the current budget remained in balance. The overall budget deficit (on a commitment basis, excluding grants) was limited to 7 percent of GDP, about four percentage points less than the PFP target. 10. The inflation target for 1994 was, however, not met. The cumulative 12-month increase in the consumer price index (CPI) for Cotonou, the capital city, was 54 percent in 1994. After the initial adjustment in the price level following the devaluation, the CPI declined slightly in the May-August period. Average monthly inflation, however, was more than 3 percent in the September-December period. Although the CPI has numerous technical problems, this increase is worrisome and is probably related to greater monetary expansion than programmed as a result of a large increase in net foreign assets, an acceleration of 1994 budget execution in September following delayed approval of the 1994 budget law, and a surge in food exports to neighboring countries. The CPI for the first quarter of 1995 was marginally lower than that for December 1994. France and the European Union are providing assistance to improve the CPI and future price developments will continue to be monitored closely. C. Poverty 11. A poverty assessment report (Benin: Toward a Poverty Alleviation Strategy, Report No. 12706- BEN) was distributed to the Executive Directors in August 1994. In 1993 GNP per capita was US$411 (Atlas methodology), malnutrition affected 30 percent of children, the illiteracy rate was 71 percent and the gross primary school enrollment rate was 66 percent. Fifteen percent of the population fell below an absolute poverty line established on the basis of minimum nutritional requirements and other basic expenses (equivalent to US$131). According to the human development index used by UNDP, Benin is one of the ten least developed countries in the world. Although the percentage of children enrolled in primary school has approximately doubled over the last twenty years, it is still only the average for Sub-Saharan Africa and only two-thirds the average for low-income countries. Similarly, while the infant mortality rate (110 per thousand) has declined by 30 percent over the last 20 years, it still remains 50 percent above the average for low-income countries. 12. The failure to adopt major economic reforms in the 1980s led to the economic crisis at the end of the decade and demonstrated clearly that the social impact of the adjustment program is strikingly positive. In the late 1980s salaries went unpaid, schools and health facilities deteriorated dramatically, medicine was unavailable, and the banking system collapsed. Salaries are now paid on time, access to primary education and health services is improving, essential medicines are widely available, rural incomes have increased substantially, and the banking system has been restored. As a result, per capita incomes have increased since introduction of the adjustment program, albeit from a very low base. After declining by about 2 percent per year in 1985-1989, GDP per capita increased by about 1 percent per year in 1990-1993. While this is clearly an improvement and constitutes the best performance in the CFA zone, at this rate of per capita income growth it would take some 45 years for Benin to move from a low-income to middle-income country. Only a large and sustained increase in income growth can significantly reduce the level of poverty in Benin. The Government policies described in Part I are designed to take advantage of the opportunity offered by the devaluation to achieve such broad-based growth, primarily by increasing the demand for labor which is the most important asset of poor households. The large increase in cotton production in recent years, and the resulting improvement in the income and living standards of rural households in cotton-growing areas, augurs well in this regard.  -4 - 13. Targeted poverty alleviation programs have also been underway since 1991 for rehabilitation of critical social infrastructure, redeployment and training of retrenched public enterprise employees, and labor-intensive public works. Some progress has also been made in providing essential services to the general population. In particular, by increasing resources for primary education, schooling has become more accessible to the poor. In addition, girls were exempted from 1993/94 school fees in the rural areas in an attempt to increase their enrollment rate. There has also been progress in increasing health coverage nationwide and ensuring the viability of the health system. The establishment of a financially autonomous central pharmaceutical supply agency has made essential drugs more widely available for the general population at low cost. A poverty alleviation strategy has been designed by the Government, with the assistance of the donor community, to strengthen the national capacity to formulate and implement social policies, monitor the living conditions of vulnerable groups, promote employment, and support community- based development through micro-projects. D. Medium Term Prospects 14. Past reforns, including the CFA franc devaluation, and strong implementation of the Govermnent's adjustment program outlined in Part I1, are projected to accelerate real GDP growth to 5-6 percent per year beginning in 1995, assuming continued strong performance of cotton and an overall increase in gross investment from 15 percent of GDP in 1993 to about 20 percent of GDP in 1999. 15. Annual growth of 5-6 percent is projected for the agriculture sector over the period 1995-99, with the cotton subsector leading the expansion. Efforts to rehabilitate and liberalize the subsector will concentrate on expanding private ginning and storage capacity, and promoting greater participation of the private sector in processing and marketing activities, in order to ensure more competition. Improved competitiveness should also enhance the growth prospects of food crops, fruits and vegetables. Efforts to diversify agriculture production will also be intensified by creating a more favorable environment with regard to agriculture extension, infrastructure and private sector marketing and export activities. 16. The secondary sector is projected to grow at about 6 percent per year during the period 1995-1999, based on substantially improved export prospects following the devaluation. Efficient production growth will be fostered by further privatization and restructuring of public sector enterprises, fiscal reforms and a revision of the regulatory framework. These measures, combined with increased competitiveness in the regional transit trade and implementation of a new transport strategy, should also benefit the development of tertiary sector activities, which are projected to grow by about 5 percent annually during the period 1995-1999. 17. Achieving the projected growth rates will require increases in private investment from an average of 6 percent of GDP in 1990-94 to about 12 percent of GDP by 1999, and maintenance of public investment at about 9 percent of GDP in 1995-99, as well as qualitative improvements in the preparation and execution of public investment projects. Domestic savings are estimated to have increased from 5 percent of GDP in 1993 to 10 percent of GDP in 1994, and are projected to grow to approximately 15 percent of GDP by 1999, reflecting an increase in both public and private savings as a result of renewed confidence in the political and economic situation, improved fiscal management, and more opportunities for investment. 18. The volume of exports, excluding re-exports, is expected to grow by about 10 percent per year in 1995-99. Export receipts, excluding re-exports, are projected to grow by about 12 percent per year during 1995-99. The volume of imports, excluding re-exports, is expected to grow by about 10 percent per year in 1995-99, reflecting mainly an increase in capital goods imports consistent with the projected  investment growth. The value of imports, excluding re-exports, is projected to grow by about 11 percent per year in 1995-99. Following the dramatic improvement in 1994, the current account deficit, excluding official grants, is expected to decline from about 5 percent of GDP in 1995 to 4 percent of GDP in 1999. 