Niger - Public Sector Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P 7074 NIR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED PUBLIC SECTOR ADJUSTMENT CREDIT OF SDR 21.6 MILLION TO THE REPUBLIC OF NIGER February 26, 1997 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 (as of February 26, 1997) Currency Unit CFA Franc (CFAF) US$1.00 CFAF 565.4 SDR 1.0 = US$1.38542 ABBREVIATIONS AND ACRONYMS ABATTOIR - Abattoir Frigorifique de Niamey (Slaughterhouse) AfDB - African Development Bank BCEAO - Banque Centrale des Etats de l'Afrique de l'Ouest (Central Bank of West African States) BDRN - Banque de Developpement de la Republique du Niger (Development Bank of Niger) CNCA - Caisse Nationale de Credit Agricole (National Agricultural Credit Agency) ESAF - Enhanced Structural Adjustment Facility EU - European Union HIPC - Heavily Indebted Poor Countries ICTS - Imp6t Cedulaire sur les Traitements et Salaires (Schedular Tax on Wages and Income) IFC - International Finance Corporation IGR - Imp6t General sur le Revenu (General Income Tax) IUTS - Imp6t Unique sur les Traitements et Salaires (Single Tax on Wages and Salaries) MIGA - Multilateral Investment Guarantee Agency NIGELEC - Societe Nigerienne d'Electricite (Power Generation and Distribution Company) OFEDES - Office des Eaux du Sous-Sol (Well Drilling Company) OHADA - Organisation pour l'Harmonisation des Droits en Afrique (Organization to Harmonize Laws) OLANI - Office du Lait du Niger (Dairy Products Company) ONAHA - Office National des Amenagements Hydro-agricoles (National Irrigation Company) ONPPC - Office National des Produits Pharmaceutiques et Chimiques du Niger (National Pharmaceutical Company) OPT - Office des Postes et Telecommunications (Post and Telecommunications Office) OPVN - Office des Produits Vivriers du Niger (Food Security Stock Agency) PE - Public Enterprises PFP - Policy Framework Paper PSAC - Public Sector Adjustment Credit RINI - Riz du Niger (Rice Company) SAL - Structural Adjustment Loan SNC - Societe Nigerienne de Cimenterie (Cement Company) SNE - Societe Nationale des Eaux (National Water Company) SONARA - Societe Nigerienne d'Arachides (Peanut and Cowpeas Marketing Board) SONICHAR - Societe Nigerienne de Charbon d'Anou Araren (Coal Mining Company) SONIDEP - Societe Nig&ienne des Produits Petroliers (Petroleum Company) SONITEL - Societe Nigerienne des Telecommunications (Telecoms Company) SONITEXTIL - Societe Nigerienne des Textiles (Textile Company) SPEHG - Societe Proprietaire et Exploitante de l'Hotel Gaweye (Hotel Gaweye) STIN - Societe des Telecommunications Intemationales du Niger (International Telecoms Company) TA - Technical Assistance UEMOA - Union Economique et Monetaire Ouest Africaine (West African Economic and Monetary Union) UNDP - United Nations Development Program VAT - Value-Added Tax FISCAL YEAR January 1 - December 31 Vice Presidents Callisto Madavo and Jean-Louis Sarbib Country Director Theodore Ahlers Technical Manager Charles P. Humphreys Task Manager Antonella Bassani  FOR OFFICIAL USE ONLY REPUBLIC OF NIGER PUBLIC SECTOR ADJUSTMENT CREDIT TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY .........................................................i I. BACKGROUND .........................................................1 A. The Country Context ...............................................................l B. Recent Economic and Political Developments ...............................................................3 C. Medium Term Prospects and Financing Requirements ............................................................... 3 II. NIGER'S ADJUSTMENT PROGRAM ........................................................4 A. Macroeconomic Framework ...............................................................5 B. Public Finances ...............................................................5 C. Reform of the Public Enterprise Sector ...............................................................8 III. THE PROPOSED PUBLIC SECTOR ADJUSTMENT CREDIT .. 12 A. Rationale for the Credit ............................................................... 12 B. Link to the CAS .............................................................. 14 C. Poverty Impact .............................................................. 14 D. Credit Amount, Disbursement Procedures and Implementation Arrangements ............................ 14 E. Benefits and Risks ............................................................... 15 IV. BANK GROUP OPERATIONS ........................................................ 16 IFC and MIGA .............................................................. 16 V. COLLABORATION WITH IMF AND OTHER DONORS ............................................. 16 VI. RECOMMENDATION ................... 17 Annexes A. Social Indicators of Development B. Key Economic Indicators C. External Financing Requirements, 1990-2000 D. Status of Bank Group Operations E. Supplemental Credit Data Sheet F. Letter of Development Policy, Policy Matrix and Attachments 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.   REPUBLIC OF NIGER PUBLIC SECTOR ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Beneficiary: Republic of iNiger Amount: SDR21.6 million (US$30 million equivalent) Terms: Standard IDA terms with 40 years maturity Description: The proposed operation would help sustain the Government's stabilization and public sector adjustment effort. The Government's overall adjustment program is outlined in the PFP distributed to the Executive Directors in January 1996. The program aims at quickly restoring macroeconomic balance and confidence in the economy, improving the management of public resources, and strengthening the policy framework for efficient private sector growth, both through measures that could be quickly implemented and by starting a medium term process of public sector reform. The specific elements of Niger's adjustment program that are supported by the proposed credit include: (i) measures to simplify the tax system, strengthen tax administration and widen the tax base; (ii) reducing the share of the wage bill, subsidies and transfers in current expenditures in favor of the priority areas of primary education, basic health care and road maintenance; and (iii) implementation of the PE privatization program. The Government's Letter of Development Policy and policy matrix are attached as Annex F. Benefits: The proposed credit would support policies designed to accelerate broad-based income growth and increase the availability and quality of basic social services. The proposed restructuring of public expenditures would contribute to improved access to basic preventive health and education services nationwide, and clean water in urban centers. The economic reform program, in particular PE privatization, would indirectly benefit the poor by improving the environment for economic growth and thereby increasing job opportunities. The positive economic impacts of more efficient electricity and telecommunications services and lower electricity and petroleum prices will reduce these primary factor costs, thereby improving Niger's competitiveness and growth prospects. Estimated Disbursement: The credit will be disbursed in one tranche immediately after the effectiveness of the Credit Agreement and will follow the Bank's new simplified disbursement procedures for structural adjustment operations.  - ii - 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 PUBLIC SECTOR ADJUSTMENT CREDIT TO THE REPUBLIC OF NIGER 1. I submit for your approval the following report and recommendation on a proposed Public Sector Adjustment Credit (PSAC) to the Republic of Niger for SDR21.6 million, the equivalent of US$30 million. The credit would be on standard IDA terms, with an amortization period of 40 years. The proposed credit will help sustain the Government's stabilization and public sector adjustment effort. The Government's program aims at quickly restoring macroeconomic balance and confidence in the economy, improving the management of public resources, and strengthening the policy framework for efficient private sector growth, both through measures that could be quickly implemented and by starting a medium term process of public sector reform. 2. The credit is a key element of IDA's country assistance strategy (CAS) and an integral part of the Government's overall reform program outlined in the medium-term Policy Framework Paper (1996-98) that was distributed to the Executive Directors in January 1996. Niger's adjustment efforts are supported by the International Monetary Fund (IMF) through a three-year Enhanced Structural Adjustment Facility (ESAF) approved in June 1996 and whose first-year second tranche was approved in January 1997. Significant support is also provided by Paris Club creditors, the European Union (EU), the African Development Bank (AfDB) and bilateral donors. I. BACKGROUND A. The Country Context 3. Poverty. Niger has a population of about 9.2 million, over half of whom live in poverty, with inadequate food and little access to medical care, education and other social services. Niger's per capita income (US$220 in 1995) and development indicators are among the lowest in the world. About 80 percent of the population rely on agriculture for a living, but arable land is scarce and soil degradation is a serious problem. Population growth is 3.3 percent and shows no sign of slowing, literacy is 14 percent, and only 27 percent of children enroll in school. A third of the population lacks food security; among children under five, 33 percent suffer chronic malnutrition and 15 percent are acutely malnourished. About one-quarter of children die before their fifth birthday and average life expectancy is only 47 years. According to the human development index used by the UNDP, Niger ranks as the least developed country in the world. 4. The burden of poverty falls disproportionately on women. As is the case in many developing countries, rural households headed by women are poorer than those with a male head when other relevant factors are constant. In Niger, the national female literacy rate and primary enrollment ratios are substantially lower than those of men (10 versus 20 percent, and 21 versus 33 percent, respectively) and in rural areas the situation is worse as less than 6 percent of women  - 2 - are literate. Mothers' age at first birth is falling and maternal mortality is extremely high at 652 per 100,000 live births. Although women are a major segment of the labor force in agriculture, their access to land, credit, technology and social services remains limited. 