19. External FinancingRequirements. Financing requirements for the period 1995-97 are estimated at a total of US$738 million. These requirements are expected to be partly met by project grants (US$235 million), project loans (US$231 million), and debt relief already obtained (US$18 million), leaving a gross financing gap of USS254 million. Exceptional financing to cover this gap has been identified, including IMF ESAF resources of US$26 million in 1995, expected bilateral financing of US$107 million, additional debt relief of US$78 million, and IDA assistance of US$43 million, including the proposed credit of US$40 million. II. BENIN'S ADJUSTMENT PROGRAM 20. The Government, in conjunction with the other members of the CFA zone, decided to reinforce its internal adjustment measures by realigning the parity of the CFA franc in January 1994. The devaluation has improved prospects for accelerating sustainable growth in the medium term. The Government recognizes, nevertheless, that despite the progress registered during the last years long-term economic prospects remain fragile. Increased savings and investment, particularly by the private sector, and improved delivery of essential health, education and infrastructure services by the public sector will be key to improving long-term growth prospects. 21. The proposed SAC m would support the Government's efforts to mnaintain a substantial real depreciation through appropriate macroeconomic policies, assure a strong supply response to the devaluation, and improve the delivery of essential public services required for higher growth in the medium- term. The Government's overall adjustment program is outlined in the PFP. The basic macroeconomic objectives of the program are to raise the rate of GDP growth to 5-6 percent in 1995-96, to reduce inflation to about 4 percent by 1996, and to reduce the current account deficit to a level that can be sustained by the projected inflow of external assistance. 22. The adjustment package proposed under SAC III consists of an acceleration of fundamental policy reforms in two areas. First, the program would support improved incentives for private sector development through simplification and rationalization of foreign trade taxation; a restructuring of domestic indirect and direct taxation; changes in the regulatory framework governing investment, commercial activity and the labor market; and completion of ongoing pubic enterprise divestiture. Second, it would support improved management of public resources and delivery of public services through restructuring current expenditures, improving public investment programming and execution, and implementing reforms in key ministries. These reforms are closely linked to the changed economic prospects brought about by the devaluation. The changed relative prices and improved prospects for public finances brought about by the devaluation make it more feasible to introduce measures, such as reduced tariff barriers, tax reform, and expenditure restructuring, which were more problematic prior to the devaluation. Implementation of such reforms will be essential to realize the potential benefits associated with the devaluation and improved competitiveness. A. Macroeconomic Framework 23. The reforms supported by the proposed credit are a key element of the Government's PFP program. Implementation of the structural changes proposed will be key to meeting the macroeconomic targets. Maintaining an appropriate macroeconomic framework, and in particular maintaining external competitiveness, will be essential for achieving the growth objectives. The macroeconomic program is on  - 6 - track and the IMF Board approved release of the second tranche of the second-year ESAF arrangement m December 1994. Continued implementation of appropriate macroeconomic policies will be a condition for release of the second tranche of the proposed operation. In this respect, the review of the macroeconomic framework for second tranche release will examine the consistency of overall macroeconomic perfornance with the PFP objectives, particularly fiscal and monetary policies. Increased public savings would be the dominant element of increased domestic savings in 1995-97. In this regard, the Government intends to maintain total revenue at around 13 percent of GDP in 1995-97, and to reduce current expenditure from 13 percent of GDP in 1994 to 11 percent in 1997. BCEAO monetary policy will aim at reducing money supply growth in order to contain domestic price increases by maintaining a tight credit policy vis-a-vis the Government while expanding credit to the private sector. These policies aim at reducing annual inflation, as measured by the GDP deflator, from 36 percent in 1994 to 15 percent in 1995 and 2 percent in 1996-97. The niacroecononuc projections and requisite policies will continue to be revised annually in the context of updating the PFP, in order to take into account both the progress achieved in reducing imbalances and the availability of financing. B. Private Sector Incentives 24. Private sector activity in Benin accounts for by far the largest share of GDP and past growth. Irrespective of progress in improving public resource managernent, the key determinant of future growth resides in policies fostering further private sector growth. The macro policies supported by the proposed credit are designed to maintain the improved competitiveness, brought about by the devaluation, by rapidly bringing inflation down to the low levels of the past following the post-devaluation shift in the price level. The proposed structural measures aim to increase the responsiveness of the private sector, enhance entry, and promote efficient investment. Such policies include tax and trade reform, as well as simplification and reduction of govermment regulation. Tax and Trade Reform 25. Background. Despite a 25 percent increase in government revenues as a share of GDP since 1989, Benin still has one of the lowest revenue/GDP ratios of the CFA countries (13 percent in 1993). At the same time, many economic operators complain of an excessive tax burden and arbitrary tax administration. This reflects a narrowly based tax system, distortions created by the tax legislation, the expansion of informal sector activities and weak tax administration. When Benin initiated its adjustment program in 1989, it had an extensive system of non-tariff barriers, including import monopolies, and relatively high import tariffs. Import taxation was moreover characterized by a cumbersome administrative valuation system and a great disparity of tariff rates. 26. Past Adjustment Efforts. Notable progress has been achieved in reducing distortions generated by the tax system, while improving Government revenue mobilization. A single-rate value added tax (VAT) of 18 percent was introduced in 1991. Exemptions from indirect taxation for foreign-financed projects were also replaced by specific tax credits for the goods and services used in public investment projects. Revenue collection also improved following the reorganization of the Tax Directorate, reforms in the customs administration and the strengthening of tax inspections and controls. Regarding trade taxation, the Government simplified the structure of import taxation in 1991 and reduced the maximum tariff rate to 63 percent. At the same time it reduced the number of products for which customs valuation was based on administrative reference values (valeurs mercuriales). Export taxes, with the exception of those on precious metals and diamonds, and import licensing requirements were abolished in 1993.  -7 - 27. 