5. Economic performance. At the center of the country's poverty situation has been Niger's weak economic performance since the end of the uranium boom in the early 1980s. Amidst short cycles of recovery and downturns, real GDP declined by about one-half of one percent per annum during 1983-1993. This poor economic performance was the outcome of: (i) external shocks, notably a sharp decline in the international price and demand for uranium and two prolonged droughts; (ii) severe weaknesses in public resource management--both with regard to resource mobilization and expenditure efficiency; (iii) a large and inefficient parastatal sector; (iv) badly distorted economic incentives for the private sector to produce, save and invest; and (v) a loss of competitiveness due to the real appreciation of the CFA franc until 1994. In addition, economic growth in the country was further limited by a weak agricultural base, underdeveloped human resources, and continued political instability. These conditions, coupled with rapid population growth, have led to a significant poverty increase since the early 1980s. 6. Over the last decade, the distortions created by inadequate price and incentive policies and the overvalued CFA franc led to a rapid growth of the informal sector, a shrinking of the formal economy, and widespread tax and customs evasion. During the transition to democracy in 1990-92, social and political instability further undermined administrative structures, including the already weak tax and customs administration. These factors eroded government revenue which fell from 11 percent of GDP in 1987 to 7 percent in 1993. Meanwhile, the government wage bill continued to increase as a share of GDP (from 4.2 percent in 1987 to 6.4 in 1993), reflecting both the steady growth of public employment and compensation levels. The declining revenue base, together with decreased revenue collection capability and the continued increase in the civil service wage bill, resulted in a profound and persistent financial crisis which had wide-ranging adverse effects on investment, growth and the development of the modern sector of the economy. Public investment in new economic and social infrastructure virtually halted, as did the upkeep of existing investments in health, education and roads. Furthermore, owing to the continual deterioration of the budgetary position, the country's outstanding debt increased significantly, including the accumulation of domestic and external payments arrears. Burdened by growing government arrears, both public and private enterprises in turn accumulated tax arrears and cross-debts. 7. Niger's Past Adjustment Programs. Niger's adjustment performance has been very poor. Since 1983, IDA has approved five operations (a SAL, a PE sector adjustment credit, an Economic Recovery Credit, and two TA projects) that focused on macroeconomic management and PE sector reform. OED evaluations of these operations show that the achievements have been very limited. Despite substantial progress in price and trade liberalization, the abolition of monopolies in agricultural trade and the adoption of some tax reform measures (including the introduction of a unified valued added tax), there were major shortfalls in addressing the causes of internal and external imbalances, largely as a result of a lack of government determination to contain the wage bill, restructure the civil service, strengthen the tax administration and privatize public enterprises. In addition, the frequent changes in governments and the emergence of strong vested interests during the country's unstable political transition since 1991 contributed to program slippage and reversal.  - 3 - B. Recent Economic and Political Developments 8. In early 1994, in conjunction with the devaluation of the CFA franc, the Nigerien Govemment adopted a short-lived stabilization program supported by an IMF Stand-by and an IDA Economic Recovery Credit. The program went off track in mid-1994 amidst continued political instability. By year end, and despite a real GDP growth of 4 percent, the revenue-to- GDP ratio had fallen to an all-time low of 6 percent, the nominal wage bill had increased by about 18 percent (91 percent of budgetary revenues), and the overall fiscal deficit (excluding official grants) had nearly doubled, reaching 12.5 percent of GDP. 9. A new Government assumed office in early 1995 and initiated corrective actions aimed at stabilizing the economy. On the revenue side, measures were introduced to simplify the tax system, strengthen tax administration (including significant personnel changes in key revenue departments) and widen the tax base. On the expenditure side, the wage bill to budgetary revenue ratio was reduced to 73 percent in 1995. Complementing these efforts was a growth in real GDP of about 3 percent, owing to favorable weather conditions and the recovery of exports which benefited from the country's improved external competitiveness. 10. Continued political instability and deteriorating relations among the President, Prime Minister and National Assembly led to a military coup d'etat in January 1996. Presidential elections were held in July and won by General Bare Mainassara, head of the regime installed following the military coup. The results were confirmed by the Supreme Court despite widespread charges of electoral fraud. Legislative elections were held in November despite a boycott by opposition parties following the Government's refusal to annul the results of the July presidential elections. 11. The Bare government rapidly confirmed its commitment to the PFP negotiated by the previous government and adopted additional measures to offset the reduced foreign financing following the coup. An IMF ESAF program was approved in June 1996 and the mid-term review successfully completed in January 1997. Real GDP growth is estimated at about 4 percent in 1996, owing to increased agricultural production, and uraniumn and livestock exports. Inflation is estimated to have fallen to about 5 percent. As a result of a sharp reduction of expenditures--including wage and salary outlays--and above target revenue collection, the overall deficit (excluding grants) is estimated at about 5 percent of GDP in 1996. The lower fiscal deficit and impro-ed competitiveness of the economy have contributed to a narrowing of the current account deficit (excluding official transfers) from about 10 percent of GDP in 1995 to an estimated 8 percent in 1996. Notwithstanding these developments, the reduction in external and internal payment arrears was far less than programmed as a result of the shortfall in external assistance. C. Medium Term Prospects and Financing Requirements 12. Under the combined influence of the sustained implementation of the Government's adjustment program outlined in the PFP and the resumption of external aid, the Nigerien economy is expected to grow in real terms at an average of about 4 percent a year during 1997- 2000, thus allowing an increase of real per capita income on the order of I percent per annum. Growth is expected to mostly come from the development of crop and livestock production and a modest increase in exports. This growth performance would be supported by an increase in the investment ratio from 9 percent of GDP in 1996 to an average of 14 percent during 1997-2000. The  - 4 - increase in investment would result from: (i) a rise in Government investment from 4 percent of GDP in 1996 to an average 8 percent during the program period--largely financed by resumed foreign assistance; and (ii) increased private investment (from 5 percent of GDP in 1996 to 7 percent in 2000) in response to the implementation of the privatization program and reforms of the incentive framework. With tax reform and a reduction of the wage bill, the current budget balance (excluding grants) is expected to become positive by 1998. Gross domestic savings are projected to increase by about 3 percentage points, to about 8 percent of GDP by 1999, primarily as a result of an improvement in the Government's financial position and more opportunities for private investment. Supported by prudent monetary policies pursued in collaboration with the regional monetary authorities (BCEAO), these trends should minimize inflationary pressures and enable the inflation rate to stabilize at about 3 percent by 1997. However, the balance of payments outlook will remain difficult and will be sensitive to developments in the price of uranium and climatic conditions. 13. Niger faces a substantial debt burden and is classified as one of the heavily indebted poor countries (HIPCs). As of 1995, the present value of debt equaled 337 percent of exports and debt service payments were 25 percent of exports (according to the methodology used in the Bank's Global Development Finance). The country received a three-year flow rescheduling from Paris Club creditors in December 1996. The amount rescheduled is estimated at US$128 million which, in conjunction with donor support, will help Niger to meet its near-term foreign exchange requirements. However, efforts to reduce the debt burden over the medium-term will be required if the country is to achieve its full development potential. The next steps will be to assess the sustainability of external debt, taking into account the recent Paris Club agreement, assumptions for future debt reschedulings, and a medium-term macroeconomic framework. It will be necessary to carefully monitor changes in debt sustainability as the country establishes a track record of performance, and to assist the government to improve its capacity to manage external debt. The Bank and the Fund will collaborate with the Government in a preliminary debt sustainability analysis during 1997. 14. Despite the anticipated improvement in its economic and financial situation, Niger will have to depend on significant amounts of external financing on highly concessional terms for many years. Total external financing requirements for 1997-99 are estimated at US$1,011 million. After accounting for the debt relief described above, these requirements are expected to be met by grants (US$399 million), IMF ESAF resources (US$71 million) and medium and long term loans (US$216 million). There remains a gap of US$263 million for the three-year period, for which Niger will need to mobilize additional debt relief and financing from bilateral donors and development assistance institutions. The prospects for filling this gap depend, in addition to Niger's economic performance, on the assessment of bilateral donors of progress on the political front. II. NIGER'S ADJUSTMENT PROGRAM 15. The Government has adopted a medium-term adjustment program aimed at further stabilizing public finances and fostering an economic environment conducive to sustainable growth. The implementation of this program is a basic precondition for sustained poverty reduction. It aims at preserving the competitiveness gains resulting from the CFA franc devaluation through strict fiscal and monetary policies, as well as the intensification of structural reforms to promote private sector initiative and achieve greater efficiency in the management of  - 5 - public resources. A detailed description of the Government's macroeconomic and structural adjustment policies for 1996-98 is provided in the Policy Framework Paper. 