1994-1996 Reform Program. Over the period 1994-96 the Government intends to continue to simplify the tax system and broaden the tax base, and to remove fiscal disincentives to new and expanded economic activities with the goal of promoting private sector development. The tax reform program is closely coordinated with the IMF. 28. In September 1994 Parliament approved three major reforms which, as envisaged under the program, became effective on January 1, 1995. The first is introduction of a Single Professional Tax (Taxe Profesionnelle Unique, TPU). For small enterprises (sales below CFAF 40 million), whose tax payment compliance is difficult to monitor, the TPU would be levied at 26 percent of the rental value of business premises and would replace the profits tax (BIC), business license taxes (patente et licence), the VAT, and the apprenticeship tax. For larger businesses it would be levied at 13 percent and would replace only business license taxes. By its simplicity, the new tax would minimize administrative costs, reduce compliance costs for businesses, and expand the tax base to small business whose limited accounting makes application of traditional taxes problematic. The second is elimination of the Minimum Presumptive Tax (Benefice Minimum Forfaitaire, BMF) which, while ostensibly a minimum "profits" tax, constituted a turnover tax levied on all firms irrespective of profit or loss. Finally, a Single Property Tax (Taxe Fonciere Unique, TFM9, incorporating a simplified identification and collection system, has been introduced to replace the four previous property taxes (Contribution fonciere des proprietes bdtes, Contribution fonciere des proprietes non baties, Taxe immobilere sur les loyers, et Imp6t general sur le revenufoncier). 29. The next step in the reform of direct taxation will be a simplification of personal income taxation. The authorities have agreed to revise the tax on wages and salaries (Imp6t Progressif sur les traitements et les salaires, IPTS) by reducing the number of rates to four and the top marginal rate to 35 percent by end-June 1995, and to prepare a proposal for revision of the general income tax fImpot General sur le Revenu, IGR) with a view to simplifying the rate structure and reducing the top marginal rate. These measures are expected to facilitate both tax compliance and administration. 30. Regarding indirect taxation, the Government extended coverage of the VATto large retail trade and the petroleum sector in 1994, and to sugar in April 1995. In addition, it has agreed to progressively increase the special ad-valorem tax on cement during the period 1995-1997 before replacing it with the VAT. Ongoing computerization of tax records would also improve VAT administration, both vith regard to collection and to net reimbursements. 31. With respect to import taxation, Parliament approved a new import tariff schedule in September 1994, which reduces the maximum rate from 63 percent to 20 percent, and the number of rates from sixteen to five (0-5-10-15-20 percent). Benin has thus adopted one of the most open trade regimes in Africa. While the overall reform is consistent with the general reconmmendations made in the context of the proposed West African Economic and Monetary Union (UEMOA) trade reform, Benin has gone further by adopting a lower maximum tariff than proposed by UEMOA. In addition, the Government has eliminated the use of remaining reference values for customs valuation. Finally, it has also agreed to elininate by January 1996 import tariff and VAT exemptions accorded under "special regimes" outside the investment code, and to increase to 5 percent the import tariff applied to all products now subject to a zero rate, with the exception of rice, cotton textiles, school books and medicines. Coordination between the customs administration and the unit in charge of pre-shipment inspection of imports should improve as a result of tighter control on declared values, stricter rules on exemptions and better nanagement of the common database linked to port management operations.  32. The overall taxation of cotton is also being revised in order to assure appropriate producer incentives. Under reforms implemented in 1991, cotton producer prices are revised annually and the after- tax profits of the cotton company (SONAPRA) are divided among producers, a stabilization fund, SONAPRA and the Treasury. The share allocated to producers varies from 30 to 50 percent depending on the level of the stabilization fund. These distribution rules were not applied to the windfall profits generated by the devaluation for the 1993/94 season. Instead, 40 percent of SONAPRA's after-tax profits were transferred to the Treasury under the provisions of a 1992 law on distribution of public enterprise profits. Despite an increase in the producer price from 80 CFAF/kg prior to the devaluation to 140 CFAF/kg for the 1994/95 season, SONAPRA generated very large 1994/95 after-tax profits as a result of the devaluation and favorable world prices. 33. In response to rapidly increasing private sector participation in input supply and ginning, the Governnent has agreed to transform SONAPRA into a mixed capital company by opening its capital to cotton producers by June 1995. Both the Government and producers will benefit from dividends distributed by SONAPRA to its shareholders instead of the accumulation and distribution of surpluses according to administrative rules. In addition, the Government has agreed to clarify the relationship between private gins and SONAPRA with respect to cotton purchase, and to re-examine the role of the stabilization fund. These measures should contribute to ensuring that producer prices reflect world market prices and that private operators bear the risk related to cotton ginning and marketing. Implementation of such revisions would constitute a second tranche release condition for the proposed operation. RegWatory Framework 34. Background. Numerous administrative obstacles have in the past inhibited private sector activity in Benin. In particular, prices of most products were controlled, formalities to establish enterprises have been overly complex and labor market regulations have severely restricted hiring and firing decisions by enterprises. The overall regulatory framework has militated against efficient growth and employment creation. 35. Past Adjustment Efforts. By 1993, price controls were eliminated on most goods and services except bread, petroleum products, rice, tomato paste, milk, school supplies and cement. Marlkng a sharp break with the Marxist-Leninist ideology of the past, a new Commercial Law, Labor Law, and Investment Code were adopted in 1989-90. While the revised legal framework established the basis for market- oriented private economic activities, and thus represented a major step forward, commnercial regulation remains burdensome, hiring and firing decisions are constrained, and eligibility for investrnent incentives is highly discretionary. 36. 1994-1996 Reform Program. The proposed operation aims at removing current distortions in the regulatory framework and improving the overall business environment, in line with the regional harmonization of the business framework in the CFA zone. The reforms have been identified in close cooperation with private sector representatives from the local and international business and financial community. 37. With respect to price liberalization, the Govermnent has eliminated the temporary price and margin controls (homologahon) introduced as a precautionary measure at the time of the devaluation and freed a number of previously controlled prices. Ex ante margin controls are now limited to water, electricity, school books, pharmaceuticals and cemnent; and fixed prices are set only for petroleum products and bread. The Government will review these procedures by the end of 1995 with a view to further reducing price controls.  -9 - 38. After having reviewed the implementation of the Investment Code and the Labor and Commercial Laws, the Government has agreed that in the current economic context further improvements are necessary, inter alia, to clarify and simplify investment incentives, to further liberalize the labor market and to reduce the formalities required to establish new firms. In order to effectively guarantee enforcement of the new legislation regulating labor, investment and business activities, the Government intends to strengthen and modernize the judiciary system. 39. The current Investment Code establishes the conditions required to obtain benefits under different investment regimes and grants the Investment Control Commission at the Ministry of Industry extensive discretionary power. The tax reforms introduced in recent years and those agreed upon under the proposed operation in large measure remove the need for special incentives to potential investors. The Investment Code is being revised in order to establish a single incentive system assuring automatic access to such benefits by all investors. The Government has agreed to adopt a revised Investment Code by end-June 1995. Proposed labor market reforms aim at increasing business flexibility by simplifying labor regulations and procedures. The Government intends to adopt a new Labor Code by end-May 1995 which will increase flexibility regarding hiring decisions, eliminate the need for prior authorization from the Labor Directorate for employee dismissal, and consolidate labor regulations currently dispersed in various texts. The provisions of the current commercial legal framework create a number of disincentives to the establishment and operation of commercial firms. The authorities are committed to simplifying and modernizing the business law framework. In this regard, Benin's Parliament ratified the treaty on the regional harmonization of business law in December 1994, a national commission is reviewing the draft general Commercial Law, and the authorities expect the first regional texts to be implemented in 1995. Public Enterprises 40. Background. During the 1970s the Government created a large number of public enterprises which dominated commercial and industrial activities. The number of such enterprises increased from 12 in 1972 to 120 in 1980. By 1981 their cumulative losses reached CFAF 40 billion and their government- guaranteed foreign borrowing reached CFAF 136 billion. Government transfers to public enterprises in 1981 alone were CFAF 17 billion. 41. Past Adjustment Efforts. The Government began to introduce partial reforms beginning in 1982, when 54 regional public enterprises were dissolved. In 1988 a privatization and restructuring program was introduced for the remaining 65 enterprises. As of March 1994, 21 of these enterprises had been liquidated, 6 privatized and 6 merged with other entities. Thirty-two enterprises thus remain in the state portfolio, of which 12 are autonomous administrative agencies, 4 are public utilities, and 16 are commercial enterprises. The direct fiscal and financial sector burden of public enterprises has been largely eliminated. Budgetary transfers to public enterprises have stopped, the share of public enterprises in non- government credit has declined from 56 percent in 1988 to 18 percent in 1992, and the 27 enterprises remaining in the state portfolio registered a net operating surplus of about CFAF 4 billion in 1993. Regarding the regulatory framework, laws and decrees have been adopted providing rules for public enterprise rehabilitation, more autonomy for enterprises, and a legal framework for privatization. 42. 1994-1996 Reform Program. The Government is committed to divesting 13 of the remaining 16 commnercial/industrial public enterprises in 1995-96. Privatization of 7 enterprises - the Sem6 oil production platform, Parakou cashew nut plant, Natitingou tomato paste plant, Za-Allahe fruit juice plant, Bohicon maize processing plant, H6tel de La Plage and H6tel Croix du Sud - is underway and will be completed before the end of 1995. In addition, the Government has agreed to liberalize the insurance sub-  - 10- sector, liquidate SONAR (national insurance company), and transfer its good portfolio to a new company in which the state would have no more than a minority share by end-1995. In the textile sector, studies are being launched for two enterprises (COTEB, SITEX) to define a divestiture strategy to be implemented in 1995. Subject to agreement with the Nigerian Govermment, the Government intends to proceed with privatization of the Onigbolo cement company (SCO) and the Save sugar company (SSS) in 1995; the situation in Nigeria may, however, delay action on these two companies. Finally, the national palm oil company's (SONICOG) plantations have been transferred to producer cooperatives, consultants have been recruited for an internal restructuring of the industrial units, and SONICOG's capital is to be opened to private investors by March 1996. 43. With respect to public utilities remaining in the state portfolio, water and electricity tariffs of the utility parastatal (SBEE) were increased by 15 percent in early 1994 after the CFAF devaluation. The Government has taken measures to reduce costs in 1995 and will eliminate the budget subsidy for electricity in 1996. 44. A legal framework for liberalizing the petroleum sector (imports, distribution and storage) was approved in 1994. Nonetheless, the national petroleum company (SONACOP) has retained a de facto monopoly on importation and distribution of petroleum products. In order to effectively eliminate the monopoly of SONACOP in importation, distribution and storage of petroleum products, the Government has revised the legal framework to remove unnecessary restrictions on private petroleum companies, including reduction of minimum capital requirements and obligatory stock and transit quantities. The Government has also agreed to transfer the management of the petroleum storage facilities to private companies by end-February 1996, to offer for sale 75 percent of service stations to the private sector by end-October 1995, and to complete sales for 50 percent of the stations by end-February 1996. Effective implementation of these actions would constitute a condition for second tranche release of the proposed operation. 45. In addition to operating a large number of public enterprises, the state formerly attempted to partially direct private investment by means of a National Investment Fund (Fonds National d 'Investissement, FNM), with mandatory contributions from all firms and partial reimbursement for eligible investments. Contributions to the fund were suspended in 1991 but large outstanding balances remain. In December 1994, the Government paid all outstanding reimbursement claims and initiated liquidation of the FNI. New reimbursement claims will be processed and all eligible claims paid through August 31, 1996, at which time the FN will cease operation. Under the law establishing the FNI, unreimbursed balances (i.e., contributions less eligible reimbursements) would be reimbursed without interest 30 years after the contribution was made. Thus the Government's legal obligation to refund contributions will begin in 2005. In order to increase the liquidity of firms but not alter the Government's legal obligations, the Govermment has agreed to examine the feasibility of issuing tradable securities for the unreimbursed balances at the completion of FNI liquidation in August 1996. C. Improved Public Services 46. Despite consolidated govermnent expenditure of 20 percent of GDP, the Government has not been able to provide the essential public services and basic infatructure required for long-term economic growth and a sustained improvement in living standards. Improvements in the efficiency with which public resources are spent will be an important determinant of the responsiveness of economic agents to the improved incentives structure. The CFAF devaluation provides the Government with the opportunity to accelerate ongoing efforts to restructure current expenditure towards the provision of essential services, strengthen public investment programming, and restructure key ministries.  