16. Regaining control over public finances through an increase in revenues and containment of the civil service wage bill will be a primary focus of fiscal policy over 1997-99. Structural impediments to growth and poverty reduction will also be addressed through: (i) a reallocation of public resources for the priority areas of primary education, basic health care and infrastructure maintenance; (ii) reform of the civil service; (ii;) privatization and restructuring of public enterprises; and (iv) sectoral reforms in the education, health and transport sectors. A. Macroeconomic Framework 17. Implementation of the structural changes proposed will be key to meeting the government's macroeconomic targets. Maintaining an appropriate macroeconomic framework, and in particular external competitiveness, will be essential for achieving its growth objectives. The macroeconomic program is on track and the IMF Board approved release of the second tranche of the first-year ESAF arrangement in January 1997. Continued implementation of appropriate macroeconomic policies will be one key determinant of the level of future IDA lending. Increased public savings would be the dominant element of increased domestic savings in 1997-99. In this regard, the Government intends to increase revenues from an estimated 8 percent of GDP in 1996 to 11 percent in 1999, and to increase current expenditure from 9 percent of GDP in 1996 to 10 percent in 1999. The growth of personnel expenditures will be restrained and their share of budgetary revenues reduced from 73 and 42 percent in 1995 and 1996, respectively, to 41 percent in 1997. The primary balance (i.e., excluding interest obligations and foreign financed expenditure) which shifted from a deficit of 2.3 percent of GDP in 1995 to a surplus of 0.1 percent in 1996, is programmed to increase to 1 percent in 1997 and 1998. 18. Niger will work with the Central Bank of the West African States (BCEAO) to ensure that monetary policy supports non-inflationary growth and the preservation of a strong regional net foreign assets position. Credit policy will be aimed at stabilizing the Government's net indebtedness to the banking system, so as to permit reorientation of available financial resources toward the private sector. The macroeconomic projections and requisite policies will continue to be revised annually during the update of the PFP, taking into account both the progress achieved in reducing imbalances and the availability of financing. B. Public Finances 19. The Government recognizes that rapidly restoring public finances to a sound footing is key to the success of its medium-term economic adjustment program. On the revenue side, a number of important policy measures were introduced in 1994-96 to simplify the tax system and improve revenue mobilization. These include: (i) the unification of the three value-added tax (VAT) rates at 17 percent; (ii) the merging of the general income tax (Imp6t General sur le Revenu, IGR) and the schedular tax on wages and income (Imp6t Cedulaire sur les Traitements et Salaires, ICTS) into a single tax on wages and salaries (Imp6t Unique sur les Traitements et Salaires, IUTS); (iii) a comprehensive consolidation of all import levies into two taxes (customs duty and statistical tax), and a reduction in the number of rates to three (10, 15 and 35 percent); (iv) elimination of duties on non-uranium exports and unification of re-export duty rates at 10 percent; and (v) a reform of informal sector taxation through the introduction of a single  - 6 - professional tax (patente synthetique). In addition, a pre-shipment import inspection firm started providing assistance to customs in its effort to combat fraud in October 1996. 20. The revenue effort in 1997 will focus on further simplifying the tax system, strengthening tax administration and widening the tax base. Effective tax collection from individuals and activities that currently evade taxes will receive special attention. These measures will consolidate and reinforce the tax reform efforts recently implemented and should make it possible.to increase the ratio of budgetary revenue to GDP to 10 percent in 1997, up from its present level of 8 percent. Achieving this increase will be a major challenge, but the authorities have reiterated their determination to do so, recognizing that it is the centerpiece of public finance reform and a prerequisite for maintaining essential expenditures. 21. Specific components of the 1997 revenue effort, which have recently been adopted by the Government, include: (i) the streamlining of taxation on petroleum products and improvements in yield through a change in the price structure; (ii) the application of a revised grid for the unified income tax on wages and salaries (IUTS); and (iii) a reduction in the maximum length of tax holidays for new investments from the current 15 years to 5 years, and a restriction in the number of qualifying investments eligible for such treatment. In addition, in 1997 the Government will undertake a major reform of the country's real estate taxation structure and enforcement. As a first step, it will enforce the property tax and the tax on rental income, harmonize the country's applicable real estate laws and regularize the cadastre. These measures are supported by a major strengthening of the tax and customs departments, both of which remain severely understaffed and underequipped. In particular, steps are being taken to decentralize and improve the tax assessment and collection services. The assignment of a single tax identification number to all taxpayers is also expected to be completed in 1997. Staff efficiency and capabilities are being reinforced through personnel redeployment, training programs and increased budgetary allocations for vehicles and computer equipment. In order to increase collection efficiency, the authorities have announced that the names of tax defaulters will be published regularly in the press and that tax arrears will be made subject to positive real interest rates. Efforts to harmonize customs and investment incentives within the UEMOA are also continuing. 22. Despite the implementation of the measures described above, the authorities realize that substantive revenue gains rest with the inevitably gradual process of restoring growth and that much of the medium-term fiscal effort will therefore need to focus on restructuring government expenditures--notably by reducing the share of the wage bill, subsidies and transfers in total current expenditures in favor of non-wage expenditure in the priority areas of primary education, basic health care and road maintenance. To this end, in the recently adopted 1997 Budget the Government reduced the wage bill by about 11 percent relative to 1995, from CFAF 49.7 billion to 44.1 billion.1 This will be mainly accomplished through a revision of the salary and benefit system (including for the military). In February 1997, the Government adopted a new salary scale that reduces base wages and the housing allowance (by far the most expensive benefit, representing about 50 percent of total allowances). The largest cuts are targeted for the higher categories and grades. Over the medium-term, it is the Government's intention to contain the wage bill by controlling the size of the civil service. For 1997, the The 1997 wage bill will be about 5 percent above actual 1996 wages because of a one-year cut of 33 percent in civil service wages that was agreed to with the labor unions.  - 7 - Government has already decided that personnel recruitment will broadly be kept in line with retirements, with the priority for new hires going to education and health. 23. In the 1997 Budget, savings on other current expenditures are envisaged through cuts in scholarships for secondary and higher education (from CFAF 4.5 billion in 1996 to CFAF 3.6 billion in 1997) and the strict application of the new eligibility criteria set forth by the Government to ensure that only the most deserving students receive support. In order to avoid the accumulation of new payment arrears, the Government intends to strictly enforce existing budgetary procedures, with advance payments being authorized only for emergency expenditures of an unforeseeable and exceptional nature. 24. The authorities also recognize that, despite the planned reduction in the wage bill noted above, maintaining effective control over the growth of wage expenditures and increasing public sector efficiency requires the rationalization of the civil service and payroll system. They have, therefore, launched a comprehensive civil service reform program which includes: (i) reform of compensation and promotion procedures, including the review of pay, benefits, grading, policies, procedures, and job evaluation techniques; (ii) rationalization of staffing including implementation of staff relocation programs in selected priority sectors, the introduction of an integrated personnel and payroll database and improving the design of the voluntary departure scheme; and (iii) modernization of personnel management, including the review of central personnel management organization and procedures and the introduction of an enhanced performance evaluation system.2 In addition to the revision of the existing salary scale (see para. 22), the carrying out of a civil service census and the launching of the personnel redeployment program for key sectors (education, health and tax administration) are underway and are expected to be completed by mid-1997. 25. Some of the budgetary savings realized under the program discussed above would allow the reallocation of public expenditures to improve the delivery of primary education, basic health care and road maintenance. Relative to 1996, allocations for non-wage current expenditure in the education and health sectors have been increased by 14 percent in the 1997 Budget (from CFAF 4.6 and 7.2 billion in 1996 to CFAF 5.3 and 8.2 billion in 1997, respectively) in accordance with the requirements of Niger's basic education and primary health care programs supported by two IDA projects (Basic Education and Health Sector Development Projects) and the recommendations of a preliminary public expenditure review conducted in 1996. A similar increase is expected for 1998. Material and equipment allocations for the tax collections agencies have been increased by 74 percent (from CFAF 459 million in 1996 to CFAF 798 million in 1997 -- see para. 21). The allocation for road maintenance has been increased from CFAF 2.6 billion in 1996 to CFAF 3.1 billion in 1997. The authorities have also allocated CFAF 4.3 billions for various compensatory measures designed to mitigate the negative social impact of some of the adjustment measures (see para. 41). In addition, the domestic budgetary contribution to the public investment program has been increased from CFAF 4 billion in 1996 to CFAF 6.5 billion in 1997. In December 1996, the Government adopted the 1997-99 Public Investment Program that adequately reflects a priority for rural development, the social sectors and job creation programs (primarily for roads and urban infrastructure rehabilitation and maintenance). The Government also plans to launch a second Public Expenditure Review in 2 Implementation of the civil service reform program is to be supported by the Public Sector Modernization project currently under preparation.  -8- April/May 1997 with the assistance of IDA and other donors in order to (i) identify financial requirements for priority sectors; (ii) strengthen expenditure programming; and (iii) improve execution procedures. 26. A reduction of domestic payments arrears is essential to ease the financial gridlock that is impeding the normal functioning of the economy and rebuild private sector confidence. Accordingly, they were reduced by CFAF 5.7 billion from March to December 1996 through tax compensation mechanisms, and are programmed to be further decreased by CFAF 19 billion in 1997. A comprehensive inventory of domestic arrears and a plan for their rapid and orderly settlement in 1997-98 was prepared with IDA assistance and adopted by the Government in February 1997. The authorities also intend to adopt measures to avoid the recurrence of internal arrears, including providing adequate funds to government departments for water, electricity and telephone consumption, instructing those departments to make utility payments their first priority and putting in place structured and comprehensive measures to reduce demand over the long term. C. Reform of the Public Enterprise Sector 27. Background. State control of a broad range of enterprises--about 40 entities, excluding 20 autonomous administrative bodies--has undermined private sector development and imposed significant economic and social costs on the country. With few exceptions, state-owned enterprises are characterized by low competitiveness, the consequence of overstaffing, high factor costs, a lack of adequate access to capital for key investments and management weaknesses. Moreover, some enterprises have been repeatedly used as a source of funds for extra-budgetary expenditure. The PE sector also suffers from significant and chronic payments arrears from the Government and cross-arrears among PEs which are threatening the financial viability of the entire sector. As a result of these conditions, most of Niger's public enterprises exhibit some of the lowest profitability and efficiency indicators in the region. The situation of the public utilities is particularly worrisome, as a result of significant government arrears and the inability to fund capital investment. This has limited the expansion of services and led to a significant maintenance backlog that now threatens the asset base. 28. Government efforts to reform the public enterprise sector started in the mid-1980s. From an initial portfolio of 45 enterprises in 1983 (excluding autonomous administrative bodies), 9 were privatized, 14 were liquidated and I integrated into Government services. In the agricultural sector, the import monopoly and price stabilization role of the cereals marketing board (OPVN) were abolished and the company's functions were limited to managing the grain security stock; the rice marketing board (RINI) was restructured and its ownership opened to private cooperatives; and the peanut and cowpeas marketing board (SONARA) was liquidated. In the financial sector, the country's largest bank (BDRN) and the agricultural credit agency (CNCA) were liquidated, and other financial institutions were restructured. Air Niger was also liquidated. Other reforms were implemented including new legislation for the sector with a view to ensuring more autonomy for public enterprises, extension of the normal fiscal regime to all public enterprises and performance contracts for six major companies. 29. In general, the Government's reform effort for public enterprises has been unsuccessful because: (i) there was no sustainable improvement in the financial performance of PEs; and (ii) there was little or no development of the formal private sector. The privatization program was abandoned in the late 1980s and, despite an initial improvement in the PEs' financial health  -9- following these reform measures, the performance of the sector deteriorated in the 1990s as a result of the country's economic downturn, continued government interference and poor company management. Compounding these problems was the economy's persistent financial crisis that prevented the Government from either regularly paying its bills or meeting its obligations to those enterprises with which it had performance contracts. In addition, some privatized enterprises were subsequently returned to the State or liquidated. As a result of this decade of experience, the authorities have designed the current public sector reform program to emphasize: (i) a focused sequential approach with emphasis on providing adequate support for program design and implementation; (ii) the know-how and financial standing of potential buyers; and (iii) adoption of measures to ensure regular payment of Government bills to avoid the recurrence of internal arrears (see para. 26). 30. Privatization and Public Enterprise Reform Program. The Government is making a renewed start on the reform of the public enterprise sector to improve the financial position of the sector and widen the scope for private activity. The Government's current strategy for public enterprise refonn calls for the privatization of twelve enterprises, the liquidation of three, and the restructuring of eight others in 1997-98. The program also includes the settlement of cross-debts and payments arrears between enterprises and the Government, institution of a payment structure that avoids the accumulation of future arrears, and the rehabilitation of the management information system for monitoring the performance of enterprises that remain in the public sector. 31. Given Niger's limited institutional and implementation capacity, the PE reform program is being carefully sequenced, with priority given to the privatization of public enterprises based on their strategic importance for the economy and the welfare of the population, or the Government's objective to divest itself from commercial and industrial activities. The program is, therefore, aimed at: (i) mobilizing private investment financing to expand and increase the efficiency of service delivery; (ii) promoting the development of the private sector by the reduction in factor costs that privatization should bring about, particularly in the areas of energy, transport and telecommunications; and (iii) reducing the role of the Government in productive activities, which will be left to the private sector. 32. In June and December 1996, the Government adopted ordinances which establish the legal framework for privatization and define the broad objectives, guidelines and procedures for the divestiture program. A privatization agency was created in November 1996 to implement the privatization program. In an effort to ensure transparency, accountability and the program's rapid implementation, the authorities decided to "privatize" the privatization process by staffing the privatization agency with non-public sector personnel and contracting investment advisors whose mandate is explicitly to complete privatization transactions rather than to provide technical advice.3 The Project Preparation Facility for the proposed credit has supported the activities of the privatization agency during the period November 1996 - March 1997. The Government will allocate US$1.5 million out of the local currency counterpart generated from the proposed credit to finance the privatization program for the remainder of 1997. After this date, it is expected that the privatization agency will finance its activities from the proceeds of public enterprise sales. The only civil servant in the privatization agency is its director.  -10- Major Companies to Be Privatized and Privatization Options NIGELEC (power generation and distribution) suffers from significant government interference which adversely affects its financial performance and efficiency. The Government is slow to settle its arrears and those of public enterprises to NIGELEC, with the result that receivables from these two sources amount to over CFAF 14 billion (or 5 times its capital). NIGELEC is also required to purchase diesel fuel from SONIDEP at a 40 percent markup and to distribute SONICHAR's high-cost electricity in the North at a loss. The Government also obligates the company to contribute to a development fund (which has yet to result in any sector investment) and it has not passed along any benefit from the 1994 cancellation of NIGELEC's debt with France. It is estimated that in 1995 these charges and requirements, together with tax contributions, resulted in a transfer from NIGELEC to the government of about US$12.5 million (or 38 percent of its revenues). Despite a relatively high tariff (US$0.138/Kwh) which makes local electric energy one of the most expensive in the region, the state's interventions have meant that the utility cannot retain or raise sufficient investment funds. As a consequence, urban service expansion has virtually halted over the last five years and rural electrification remains very limited. Currently, only about 5 percent of the country's population (mainly in Niamey) has access to electricity, one of the lowest service access ratios in the world. The Government is committed to introducing private sector participation in NIGELEC during 1997 through a combination of: (i) a management contract for the financially non-viable isolated centers, mainly in the rural areas, with an incentive structure that rewards the operator for explicitly quantified performance targets; and (ii) a concession awarded for the financially viable inter-connected zones to a private operator that would have management control and would be subject to mandatory quality service targets and a pre-defined investment program to expand the network. The water company, Societe Nationale des Eaux (SNE), provides water to only about 45 percent of the population in its service territory (or 14 percent of the country's population). Hampering an increase in service coverage is the lack of adequate investment capital (investment decreased by 95 percent during the period 1990-1995), caused by a combination of large arrears from the government and state-owned enterprises (CFAF 5.5 billion as of June 1996, equal to about one year's turnover), bad debts from private customers that reached about CFAF 1.5 billion this year and the state's reluctance to raise tariffs enough to offset the effects of the CFAF devaluation (the 1994 tariff increase was only 10 percent). As a result, the company is experiencing a severe cash flow crisis (despite showing a profit on an accrual basis in 1994 and 1995). This has, in turn, led to a growing accounts payable problem, including to NIGELEC for CFAF 1.5 billion, and the asset base is thought to be suffering from an acute lack of preventive maintenance. Finally, SNE has been unable to improve performance indicators and these remain below those of other utilities in the region. The Government intends to quickly improve the company's efficiency and expand its coverage through a private sector operator that will assume management of SNE under a 15-year lease contract. Provisions for operator financed investments and performnance based incentives will be included in the contract. Before 1996, telecommunications services were provided by two companies (OPT and STIN) benefiting from a monopoly on local and international telephone traffic, respectively. A merger of the two companies into a new one, SONITEL, is currently under way. Despite their monopoly position and a 65 percent rise in revenues over the period 1991-95, the two companies have lost money every year since 1991. This was in part caused by a 23 percent increase in personnel during this period (now averaging 35 percent of combined revenues), and a 150 percent increase in operating costs. The companies are also hampered by a chronic lack of investment capital to maintain and upgrade the network and quality of service, and poor cash flow (aggravated by growing receivables from the state that approached CFAF 4.8 billion in 1995 and payables to other telecoms companies of CFAF 4.5 billion).  