Current Expenditures 47. Background. The composition of current expenditures has not provided adequate allocations for non-wage operating and maintenance expenditure. This is primarily the result of a civil service wage bill that absorbed more than 80 percent of total Government revenue in 1989. Allocations for primary education, basic health care and infrastructure maintenance have been inadequate and have jeopardized the long-term supply response necessary for a sustained increase in per capita income. 48. Past Adjustment Efforts. Relative to 1991, 1993 non-personnel current expenditures increased by 21 percent, for health and education by 59 percent, and for road maintenance by 4 percent. The share of the wage bill in total current expenditure declined from 65 percent in 1991 to 61 percent in 1993. Over this same period the size of the civil service was reduced from 36,900 positions at end-1991 to 33,385 positions at end-1993. 49. 1994-96 Reform Program. The reform program aims at improving the structure of current expenditures, in particular the provision of adequate allocations for essential services, particularly in primary health and education, and basic infrastructure maintenance. The Government also intends to eliminate the stock of domestic arrears by 1996. The key element for restructuring current expenditures is an increase in non-wage operating and maintenance expenditures relative to personmel expenditures. Relative to 1993, 1994 allocations for non-wage operating and maintenance expenditure were increased by 103 percent in nominal terms, for road maintenance by 25 percent, for education by 63 percent, for health by 51 percent and for agriculture by 36 percent. 50. The Government intends to reduce the relative size of the wage bill in total current expenditures from 48 percent in 1993 to 38 percent in 1995. The increase in the wage bill was limited to 21 percent in 1994, corresponding to a base salary increase of 10 percent, the restoration of the 10 percent housing allowance suspended in 1989, and raises related to promotions in 1986 and 1988. Indemnities and other variable components of the wage bill remained unchanged. There will be no net additions to the civil service in 1995. The Government intends to limit the increase in the wage bill to an additional 10 percent in 1995 which corresponds to the full-year impact of the measures adopted in 1994. 51. The share of non-wage current expenditures in total current expenditures will increase from 20 percent in 1993 to 30 percent in 1995. Taking into account 1994 budget execution results, agreement has been reached on increasing 1995 budget allocations to CFAF 6.7 billion (7.5 percent of the current budget) for maintenance and supplies, CFAF 7.3 billion (8.2 percent of the current budget as compared with 5 percent in 1993) for non-wage education expenditure, CFAF 5.2 billion (5.8 percent of the current budget as compared with 3 percent in 1993) for non-wage health expenditure, and CFAF 2 billion for road maintenance (Road Fund). Effective realization of these budget share allocations as reflected in budget execution figures for 1995, and agreement on allocations for the 1996 budget would constitute conditions for release of the second tranche of the proposed credit. In order to assure close and timely monitoring of actual expenditures during the year, the authorities have agreed to furnish a quarterly'budget execution summary to IDA within 45 days of the end of each quarter beginning with the 1995 budget. Public Investment 52. Background. Traditionally, public investment projects have been subject to little Government screening as to their economic rate of return, financial viability and consistency with sector development  - 12 - strategies. The public investment program has, moreover, been plagued by low rates of execution, lack of counterpart funds, and procurement problems. 53. Past Adjustment Efforts. The government took initial steps to improve public investrnent programming in 1989 with the introduction of a three-year rolling public investment program (PIP). Coverage, project selection and implementation monitoring of the PIP have improved in subsequent years on the basis of annual revisions undertaken in consultation with IDA. Progress has also been realized in the allocation of budgetary counterpart funds, which nearly tripled from CFAF 0.9 billion in 1990 to CFAF 2.5 billion in 1993, although this still represents only about 10 percent of the total PIP. Execution of the PIP has also improved, although much remains to be done in this regard. Estimates for 1993 imply an execution rate of 69 percent, compared to 63 percent in 1992. Additional improvements in investnent programming, monitoring and execution are being supported through the IDA-financed Economic Management Project. 54. 1994-96 Reform Program. The Government's public investment objectives are to increase the rate of growth and improve the welfare of the population, by allocating adequate resources to key sub-sectors such as infrastructure, health and education, and encouraging labor-intensive methods. Better project analysis and programming would increase both the level and quality of public investments, and contribute to providing the physical and administrative infrastructure that will facilitate an expansion of private investments. 55. The Govermment has adopted a revised 1995-97 PIP, on the basis of discussions with the main donors and a final review conducted by IDA. The PIP addressees key constraints to the acceleration of growth, and gives priority to investments in infrastructure, energy and agriculture which are supportive of private sector development, as well as projects required to expand primary education and health services and improve administrative capacity. Public investment expenditure is programmed to increase to about CFAF 107 billion in 1995 and 1996 compared to CFAF 83 billion executed in 1994. The domestic budgetary contribution to the investment program increased to CFAF 4.3 billion in 1994 and is programmed at CFAF 7.9 billion in 1995. Disbursements of counterpart funds will be monitored on a quarterly basis. Agreement on the 1996-98 PIP would be a condition for second tranche release. 56. In order to improve the PIP execution rate (69 percent in 1993), the Government has also established a special unit in the Ministry of Finance to ensure monitoring and timely disbursement of counterpart funds and to facilitate closer coordination with donors. The Government intends to reinforce its effort to improve the selection of projects in the PIP. Beginning with the 1996 PIP, each project with a total cost exceeding CFAF 2.0 billion would require a feasibility study demonstrating its economic and financial viability, taking into account counterpart funding, recurrent cost and debt-service implications. 57. A revised public Procurement Code satisfactory to IDA was approved by the Governnent in January 1994. Since parliamentary ratification of the new code was delayed, a waiver was requested and granted for the release of the third tranche of SAC II. The code will be one of the first items on the agenda of the new Parliament which is to convene in May 1995. Adoption of the new code would be an effectiveness condition of the proposed credit. Public Administration Reform 58. Background. Despite the size of the civil service and the predominance of the wage bill in current expenditures, Benin has a public administration that cannot efficiently deliver basic public services to the  - 13 - bulk of the population. In addition to the immediate restructuring of current expenditures described above, institutional reform of the public administration is required. 