As a result, OPT and STIN provide inadequate domestic coverage, with only I line per 1000 inhabitants (compared to 60 lines in the region) and 6 international lines for the whole country -- meaning that the vast majority of Nigeriens lack access to telephone services. In addition, the companies also have some of the lowest productivity indicators in the region, e.g., 137 agents per 1000 lines compared to 50-73 agents elsewhere in the region. Finally, given the lack of resources for operations and maintenance, the call completion rate is very low by international standards and call quality is highly variable. The Government intends to privatize SONITEL with the Government shares in the company reduced to 35 percent. The new operator would be given service monopoly for four years on basic phone services. The market would be opened to competition for cellular services. The national petroleum company (SONIDEP) has a de facto monopoly on importation and storage of petroleum products (retail distribution is carried out by private companies; SONIDEP has no retail network). Although profitable, it suffers from inefficient performance and smuggling, mainly from Nigeria (illegal imports are estimated at about 50,000 m3, or half of SONIDEP's imports). Other problems are the high cost of imports and storage, overstaffing (it is estimated that between a half to two-thirds of its 300 employees are redundant), increasing receivables from the state and state-owned enterprises (CFAF 3.1 billion and CFAF 1.1 billion, respectively) and excessive capital investments. The company is also burdened by a large debt service mainly resulting from a high-cost expansion of storage capacity undertaken in 1994. The Government has eliminated the de facto import monopoly of SONIDEP by allowing competition at the import and distribution levels. Liquidation of SONIDEP, transfer of its storage facilities to a private management company through concession or lease, and revision of the sector regulatory framework is expected to become effective by end-July 1997. Eight small and medium-sized enterprises--SNC (cement), SPEHG (hotel), SONITEXTIL (textile), OLANI (dairy products), ABATTOIR (slaughterhouse), RINI (rice), ONAHA (irrigation) and OFEDES (well drilling)--are also slated for privatization. These companies generally suffer from overstaffing, high production costs, an overly restrictive regulatory environment (e.g., profit caps in the food sector and high tax rates) and a lack of adequate access to capital for key investments (that could raise production and efficiency). The results of these problems can be summarized by an insufficient cash flow to maintain existing plant and equipment, deteriorating operating margins and decreasing market share. The Government intends to sell all or the majority of its shares in these enterprises. Potential investors could include current private sector shareholders, employees and/or cooperatives. 33. In a decree issued in November 1996, the authorities targeted 12 enterprises for rapid privatization, including the country's three main public utilities, the national petroleum company and 8 small and medium-sized enterprises operating in the manufacturing and service industries. A detailed description of these enterprises and of privatization strategies is presented in the above box. Preparatory work for the implementation of the privatization program is underway. In February 1997, the Council of Ministers adopted privatization strategies for the complex transactions (electricity, water, telecoms and petroleum) -- see Attachments 1-4 of the Letter of Development Policy. Tariff studies for water, electricity and telecoms will be launched during March 1997 in order to define an appropriate tariff structure for each sector before privatization. In addition, sector strategies are being prepared for electricity and water that re-define the role of the state in the sector and introduce alternative and cost-effective approaches for expanding service access among the rural population. Asset valuations and market research are underway for four small and medium-sized enterprises (cement, dairy products, slaughterhouse and hotel). Finally, and as discussed in para. 26, a plan to settle government arrears to the public utilities has been adopted for implementation in 1997-98.  - 12 - 34. The proposed operation would support implementation of the first phase of the privatization program for these enterprises. Further implementation of the country's privatization program and the restructuring of other PEs would be supported by the Public Sector Modernization project currently under preparation and a follow-up adjustment operation. A detailed implementation schedule for the public enterprise reform program is included in the policy matrix annexed to the Letter of Development Policy (Annex F). 35. The privatization program is closely linked to the authorities' efforts to improve the business climate for private sector activity. In June 1996, the Labor Code was revised to enhance wage flexibility and mobility and the National Employment Bureau's monopoly on hiring and firing was eliminated. The authorities are also continuing to improve regulations regarding contract and bankruptcy law in conformity with the requirements of the Treaty on the Harmonization of Business Law in Africa (OHADA). The government monopoly on mining freight was abolished in June 1996. To assure wide access to essential drugs and medicines, the Government is restructuring the pharnaceutical sector and has embarked on a policy of promoting generic drugs. The Government monopoly on drugs import was abolished in December 1996 and a new Pharmaceutical Law including a regulatory framework for drugs imports and distribution was adopted in January 1997. A pricing structure for drugs that encourages the sale of generics is being prepared and the pharmaceutical company (ONPPC) will be restructured during 1997-98. The simplification of administrative and judiciary procedures is envisaged in the context of the IDA-supported Public Sector Modernization project now under preparation. Legislation supplementing the Rural Code and addressing inequalities of access to property ownership was adopted in November 1996 and January 1997. Progress is also being made in the preparation of a Family Code which is expected to be adopted by 1998. As indicated above, the privatization process will contribute to mobilizing private investment financing to expand service provision and reduce factor costs. III. THE PROPOSED PUBLIC SECTOR ADJUSTMENT CREDIT A. Rationale for the Credit 36. Niger's urgent need for adjustment financing is the result of long standing public finance and public enterprise problems. The country's track record on implementing economic policy reforms over the last decade is very poor. The Government nonetheless made considerable progress in 1996 in initiating economic reforms and regaining control of the fiscal situation, despite a very difficult political environment and dramatically reduced foreign assistance. Maintaining this reform momentum is dependent, among other things, on external financial support. Given these circumstances, we propose a single-tranche operation for US$30 million that is based on a small number of key actions, taken between September 1996 and February 1997, to directly address the public finance and public enterprise problems. The level of future IDA lending will depend upon sustained implementation of the measures detailed in the Letter of Development Policy, and on satisfactory performance on a number of monitorable indicators detailed in the matrix annexed to the Letter. 37. In addition to proceeding with the overall PFP reform program, the proposed credit supports specific measures to increase fiscal revenue, reduce the wage bill and privatize major  - 13- public enterprises. In this regard, the following key actions have been taken by the Government between September 1996 and February 1997: Public Finances 0 Reduction of the 1996 wage bill to CFAF 42.1 billion (cash basis). 0 Increase of budgetary revenue in 1996 to CFAF 79 billion. 0 Limiting the 1996 overall budget deficit (on a commitment basis and excluding grants) to 4.7 percent of GDP. 0 Adoption of the 1997 budget law: - limiting the wage bill to CFAF 44.1 billion; - increasing the health sector allocation for non-wage current expenditures from CFAF 7.2 billion in 1996 to CFAF 8.2 billion in 1997 (representing an increase of 14 percent); - increasing the education sector allocation for non-wage current expenditures from CFAF 4.6 billion in 1996 to CFAF 5.3 billion in 1997 (representing an increase of 14 percent); - increasing the allocation for road maintenance from CFAF 2.6 billion to CFAF 3.1 billion; - increasing material and equipment allocations for tax and customs services from CFAF 459 million in 1996 to CFAF 798 million in 1997; - introducing a number of tax reform measures including: (i) the streamlining of taxation on petroleum products through a change in the price structure; (ii) the application of a revised grid for the unified income tax on wages and salaries (IUTS); and (iii) a reduction in the maximum length of tax holidays for certain investments from the current IS years to 5 years, and a restriction in the number of qualifying investments eligible for such treatment. 0 completion of inventory of domestic arrears and adoption of plan for their orderly settlement. 0 initiation of civil service census. Public Enterprises 0 Adoption of revised PE privatization law. 0 Adoption of decree to privatize 12 key public enterprises. 0 Adoption of privatization strategies agreed with IDA for the public utilities (SNE, NIGELEC and SONITEL) and the petroleum company (SONIDEP). 0 Initiation of hiring process for financial advisors to complete privatization transactions for the 12 targeted companies. 38. Despite these measures, the proposed credit does not resolve Niger's daunting medium- term development problems--poor growth prospects, increasing poverty, underdeveloped human resources, and a very limited natural resource base. Rather, it supports a key few actions to directly address long-standing and interlinked public finance and public enterprise problems, namely wage expenditures inconsistent with available resources, widespread tax evasion, and political interference in public enterprise management. Action on these fronts and the restoration of order to public sector finances is a prerequisite for action on the even more difficult medium- and long-term development issues. In general, sustained implementation of the measures supported by this credit is a pre-condition for both further adjustment lending and increased investment lending. Specifically, future IDA adjustment lending will be conditional upon  - 14- execution of the 1997 budget in line with the agreed objectives and measures in the matrix annexed to the Letter of Development Policy dealing with revenue and expenditure issues. B. Link to the CAS 39. The Niger's CAS was discussed by the Executive Directors in May 1994. The key elements of the strategy are: (i) the restoration of a stable macroeconomic framework and removal of structural impediments to growth; (ii) human resource development, in particular for girls' education and maternal and child health care; and (iii) rural development and natural resource management. The CAS envisioned a multi-tranche second SAC in FY96-97 addressing a wide range of reform issues. Such an operation is no longer judged to be appropriate because of uncertainty regarding the political situation, Niger's poor implementation track record, and the need to re-examine medium term priorities in light of a more realistic assessment of Niger's growth prospects. The proposed smaller, single-tranche operation would replace the originally envisioned SAC. It is fully consistent with the CAS and sustained implementation of the reforms it supports constitutes a trigger for higher lending under a new CAS to be discussed by the Executive Directors in July 1997. C. Poverty Impact 40. The proposed credit will contribute to poverty reduction by supporting policies designed to accelerate broad-based income growth and increase the availability and quality of basic social services. The restructuring of public expenditures will contribute to improved access to basic preventive health and education services nationwide and clean water in urban centers. The economic reform program, in particular PE privatization, would indirectly benefit the poor by improving the environment for economic growth and thereby increasing job opportunities. The positive economic impacts of more efficient electricity and telecommunications services and lower electricity and petroleum prices will reduce these primary factor costs, thereby improving Niger's competitiveness and growth prospects. 41. The Nigerien authorities are also conscious of the need to assist those who are not poor but who might suffer as a result of the adjustment effort, notably PE workers laid off for economic reasons. In this respect, detailed estimates of resource requirements for staff severance packages are being prepared. An initial allocation of CFAF 4.2 billion has been included in the 1997 budget for various compensatory measures, including severance packages for the first enterprises to be privatized. D. Credit Amount, Disbursement Procedures and Implementation Arrangements 42. The credit will be disbursed in one tranche in an amount equivalent to US$30 million. The program was designed to emphasize actions taken prior to credit approval, as indicated in para. 37, for two reasons: (i) to demonstrate the authorities' commitment to the program; and (ii) to decrease, to the extent possible, the risk of policy reversal (see also the section on risks below). 43. The credit will follow the Bank's new simplified disbursement procedures for structural adjustment operations. Thus, disbursements will not be linked to specific purchases and there will be no procurement requirements. Proceeds of the Credit will be deposited by IDA in a  - 15 - Central Bank account at the request of the Borrower. If, after deposit in this account, the proceeds of the credit are used for ineligible purposes (i.e., to finance items imported from non- member countries, or goods and services on the Bank's standard negative list), IDA will require the Borrower to either: (a) return that amount to the account for use for eligible purposes; or (b) refund the amount directly to IDA. The credit administration will be the responsibility of the Ministry of Finance. Although an audit of the deposit account will not be required, the Bank reserves the right to require audits at any time. 44. Implementation of the policy program will be monitored by an Inter-ministerial Committee chaired by the Prime Minister. The committee will have responsibility for monitoring and evaluating progress under the various components of the program with input from participating ministries and institutions. Three technical groups, in charge of public finances, PE privatization and restructuring, and civil service reform, respectively, are responsible for the implementation of the reform program. IDA will monitor implementation of the program through regular supervision missions, the Committee's quarterly reports and continuous monitoring by the Resident Mission. E. Benefits and Risks 45. In light of Niger's poor performance in implementing previous reform programs and its fragile political situation, the proposed credit is of high risk. The three main risks are: (i) political and social; (ii) a shortfall in external financing for 1997-1998; and (iii) the Government's implementation capacity. 46. The largest risk associated with the proposed credit is a scaling back, or even reversal, of the reform package linked to political developments. Although as indicated above there appears to be broad consensus on the economic reform agenda (the current opposition parties were in power when the PFP program was negotiated in 1995), privatization and wage bill issues are highly political and could become the focus of Government opposition if underlying political issues are not resolved. In addition, if the political situation deteriorates on issues unrelated to economic reforms, the Government's ability to implement the program may be called into question. The authorities are trying to broaden the support for the reform program and develop the necessary consensus to carry it out. These measures include consultations with the trade unions to define the modalities of the 1997 wage bill reduction. In addition, a program of information and consultation was launched in June 1996 in public enterprises to promote a better understanding of the need and rationale for the privatization program. Workers representatives and management from several concerned enterprises are also participating in the definition of privatization strategies. 47. A second risk is a possible shortfall in external financing for 1997-1998. For 1997, the financing gap is substantial, US$97 million, and it as yet unclear whether or not donors will be ready to fill it entirely. Some donors remain concerned over Niger's political situation and have made the resumption of their assistance programs conditional on positive developments in this area. A failure to close the financing gap would increase macroeconomic instability, thereby threatening the framework for carrying out sustainable reforms under the proposed credit. The Government is aware that mitigation of this risk is solely dependent on donors' assessment of developments in the political area.  - 16- 48. A third risk is that the relatively weak administrative capacity of the Government could lead to delays in the implementation of key measures. Similarly, because of recent changes in the Government, inter-ministerial coordination mechanisms are still being developed. These concerns are addressed through: (i) the design of the program which focuses on implementing a few key reforms; and (ii) the provision of considerable technical assistance under a Project Preparation Facility.4 49. In our assessment, the potential benefits of support to Niger in the form of the proposed credit outweigh the high level of risk. However fragile, the present situation offers the best prospects in the 1990s for addressing fundamental reform and development issues. The key benefit of the reform program will be a major contribution, along with the IMF ESAF, to stabilizing public finances and improving public sector efficiency, both of which are pre- conditions for sustainable economic development in Niger. The proposed credit will permit the Government to sustain implementation of the reform program and thereby gain the necessary momentum to help ensure its success. Without the quick-disbursing financing provided by the credit, the country's prospects for sustainable development would be considerably weakened. IV. BANK GROUP OPERATIONS IFC and MIGA 50. There is no existing IFC portfolio for Niger. IFC was recently briefed on the proposed privatization components of the credit and, although it is still early in the planning stages, it is expected to actively examine investment opportunities in privatized/restructured enterprises. Niger has yet to complete its MIGA membership requirements and is thus not yet eligible for MIGA coverage. However, the authorities have recognized the importance of MIGA membership for encouraging private sector development and have accelerated completion of the remaining requirements. V. COLLABORATION WITH IMF AND OTHER DONORS 51. Bank staff are working closely with the IMF and other donors in helping Niger design and implement its reform program, as well as in mobilizing quick-disbursing assistance and debt relief to finance it. IDA and the IMF collaborated with the Nigerien authorities on the preparation of the PFP, and in June 1996 the IMF approved an ESAF in an amount equivalent to SDR 57.96 million to support a three-year program. An IMF ESAF midterm review mission overlapped in November 1996 with the IDA preparatory mission for the proposed operation and played a key role in formulating the fiscal policy measures contained in the 1997 budget. 52. Bank staff have also closely collaborated with Niger's major donors, including those that have not fully resumed their assistance to the country. In this regard, staff from the European Union (EU) and the African Development Bank participated in IDA's preparatory mission and 4 For US$750,000 and is being used for the strengthening of the tax administration agencies, and design of the civil service reform and public enterprise privatization programs.  - 17- donors have been fully briefed on results of the appraisal mission. In addition, several bilateral donors (France, Germany and Denmark) are active in the water, electricity and telecoms sectors and have been closely coordinating with IDA's efforts under the proposed credit. VI. RECOMMENDATION 53. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association, and I recommend that the Executive Directors approve it. James D. Wolfensohn President by Gautam S. Kaji Attachments Washington, D.C. February 26, 1997   Annex A Niger Page 1 of 2 Latestsing year rcent' S. higher Unit of estimate SeJaran Low- income Indicator meara _ 1970-75 198045 1989.94 AWfea income grEup Priority Poverty Indicators POVERTY Upper poverty line local curr. Headcount index % of pop. .. Lower poverty line local curr. Headcount index % of pop. .. .. GNP per capita USS 230 220 230 500 390 1.670 SHORT TERM INCOME INDICATORS Unskilled urban wages local curr. .. .. Unskilled rural wages Rural terms of trade Consumer price index 1987=100 39 111 113 Lower income Food' Urban Rural SOCIAL INDICATORS Public expenditure on basic social services % of GDP .. .. Gross enrollment rtios Primary % school age pop. 20 26 29 71 105 104 Male 25 33 35 77 112 105 Female 14 18 21 64 98 101 Mortality Infant mortalty per thou. Iive births 166 146 120 92 58 36 Under 5 mortality .. .. 320 161 101 47 Immunization Measles % age group .. 16.0 24.0 51.4 86.2 77.4 DPT .. 5.0 18.0 53.5 89.1 82.0 Child malnutrition (under-5) . 49.4 38.28.2 Life expectancy Total year 39 42 46 52 63 67 Female advantage 3.1 3.2 4.6 3.5 2.4 6.4 Total fertility rate births per woman 7.2 7.5 7.4 5.9 3.3 2.7 Matemal mortality rate per 100,000 live births .. 519 593 Supplementary Poverty Indicators Expenditures on social security of toal gov't exp. .. 3.3 Social security coverage * econ. active pop. .. .. Access to safe water total % of pop. 27.0 48.8 59.4 Urban 36.0 48.0 100.0 Rural 26.0 49.0 52.0 Access to health care .. 