59. Past Adjustment Efforts. In order to initiate the long-term restructuring of the public administration, the Government launched a program of organizational audits and subsequent restructuring plans for key ministries. A new organizational structure for the Ministry of Finance was approved and implemented in 1993. The Ministry of Rural Development and the regional development organizations (CARDER) were also restructured in 1993, resulting in a substantial reduction in the number of government personnel. Organizational audits of the Ministries of Plan, Health and Education were also launched in 1993. 60. 1994-96 Reform Program. On the basis of the above-mentioned organizational audits, new organizational structures were adopted for the Ministries of Health and Education in May 1994. In the Ministry of Health, a Human and Financial Resources Department, a Planning, Programming and Evaluation Department, and a Family Health Department have been created. The ongoing reorganization of the Ministry of Education is being completed with the establishment of a Financial Affairs Department and the redeployment of teachers employed in administrative departments. The Government is in the process of evaluating a new organizational structure for the Ministry of Plan and Economic Restructuring, on the basis of its audit, and has completed organizational audits of the Ministries of Labor, Employment and Social Affirs; Industry, Small and Medium-Size Enterprises; Transport and Public Works; Commerce and Tourism; and Energy, Water and Mines. A dated action program for implementation of the new organizational structures involving a redefinition of functions and redeployment of personnel, on the basis of these audits, would be prepared in 1995. Ill. THE PROPOSED STRUCTURAL ADJUSTMENT CREDIT A. SAC III Program and Link to CAS 61. The IDA country assistance strategy (CAS) for FY95-97 was discussed by the Executive Directors on June 7, 1994. Its main objectives are to encourage and support the private sector supply response, and to ensure adequate provision of basic social services. The proposed operation is a key element of the lending program proposed in the CAS. It would provide quick-disbursing support to help the Government consolidate structural reforms and implement accompanying measures aimed at encouraging the supply response of the private sector to an increase in competitiveness following the devaluation of the CFA franc. Assuming satisfactory performance, total lending for FY95-97 under the base case scenario is expected to be in the range of US$125-155 million. Timely implementation of the measures required for release of the second tranche of the proposed operation, coupled with significant improvements in procurement and in disbursement of counterpart funding, would trigger a high case scenario. B. Poverty Impact 62. The proposed operation would address poverty issues in two ways. First, it would support policies designed to accelerate broad-based income growth. Second, it would increase the availability and quality of basic social services. With regard to income growth, one of the most important impacts of the devaluation and accompanying measures should be a sustained increase in the demand for labor, which is the most important asset of the poor. Cotton will continue to be the main source of agriculture growth in the immediate future, but the devaluation has also opened new opportunities for expansion in the food crops sector, both for import substitution and export. Parallel actions to stimulate equitable agricultural growth will aim at improving information disseminated to the farmers, access to inputs, marketing opportunities  - 14- and rural infrastructure. Poor segments of the population who are underemployed in the informal sector would benefit from expanding formal activities in the industry and trade sectors. Tax burden reduction and tax neutrality across sectors, simplification of the import tariff regime and rationalization of the framework of incentives would promote efficient and sustainable income, and employment opportunities. Parallel actions in these areas will focus on training programs, assistance to micro-enterprises and improved access by small firms to public contracts. With regard to basic social services, a greater share of both current and investment expenditures will be allocated to the social sectors with the goal of improving the availability and quality of primary education and health services, which are essential to improve the living standards of the poor. C. Credit Amount and Proposed Conditionality 63. An amount equivalent to US$40 million is proposed for this credit, which would represent about 16 percent of Benin's gross financing gap for 1995-97. The proposed credit is expected-to generate cofinancing and parallel financing from other donors, including Japan, Germany and Denmark, that have expressed interest in having their quick disbursing assistance to Benin linked to an IDA-supported adjustment program. 64. The policy measures to be undertaken under this operation are outlined in Part II and the attached matix, and are detailed in the Government's Letter of Development Policy. Release of the second tranche would depend upon satisfactory review of overall performance under the adjustment program, including maintenance of an appropriate macroecononic framework and agreement on any additional actions required to achieve the program's objectives, and upon realization of the specific conditions listed below. The attached Letter of Development Policy and matrix would form the basis for the performance review. 65. Adoption by Parliament of the new procurement code (para. 57) is proposed as a condition of effectiveness. 66. In addition to satisfactory implementation of the overall program specified in the Letter of Development Policy and attached matrix, the following measures are proposed as specific conditions for second tranche release: * Maintenance of an appropriate macroeconomic framework as specified in the PFP (para. 23). * In order to ensure an adequate link between cotton producer prices and world market prices: (a) transformation of SONAPRA into a mixed capital company and offer of one third of its shares to cotton producers; (b) adoption of market-based pricing procedures for SONAPRA's seedcotton sales to private gins; (c) completion of a review of the price stabilization mechanism in consultation with IDA and, on the basis of this review, revision of the stabilization fund procedures to take account of private sector participation in cotton ginning and export; and (d) completion of a review of the feasibility of opening of seedcotton marketing to private operators (para. 33);  - 15 - * For the purpose of liberalizing the petroleum sector, the borrower has taken the following measures: (a) transfer of ownership of storage facilities from SONACOP to the State and conclusion of either a long-term lease or a management transfer arrangement with the oil import and distribution companies, (b) offered for sale 75 percent of the service stations held by SONACOP to private sector operators, and (c) completed the sale of 50 percent of the stations (para 44); * Budget execution in line with agreed expenditure targets for 1995, and agreement on the 1996 budget, as described in the Letter of Development Policy, including: (a) salary expenditure of no more than 38 percent of total current expenditure; (b) budget allocations of at least 7.5 percent of the current budget for maintenance and supplies, at least 8.2 percent for non-wage education expenditure, and at least 5.8 percent for non-wage health expenditure; and (c) an increase of the budget allocation for the Road Fund to at least CFAF 2.5 billion (para. 51); * Agreement on 1996-98 PIP satisfactory to IDA (para. 55). D. Procurement, Disbursement, Financial Management, Auditing and Preshipment Inspection 67. The proposed credit would be disbursed in two equal tranches of $20 million. The first tranche would be released at effectiveness and the second would be released following a review indicating satisfactory progress in implementing the program as a whole, including maintenance of an adequate macro framework, and upon fulfillment of the specific second tranche release conditions listed above. 68. Credit proceeds would be used to finance 100 percent of the foreign exchange costs of general imports of goods, excluding goods financed by bilateral agencies, luxury goods, military equipment and other goods specifically prohibited in a negative list defined under the Standard International Trade Classification (SITC) or equivalent classification. Retroactive financing for up to 20 percent of the loan amount is recommended for eligible expenditures incurred not more than four months prior to the date of credit signature. A simplified international competitive bidding (ICB) procedure would be required for purchases exceeding US$2 million. Procurement valued below the ICB threshold would follow the standard procedures in the case of public sector purchases and established normal commercial practice acceptable to IDA in the case of private sector purchases, by obtaining price quotation from at least two suppliers where practical. Standard simplified ICB documents for petroleum products and commodities will be finalized within the next months. Contracts for a value above US$2 million will be subject to IDA prior review. 69. Disbursement of the credit would be made against import documentation or custom declaration certificates received from the BCEAO which will be responsible for the collection of the relevant documentation and submission of loan withdrawal applications. Custom declaration certificates would be supported by bills of lading, insurance cover certificates, and pre-shipment certificates, when available. IDA would follow the simplified documentation procedures for adjustment operations. For those contracts valued at more than US$5,000 and less than US$2 million equivalent, IDA would reimburse the BCEAO on the basis of Statements of Expenditures (SOE) prepared from the import documentation, or customs declaration certificates, showing that eligible goods at least equal in value to the amount requested from IDA had been imported into the country during the period under consideration. Import documentation would be retained by the BCEAO for review by IDA supervision missions and by external auditors. In addition to standard auditing covenants, an audit report would be submitted to IDA no later than 90 days after the full disbursement of the credit.  - 16 - 70. The National Adjustment Commission, chaired by the Minister of Finance, which includes the Minister of Plan and Economic Restructuring, the Minister of Industry and SME, the Minister of Energy, Mines and Water, the Minister of Commerce and Tourism, the Minister of Rural Development and the Minister of Labor, Employment and Social Affairs, has overall responsibility for program management and monitoring. Day-to-day coordination of the Commission's work is assured by a technical secretariat. 71. Preshipment inspection of imports was initiated in Benin in 1991 and has contributed to reducing fraud and increasing revenue collection at customs. An evaluation of preshipment inspection services completed in 1993 concluded that, despite improved customs administration, maintenance of a separate service to assure preshipment control of imports was still warranted. Cooperation between customs and the preshipment inspection service still needs to be improved. A two-year contract was signed in September 1994 with Veritas for preshipment inspection services. E. Benefits and Risks 72. The proposed operation would support restoration of internal and external financial equilibria through its impact on the budget and external trade. It would support implementation of the accompanying measures - including tax, trade and regulatory reform - required to realize the opportunities for improved competitiveness and accelerated growth offered by the devaluation of the CFA franc. The proposed restructuring of public expenditures and associated resource management reforms would increase the availability of essental health, education and infrastructure services, which are expected to be particularly beneficial for the poorest segments of the population. 73. There are three najor risks related to the proposed operation. First, lack of consensus between the executive and the legislative powers, particularly in light of presidential elections in 1996, poses a risk for timely implementation of the adjustment program. Disagreement between the Government and Parliaent delayed approval of the 1994 budget, for example. The Government is attempting to reduce this risk by increasing consultations with Parliament and has demonstrated the effectiveness of this approach with regard to the 1995 Budget Law, which was approved by Parliament in December 1994. Finally, the Government has shown its comnitmnent to the reform program and ability to generate a consensus for action by the large number of actions taken prior to Board presentation. 74. A second risk is that the relatively weak administrative capacity of the Government could lead to delays in the implementation of key measures. This risk would be reduced through the design of the program which focuses on a few key reforms and involves a simplification of administrative requirements based on lessons learned implementing SAC II. In addition, the IDA-financed Economic Management Project became effective in January 1995 and will provide the required support to the Ministries of Finance and Plan to implement the proposed reform program. 75. A third risk is uncertainty concerning developments in Nigeria. Given the size of the Nigerian market and Benin's locational advantages, a prosperous and rapidly growing Nigeria is in Benin's inrest. Benin's economy is, however, highly vulnerable to policy changes in Nigeria. Although Benin is still benefiting from Nigerian import restrictions, which have led to growth in unofficial re-export activities in the past, a correction of policies in Nigeria could lead to a temporary but rapid drop in re-export activities, which would reduce custom revenues and require additional fiscal adjustment in Benin.  - 17 - IV. BANK GROUP OPERATIONS 76. Performance Under Previous Adjustment Operations. Overall progress under the structural adjustment program initiated in 1989 with SAC I and followed by SAC n in 1991 is satisfactory despite the delayed implementation of some reforms. SAC II implementation results were reported to the Board in July 1994, and the release of its third tranche was approved in August 1994. Progress achieved in key areas has been summarized in Part II of this memorandum. 77. Waivers. Benin requested and was granted two waivers on the adoption of a new Procurement Code and changes in the legislation regulating investment, labor and business activities for the third tranche of SAC II. Although the Government has continued to take action on the required measures subsequent to granting of waivers, the practice of seekdng waivers cannot continue. The specific conditions for release of the second tranche are therefore limnited to those for which we would propose blocking disbursement even if all other actions were taken. Tranche release would, of course, also be conditional on a satisfactory implernentation of the overall program specified in the Letter of Development Policy and maintance of the agreed macroeconomic framework. 