48.0 30.0 Population growth rate GNP per capita growth rate Development diamondb (average annual, percent) 10+ (averap annual. percent) Life expectancy 4- 5. GNP Gross 2 -0 I per F- /primary L..............J capita enrollment 0 I I I ~~~~~~~~~~~-5 -2 1970-73 1980-85 1989.94 1970.75 198"-5 1989-94 Acs osf ae a Niger ' Niger - Low-income - Low-income a. See the technical note, p.387. b. The development diamond, based on four key indicators, shows the averge level of development in the country compared with its income group. See the introduction.  Annex A Niger Page 2 of 2 Most ran n/-# eVog Next Last singe >ar recent - Siib higher Unit of fhtla Sahan Low- income Indicator measure 1970-75 1980485 1989-94 Afiica income gswup Reources and Expenditures HUMAN RESOURCES Population (mre=1994) thousands 4,704 6,563 8,730 571,902 3.182,221 1,096,881 Age dependency ratio ratio 0.95 0.99 1.02 0.94 0.66 0.63 Urban % of pop. 10.6 16.2 22.4 30.6 28.3 55.9 Population growth rate annual % 2.8 3.3 3.4 2.8 1.7 1.3 Urban 6.9 7.1 6.7 4.9 3.2 2.7 Labor force thousands 2,439 3,236 4,238 254,250 1,590,533 488,647 Agriculture % of labor force 92 91 90 65 67 36 Industry 3 4 4 9 14 26 Female 45 44 44 41 39 40 Labor participation rates Total % of pop. 52 49 49 44 50 45 Female 23 22 21 37 41 36 NATURAL RESOURCES Area thou. sq. km 1,267.00 1.267.00 1,267.00 24,273.83 40,391.42 40,594.43 Density pop. per sq. km 3.71 5.18 6.66 22.90 77.44 26.66 Agricultural land % of land area 10.09 9.92 9.88 50.61 52.42 41.05 Change in agricultural land annual % 0.02 -1.68 0.00 0.01 0.16 -1.38 Agricultural land under irrigation % 0.14 0.24 0.53 0.86 17.84 11.40 Forests and woodland thou. sq. kn .. 25.20 24.20 5,323.14 7,632.00 5,969.25 Deforestation (net) % changs, 1980-90 .. .. 0.40 INCOME Household income Share of top 20% of households % of income .. .. 44 Share of bottom 40% of households ,. .. 19 Share of bottom 20% of households .. .. 7 EXPENDITURE Food % of GDP .. .. .. Staples Meat, fish, milk, cheese, eggs Cereal imports thou. metric tonnes 17 341 136 14,051 36,922 68,936 Food aid in cereals 73 221 26 5,079 8,516 5.771 Food production per capita 1987 =100 125 102 122 102 115 102 Fertilizer consumption kglha 0.1 0.3 0.1 5.3 58.5 46.3 Share of agriculture in GDP %ofGDP 50.3 36.8 38.5 19.5 27.6 14.0 Housing % of GDP .. .. .. Average household size persons per household .. .. 6.1 Urban .. .. 6.3 Fixed investment: housing % of GDP .. .. .. Fuel and power % of GDP .. .. .. Energy consumption per capita kg of oil equiv. 25 42 37 251 373 1,602 Households with electricity Urban % of households .. .. .. Rural Transport and communication % of GDP .. .. .. Fixed investment: transport equipment .. .. .. Total road length thou. km 7 18 11.. INVESTMENT IN HUMAN CAPITAL Health Population per physician persons 59,306 39,675 34,845 .. .. 3,064 Population per nurse 5,608 458 654 Populationperhospitalbed 1,974 .. .. 1,316 1,034 592 Oral rehydyration therapy (under-5) % of cases .. .. 17 37 38 Education Gross enrollment ratios Secondary % of school age pop. 2 5 7 24 48 63 Female 1 3 4 23 42 62 Pupil-teacher ratio: primary pupils per teacher 39 37 38 40 39 Pupil-teacher ratio: secondary 24 26 35 .. 20 Pupils reaching grade 4 % of cohort . 76 83 88 Repeater rate: primary % of total enroll 13 15 14 Illiteracy % of pop. (age 15+) .. 79 72 53 35 Female % of fem. (age 15+) .. 89 93 54 46 Newspaper circulation per thou. pop. 0 1 1 12 .. 236 World Bank International Economics Department. April 1996  Annex B Page lot 2 Niger: Key Economic Indicators Actual Est. Projections 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 National Accounts (% of GDP at current market prices) Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 35.3 37.5 38.8 38.5 42.9 .. .. .. Industry 16.1 16.6 17.9 17.9 14.5 .. .. .. Services 45.9 43.7 41.7 42.0 41.4 .. .. .. Import Duties and Taxes 2.7 2.2 1.6 1.7 1.2 .. .. .. Consumption 92.7 93.9 98.6 98.9 98.3 97.7 95.1 95.5 93.5 92.2 91.3 Gross Domestic Investment 11.4 7.8 5.8 5.7 10.4 7.5 9.0 13.1 13.5 14.2 14.9 Private Investment 7.3 2.5 2.3 1.9 3.8 2.1 5.0 5.0 5.2 6.1 6.9 Public Investment a/ 7.4 3.7 3.9 4.2 6.6 5.4 4.0 8.2 8.3 8.1 8.0 Changes in Stocks -3.3 1.6 -0.4 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Resource Balance -4.1 -1.7 -4.4 -4.7 -8.7 -5.3 -4.1 -8.6 -7.0 -6.4 -6.2 Exports of GNFS b/ 17.0 17.0 13.4 13.3 16.4 15.2 15.3 15.0 15.0 14.5 14.6 Imports of GNFS 21.1 18.7 17.9 18.0 25.1 20.5 19.4 23.6 22.0 20.9 20.8 Gross National Savings 1.7 5.8 -0.3 5.0 5.4 3.9 7.2 6.7 8.7 10.3 11.5 Gross Domestic Savings 7.3 6.1 1.4 1.1 1.7 2.3 4.9 4.5 6.5 7.8 8.7 Memorandum Items: Gross Domestic Product 2480.6 2327.5 2342.8 2220.4 1563.1 1881.9 2013.2 2165.2 2303.5 2463.7 2598.3 (US$m at current prices) Gross Domestic Product 323.6 294.3 286.9 263.1 179.3 209.0 216.4 225.3 232.0 240.2 245.3 Per Capita (US$) Public Finance (% of GDP at current market prices) Budgetary Revenue 10.3 8.5 8.2 7.3 6.0 7.2 7.7 9.8 10.7 10.9 11.2 Current Expenditure 13.3 11.1 12.6 12.8 12.5 11.8 8.6 9.9 10.0 9.9 9.6 Current Balance (- deficit) cl -3.0 -2.6 -4.4 -5.5 -6.4 -4.4 -1.2 0.0 0.4 1.0 1.6 Capital Expenditure 9.4 5.8 4.2 4.0 5.8 4.8 3.5 7.2 7.2 8.6 8.5 Overall Balance (commitment, excl grant -12.4 -8.4 -8.6 -9.5 -12.5 -9.2 -4.7 -8.0 -8.0 -7.6 -6.9 Real Annual Growth Rates Gross Domestic Product -1.3 2.5 -6.5 1.4 4.0 2.6 3.9 4.3 4.3 4.3 4.3 GDP per Capita -4.2 -0.7 -9.5 -1.9 0.7 -0.6 0.6 1.0 1.0 1.0 1.0 Monetary Indicators M2/GDP (%) 20.4 18.6 19.5 19.2 14.9 14.3 14.1 13.4 Growth of M2 (%) -4.1 -8.8 -1.0 0.1 6.7 3.8 8.0 7.5 Private Sector Credit Growth/ 1.0 1.0 0.7 0.7 1.4 0.9 1.0 1.0 Total Credit Growth a/ includes public enterprise investment b/ GNFS = goods and nonfactor services, including re-exports cl Revenue without grants less current expenditure and adjustments, less annexed budget and special accounts.  Annex B Page 2 of 2 Niger: Key Economic Indicators Actual Est. Projections 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Balance of Payments (US$m) Exports (GNFS) 420.5 395.6 314.7 296.4 257.0 285.9 308.6 325.0 345.8 358.5 379.1 Merchandise (FOB) 312.5 290.7 269.4 250.0 224.1 246.4 267.2 279.7 293.0 303.7 322.1 Imports (GNFS) 523.0 434.2 418.2 400.1 392.3 384.9 391.1 510.4 507.1 515.1 540.6 Merchandise (FOB) 337.5 280.8 266.3 257.7 243.9 240.6 232.8 328.5 332.7 345.4 365.0 Resource Balance a/ -102.5 -38.6 -103.5 -103.7 -135.3 -99.0 -82.5 -185.5 -161.4 -156.6 -161.6 Current Account Balance -261.1 -166.2 -170.0 -170.5 -212.2 -185.2 -159.1 -262.7 -237.7 -229.5 -228.9 MLT Private Capital (net) -12.1 0.0 0.0 0.0 0.0 4.0 0.0 0.0 0.0 0.0 0.0 MLT Public Capital (net) b/ 48.8 -20.2 28.7 -10.9 5.8 -14.8 7.3 15.8 9.0 7.4 -1.0 Other cl 225.9 178.7 154.1 170.9 199.4 195.0 151.8 258.0 255.4 237.7 233.7 Change in Reserves d/ 1.5 -7.8 12.8 -10.5 -7.0 -1.0 0.0 11.0 26.7 15.5 3.9 Memorandum Item Current Account (% of GDP) -10.5 -7.1 -7.3 -7.7 -13.6 -9.8 -7.9 -12.1 -10.3 -9.3 -8.8 Real Annual Growth Rates (1992 prices) Merchandise Exports -0.2 0.2 2.5 -4.7 2.0 5.8 10.4 3.6 1.4 1.5 2.2 Merchandise Imports 3.2 -19.2 -9.4 1.4 -6.8 -4.8 -6.3 41.1 -0.2 2.1 4.0 Price Indices (1992 =100) Export Price Index e/ 113.0 110.3 100.0 104.6 179.5 167.6 167.6 169.1 176.0 180.9 189.0 Import Price Index 102.5 103.3 100.0 103.0 203.9 189.8 199.5 199.3 203.6 208.4 213.1 Terms of Trade Index 110.3 106.8 100.0 101.6 88.0 88.3 84.0 84.8 86.4 86.8 88.7 Real Effective Exch Rate (1990=100) 100.0 87.5 84.8 82.8 55.1 61.1 63.1 GDP Deflator (%) -1.5 -2.5 1.1 -0.1 32.7 5.4 4.8 3.0 2.8 3.0 2.0 a/ Excludes official capital and current grants b/ Includes grants cd Includes debt relief, changes in arrears, short-term capital, and errors and omissions d/ Includes IMF e/ Reflects prices received including through forward sales, hence world price changes appear with a lag  Annex C Page I of I Niger: External Financing: Requirements and Sources (in millions of U.S. Dollars) Actual Est. Projections 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 A. External FinancingRequirements(1+2+3+4+5) 321.4 171.2 179.5 172.6 394.8 165.6 260.6 406.6 310.2 294.3 293.4 1. CurrentAccountBalance 261.1 166.2 170.0 170.5 212.2 185.2 159.1 262.7 234.7 229.3 229.1 2. Amortization 64.3 44.7 54.0 56.6 52.6 49.7 37.6 34.3 45.6 49.5 60.4 3. Change in Arrears -5.5 -31.9 -57.4 -43.9 119.8 -57.5 35.6 98.5 0.0 0.0 0.0 4. Change in Reserves (excl. IMF) 1.5 -19.1 3.4 -20.0 0.0 -24.1 16.3 -4.9 15.1 9.1 1.9 5. IMFRepurchases 0.0 11.3 9.4 9.5 10.3 12.2 11.9 16.0 14.9 6.4 1.9 B. FinancinR (6+7+8+9+10+11) 321.4 171.2 179.5 172.6 394.8 165.6 260.5 309.6 237.7 201.4 199.8 6. Grants 184.4 157.7 129.2 154.7 133.8 116.3 123.6 136.2 128.7 134.4 140.3 Project 110.2 94.3 69.1 69.6 57.3 59.5 48.1 96.2 100.9 105.9 111.0 Program 25.0 18.1 34.4 60.8 54.9 29.3 47.3 12.8 0.0 0.0 0.0 Other 49.2 45.4 25.7 24.3 21.6 27.5 28.2 27.2 27.8 28.6 29.3 7. Loans 113.1 24.5 82.7 45.7 58.4 34.9 28.2 104.7 54.6 56.9 59.4 Project 89.6 24.5 36.6 29.9 28.5 25.3 16.0 50.1 54.6 56.9 59.4 Adjustment 23.5 0.0 46.1 15.8 29.9 9.6 12.2 54.6 0.0 0.0 0.0 o/wWorldBank 0.0 0.0 0.0 . 0.0 25.0 9.6 10.6 27.8 0.0 0.0 0.0 8. IMF SAFIESAF 0.0 0.0 0.0 0.0 16.2 0.0 14.2 42.6 28.2 0.0 0.0 9. Debt Relief 1/ 118.6 34.0 5.3 9.1 189.7 3.4 75.8 26.2 26.2 10,0 0.0 Debt Relief Obtained 118.6 34.0 5.3 9.1 189.7 3.4 75.8 24.0 24.0 10,0 0.0 o/wdebtforgiven 0.0 3.9 5.3 0.0 26.7 3.4 55.1 17.5 17.5 9.0 0.0 10. Long-TermPrivateCapital 2/ -12.1 0.0 0.0 0.0 0.0 4.0 0.0 0.0 0.0 0.0 0.0 11. Net Short-term Capital 3/ -82.6 -45.0 -37.8 -36.9 -3.2 7.0 18.8 0.0 0.0 0.0 0.0 C. FinancinaGa (A-B) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 96.9 72.6 93.0 93.6 I/ Does not include moratoriurn interest of US$8 million for the period 1997-99. 2/ direct foreign investment 3/ including errors and omissions  Annex D Page 1 of 2 Status of Bank Group Operations in Niger IBRD Loans and IDA Credits in the Operations Portfolio Difference Original amount in USS millions between expected Project Loan or Fiscal and actual ID Credit No Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursements Number of Closed Loans/Credits 37 Active Loans NE-PE-1963 C18900 1988 GOVT OFNIGER SMALL RURAL OPERATION 9.30 1 35 084 NE-PE-1968 C21220 1990 GOVERNMENT OF NIGER AGRIC. RESEARCH 19.90 11 12 898 NE-PE-1993 C22090 1991 GOVERNMENT PUBLIC WKS&EMP 20.00 0.17 .6.17 NE-PE 1976 C23600 1992 GOVTOFNIGER POPULATION 17.60 8.70 302 NE-PE-1995 C23550 1992 GOVERNMENT AG. SERVICES 18.00 6.37 4.00 NE-PE 1980 C26180 1994 GOVT OF NIGER EDUCATION Ill - SECA 41 40 21 26 -8.38 NE-PE-1993 C22091 1995 GOVERNMENT PUBLIC WKS & EMP 1000 360 .624 NE-PE-1994 C27070 1995 GOVERNMENT PILOT PRIVATE IRRIG 6.80 6 13 3.70 NE-PE-1967 C27960 1996 GOVERNMENT OF NIGER NATURAL RES. MGMT 26 70 23 24 1.68 NE-PE-1999 C29150 1997 GOVERNMENT OF NIGER HEALTH 11 40.00 38.77 TOTAL 0.00 209.70 0.00 120 71 1 45 Active Loans Closed Loans Total Total disbursed (IBRD and IDA) 88.58 502.26 590.84 Of which repaid 0.00 24.78 24.78 Total now held by IBRD and IDA 209.70 443.67 653.37 Amount sold 0.00 3.15 3.15 Of which repaid 0.00 3.15 3.15 Total undisbursed 120 71 0 29 121 00 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Following the FY94 Annual Review of Portfolio Performance (ARPP), a letter-based system was introduced (1IS-highly satisfactory, S-satisfactory, U-unstatisfactory, HU=highly unsatisfactory), see Proposed Improwemeris it Projec d Portfolio Perf ormace RalifgA*ihodology(SecM94.901), August 23, 1994 Note: Disbursement data is updated at the end of the first week of the month.  