78. IFC and MIGA. IDA and IFC will continue to work together to promote private sector development. IFC's activities have been geared to promotmg investments in the areas of small and medium size enterprises. This strategy has led to the approval of three investments since 1991: FRUITEX (production and export of pineapples), SOBEP (fisheries) and Bank of Africa-Benin. IFC's participation is expected to increase in the future, mainly as a catalyst to promote foreign investment. Thus, IFC is actively pursuing proposals to diversify the financial sector. This strategy has led to the preparation of projects for a leasing company and a life insurance company. IFC is also engaged in discussions with the Ministry of Commerce and Tourism for possible involvement in the privatization of state-owned hotels. FIAS has conducted a review of the investment climate in Benin. Benin signed the MIGA convention in April 1986, ratified the agreement in July 1994, and became a MIGA member in September 1994. Foreign investments in Benin are now eligible to receive MIGA guarantees and two applications have already been registered. V. COLLABORATION WITH IMF AND OTHER DONORS 79. Bank staff have worked closely with IMF staff in policy discussions with the Government during joint missions, in particular for the preparation of the PFP. The proposed SAC III reform program has been discussed with the IMF. In particular, the IMF has played a key role in formulating the proposed tax reform program. 80. A three-year ESAF, whose third annual arrangerent is expected to be approved by the IMF Board in May 1995, provides IMF support of US$75 million for 1994-96. Bank staff are also coordinating activities with the European Union (EU), the African Development Bank, the West Africa Development Bank (BOAD) and bilateral donors such as France, Denmark, Japan, Germany, the Netherlands, Switzerland and the United States. IDA also assisted the UNDP in organizing a Round Table Meeting in April 1992 and subsequent sector round tables to mobilize financing for Benin's medium term public investment progranm.  - 18- VI. RECOMMENDATION 81. I am satisfied tat the proposed credit would comply with the Articles of Agreement of the Association, and I recommend that the Executive Directors approve it. Lewis T. Preston Pmident by Gautam S. Kaji Washington, D.C. April 27, 1995 Attachments  Annex A Benin Page 1 of 2 Most Sme nrean/incoe group Me= Latest single year recant higher Unit of estintue Schamn LOW. income Indicaor : sure 1970-75 198045 1988.93 Africa income group Priority Poverty Indicators POVERTY Upper poverty line local curr. .. Headcount index % of pop. .. .. 19 Lower poveny line local cur. .. .. .. Hcadcount index % of pop. .. .. .. GNP per capi USS 220 280 430 520 380 1.590 SNORT TERM INCOME INDICATORS Unskllcd urban wages local curr. .. .. Unskilled mural wages Rural terms of trade Consumerprice index 1987=100 .. .. Lower income Foode Urban Rual SOCIAL INDICATORS Public expendirure on basic social ervices % of GDP .. .. _. Gsoss enrollment rios Primzy % school age pop. 50 67 66 67 108 104 Male * 70 89 78 74 116 . Female 31 44 39 60 101 Mortality Infant morality per thou live births 136.0 100.0 84.6 93.1 63.1 39.0 Under 5 mortality .. .. 144.0 1723 101.4 61.5 Imrnunizaoon Measles % age group .. 23.0 70.0 49.9 S7.3 77.6 DPT .. 17.0 67.0 51.9 89.9 82.2 Child malnutridon (under-5) .. .. .. .. 40.3 Life expectancy Total years 40 44 48 52 62 67 Female advanragc 3.1 3.4 3.4 3.3 2.1 5.9 Toralfesrdliyryrm birthsperwoman 7.1 7.1 7.0 6.2 3.6 2.9 Matemnal morality raw per 100,000 live birts .. 1680 .. .. _ Supplementary Poverty Indicators Expenditures on social security % of Oal gov't cxp. .. .. _ Social security covenge % econ. actve pop. .. .. .. Access safe watcr wtal % of pop. 34.0 49.S 50.3 _ 67.0 Urban * 100.0 80.0 79.0 .. 78.7 Rural 20.0 34.0 34.5 620 Access to health rat * _ 50.0 Population growth rate GNP per capita growth rate Development diamondb (annual average, (annual averag percent) 6T Life expectawcy 1970-75 1980-85 1988M93 1970-75 1980-85 1988,93 Access to sufe watr : Benin Benin Low-income Low-income a See the technical noes. p.387. b. The development dimond based on four key indicaors. shows the averae level of development in the coumny compared with its income goup. See the inutoducton.  Annex A Benin Page 2 of 2 Benin~~~~~~UnS giiroe rY _______________ _ e fr hig . rink of <gxmat SShma Low . Aware indicator arewure 19707 190 198893 Afnom grp Resources and Expenditures HUMAN RESOURCES Population (mreu1993) dtousands 3.033 3.988 5.086 558.978 3.091.764 1.096.665 Age dependency raiio raio 0.94 0.97 1.00 0.94 0.67 0.69 Urban V. of pop. 20.4 26.9 30.4 29.8 27.6 54.7 Population growth rae annual% 2.4 2.9 3.1 2.9 1.9 1.6 Urban 6.9 4.3 4.7 5.0 3.9 2.9 Labor force (15-64) thousands 1.592 1.964 2.365 229.480 1.442.452 459,196 Agnculmre % of labor force 76 70 .. Induswy 6 7 ... Female 48. 48 47 36 33 31 Females per 100 males Urban number 121 - .. _ Rural 117 NATURAL RESOURCES Arca thou. sq. km 112.62 112.62 112.62 24.2.63 39.091.96 40.682.67 Dentity pop. per sq. km 26.93 35.41 43.77 22.37 77.60 26.52 Agriculmual land V. of land area 20.00 20.61 20.99 52.54 52.S2 39.61 Qungc in agriculmura1 1d rnnurl % 1.61 0.8S 0.43 0;06 003 -013 Agriculwral land under irrigation % 0.18 0.26 0.30 0.83 18.0 12.66 Forests and woodland thou. sq. km 0.06 0.05 5.32 7.15 5.95 Deforestation (net) annual % 131 - INCOME Household income Shar of op 209 of householts %ofincomc Sha of botom 40% f housebolds . . - . - Sham of botom 205 of housebolds 3XENDITURE Food % of GDP . 30.5 Staples 9 9 Mea, fish. milk, chee eggs 11.3 . . C.real imports thou. merc tonnes 12 67 134 13,157 34.420 66.281 Food aid in cereals 9 21 19 5.079 8.334 5477 Foodproducionpercapita 1987=100 93 III 11S 101 113 101 Fertilizer consurnpnon kglh 1.1 5.0 66 46 59.9 48.0 Shamr of apiculture in OD? S of GDP 30.5 32.0 35.8 16.3 26.3 15.7 Iotsing * of GDP 9.8. S. Avcrage household size persons per household Urban . . . Fixed investment: housing * of GDP -. 4.0 Fuel and power * of GDP 2.0 Energy consumnpion per capita kg of oil equiv. 53 48 20 257 364 1,595 Households with elecuicity Urban * of households . Rural Transport and communicato % of GDP 11.6 . - Fixed investnent nisport quipat m 1.0 Total mad tIngth h.knm 7 8 a INVESTNT IN EHUMAN CAPITAL Baltic Population per physician pesons 28.957 13.312 _ 3.277 Populaion per nurse 2.613 1.743 _ _ Population per hospital bed 862 884 1,269 1.016 604 Oral rehydyraxion therapy (under-5) % of cs 28 37 38 - Education Gross enrollment ratio Secondary % of choo-agepop. 9 17 12 is. 41 53 Female 5 10 7 - 34 Pupil-reacher nio: pnmary pupis per tachr 53 33 35 40 39 Pupil-teacher raio: secondary 38 37 3S _ 20 Pupils raching grade 4 *ofcohns 64 63 Repeat rc: primary . of 0al eo 21 27 26 _ Illiteracy S ofpop. (age4 15+) _ 81 77 50 41 19 Female V of fem (age 1) s 88 84 62 53 New!papr circulation Io 0 2 12 . 74 worid bankt Knternnaonai boonows Lwme Apru i;  Annex B Pege I of 2 Benin: Key Economic Indicators 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 (est.) (proj.) (proj.) (proj.) (proj.) (proj.) National Accounts (Yo of GOP at current market pnces) Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 36.1 37.0 36.8 35.8 33.4 .. .. Industry 13.2 12.5 12.7 12.9 13.6 .. .. Services 46.5 45.7 45.8 46.4 48.0 .. .. Import Duties and Taxes 4.1 4.8 4.8 4.9 5.0 Consumption 94.5 94.0 95.6 95.1 90.5 90.6 89.2 87.8 86.7 85.1 Gross Investment 14.2 14.5 13.9 14.9 14.3 15.2 16.6 17.8 - 18.3 19.9 Private Investment 6.0 6.1 6.7 7.8 4.5 5.4 7.7 8.7 10.0 11.8 Public Investment a/ 7.4 7.5 6.7 6.7 9.5 9.8 8.9 9.1 8.3 8.1 Changes in Stocks 0.8 0.9 0.5 0.4 0.2 .. .. Resource Balance -8.7 -8.5 -9.5 -10.0 -4.7 -5.9 -5.8 -5.6 -5.0 -5.1 Exports of GNFS b/ 21.8 24.2 23.8 22.5 26.6 24.9 25.3 25.1 25.3 24.7 Imports of GNFS 30.5 32.7 33.4 32.5 31.4 30.8 31.1 30.7 30.3 29.8 Gross National Savings 12.1 11.8 9.3 11.3 13.1 12.3 13.0 14.1 14.6 15.7 Gross Domestc Savings 5.5 6.0 4.4 4.9 9.5 9.4 10.8 12.2 13.3 14.9 Memorandum Items: Gross Domesbc Product 1845.0 1899.1 2156.6 2125.1 1521.1 1926.4 2046.2 2195.0 2354.2 2526.4 (USSm at current prices) Gross Domestic Product 398.2 397.4 437.5 417.8 290.4 357.0 368.2 383.5 399.3 416.0 Per Capita (USS) Public Finance (