Annex D Page 2 of 2 Niger - Statement of IFC Investments Committed and Disbursed Portfolio As of (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic There is no existing portfolio for this country. Approvals Pending Commitment Loan Equity Quasi Partic There are no approvals pending commitment for this country  Annex E Page I of I NIGER PUBLIC SECTOR ADJUSTMENT CREDIT SUPPLEMENTAL CREDIT DATA SHEET Timetable of Key Project Processing Events Time taken to prepare the project 5 months Project Prepared by: Government with the assistance of IDA staff Loan Committee: January 28, 1997 Appraisal: February 6-12, 1997 Negotiations: February 13-14, 1997 Board Presentation: March 20, 1997 Effectiveness Date: March 1997 Closing Date: March 31, 1998 This report is based on the findings of the World Bank mission which visited the Republic of Niger in February 1997 to assist the Government in the appraisal of the PSAC. Mission members included: Messrs./Mmes Bassani (Task Manager); Nignon (Acting Resident Representative); Gnandou (Economist); Daniel (Consultant); Vallee (Consultant); Tomieri (Consultant); Moumal (Staff Assistant). Additional contributors include: Messrs./Mmes Wabnitz (Counsel); Desclaux (Disbursement Officer); Nemethy (Private Sector Development Specialist); Mattila (Private Sector Development Specialist); and Abisourour (Research Assistant). Messrs. Ahlers and Humphreys are the Director and the Technical Manager, respectively, for the operation.  Annex F Page I of 18 Unofficial Translation REPUBLIC OF NIGER Niamey, February 14, 1997 OFFICE OF THE PRIME MINISTER The Prime Minister to No. 109/PM Mr. James D. Wolfensohn President of the World Bank 1818 HStreet, NW. Washington, D.C. 20433 Dear Mr. President, I am pleased to transmit herewith the Government of the Republic of Niger's letter of development policy. This letter, together with its policy matrix and attachments, summarizes the goals, strategies and policies which the Nigerien authorities intend to pursue to correct the main existing financial imbalances and to place the Nigerien economy on the path to sustainable growth with both bilateral and multilateral externalfinancial assistance. The different elements of this letter have been the subject of in-depth discussions withyour staff and have made it possible, on February 15, 1997, to conclude negotiations in Niamey for a Public Sector Adjustment Credit of US$30 million. Yours truly, /s/ AMADOUBOUBACAR CISSE [Seal of Office]  Annex F Page 2 of 18 LETTER OF DEVELOPMENT POLICY I. INTRODUCTION 1. The Government's economic program is based on the broad guidelines set forth in the Policy Framework Paper prepared by the Nigerien authorities during 1995 and agreed upon with the international lending agencies in June 1996. Background 2. Since 1989, Niger has undergone a series of political upheavals; the resulting governmeilt instability made it difficult to pursue the financial stabilization -and later structural adjustment- efforts undertaken since 1985 in order to soften the impact of the drop in export earnings which followed the slump in uranium prices. 3. After the Sovereign National Conference and a transition marked by financial and social difficulties, installation of the 3rd Republic ought to have paved the way for sustained adjustment efforts. However, completion of the programs launched by successive governments was thwarted by institutional bottlenecks, which culminated in 1996 in a constitutional reform marked by adoption of a presidential regime. The institutions envisaged by the new constitution, adopted by referendum on May 12, 1996, were put in place following the presidential election of July 7-8, 1996 and the legislative elections of November 27, 1996. 4. Niger's development policy for the 1980s had been designed with the expectation of continued high earnings from uranium exports. Major investment programs were undertaken according to this assumption; the indebtedness incurred for this purpose and the burdens it imposed created a serious drain on public finances just when they were being adversely affected by the steady decline in revenues from the uranium sector, by the growth of the informal sector, which goes largely untaxed, and by the drop in investments. 5. Moreover, the increasing irregularity of weather conditions hastened environmental degradation and made agricultural and livestock production more unreliable, just as population pressures were generating a constant increase in the demand for foodstuffs. 6. Finally, up until 1994, the appreciation of the CFA franc, especially in relation to the Nigerian naira, seriously undermined the competitiveness of an economy already vulnerable from the extreme weakness of national savings and investment, inadequate economic management, and inappropriate policies that were prompting an excessive expansion of the. informal sector. 7. The combined impact of all these factors during the period 1983-93 was a decline in real GDP averaging 0.5 percent a year, accompanied by a substantial increase in poverty. It is estimated that more than 60 percent of the population (5.3 million) live below the poverty line and lack access to basic water, education and health services. 8. By enhancing its competitiveness, the devaluation of the CFA franc on January 12, 1994 was meant to impart fresh momentum to Niger's economy on the basis of a program supported by a stand-by arrangement with the IMF and a World Bank Economic Recovery Credit.  Annex F Page 3 of 18 9. Despite a 4 percent increase in real GDP in 1994, the results of the program proved unsatisfactory because the public finance situation was beset by tax shortfalls (revenues, which had already declined from 11 to 7 percent of GDP between 1987 and 1993, fell to their all-time low, 6 percent, in 1994). 10. In 1995, a series of corrective measures, both administrative and technical, were taken in an effort to stabilize the economic and financial situation. These include: simplification of the tax system, strengthening of tax administration, and a broadening of the tax base. These succeeded in lowering the ratio of the wage bill to budgetary revenues from 91 percent in 1994 to 73 percent in 1995, while the GDP grew by about 3 percent. However, the pressure on prices remained considerable, with inflation running at 5 percent. Finally, the reduction in the cunent account deficit reflected mainly slow economic activity and persistently low level of imports. 11. Starting in March 1996, even before talks had concluded on an Enhanced Structural Adjustment Facility (ESAF) arrangement, the new government undertook to coordinate and broaden the actions undertaken earlier in the area of public finances, within the framework of an emergency program aimed at increasing government revenues, bringing the wage bill under control, and reducing domestic and external payments. 12. In December 1996, despite unfavorable conditions, notably foreign aid disbursements 60 percent lower than projected and a resulting low investment level (41 percent below projections), budgetary revenues were on target. Current expenditures were cut by about 14 percent, with the wage bill scaled back to 42 percent of budgetary revenue and domestic payments arrears lowered by CFAF 5.7 billion. GDP grew by an estimated 4 percent, while inflation fell to 5 percent. II. NIGER'S POTENTIAL NATIONALPROJECT, AND DEVELOPMENTSTRATEGY Niger's potential 13. Niger undoubtedly suffers from severe natural and human handicaps related to its growing aridity, fast growing population, and low levels of human development. It has the further disadvantage of being landlocked, which increases the cost of imported consumer goods and inputs and penalizes the export of heavy products. 14. On the other hand, the country contains sizable mineral resources that, apart from uranium, have not yet been fully identified. Cases in point are gold, which is already showing promise, and oil. 15. There are also substantial groundwater resources in much of the country; to some extent this compensates for the fact that its surface water is located in limited areas, whose potential production capacity in terms of farming and stock raising could be increased substantially. 16. Animal husbandry, which has traditionally been a key component of the national economy and ranks second in export revenues, is, like agriculture, beset by periodic droughts. However, the restructuring of this sector could considerably increase its productivity. 17. Finally, though landlocked, Niger's geographical location can also be seen as a major asset, with the development of the trans-Saharan link, when it comes to capitalizing on the expansion of trade flows  Annex F Page 4 of 18 between the Maghreb and Nigeria. It should also benefit from its natural role as a link between Nigeria and an UEMOA that is likely to be strengthened by economic integration. Growth and poverty reduction objectives 18. The Government intends to implement a program of economic policy reforms that will: * further stabilize public finances; * generate and sustain rapid and durable economic growth based on the encouragement of private sector initiatives, which, while reducing the role of government, will make it possible to enhance efficiency in the delivery of services and lower their cost, especially in the area of electricity, water and telecommunications; make an improvement in rural incomes through appropriate agricultural and food security policies the centerpiece of the fight against poverty; enhance the performance of government services, and in so doing contribute to the reduction of poverty, by giving priority to human resource developmentthrough: - higher enrollment rates in primary schools; - improved access to health services; and - better control of demographic growth with the aid of an adequate family planning policy; put safety nets and social programs in place to accompany the implementation of structural reforms, and cushion any adverse impact they may have on the most vulnerable social groups. Quantitative targets for the medium term 19. To consolidate the progress already made in stabilizing the economy, promote the development of an environment conducive to sustainable economic growth with a high labor intensity, and reduce poverty, the authorities' key macroeconomic goal as set forth in the medium-term Policy Framework Paper is to raise the real GDP growth rate to 4.3 percent over the period 1997-99 resulting in a real per capita income increase of 1 percent a year. 20. This development will need to be engineered while simultaneously curbing inflationary pressures and consolidating the competitiveness gains generated by the devaluation. Accordingly, the rate of inflation must not exceed 3 percent from 1997 onward. 21. Finally, the current account deficit (excluding grants) will be gradually scaled back to 10 percent of GDP by 1998. 22. The extent to which Niger has slipped in terms of the human development index, with 63 percent of Nigeriens (5.3 million persons) identified as poor, including 34 percent (2.8 million persons) classified as very poor, clearly makes poverty alleviation the focal point of its economic and social policies. 23. The strategy for addressing this issue was devised by the Government using a participatory approach in order to pinpoint the needs and expectations of the groups concerned. Because 91 percent of the poor are located in rural areas and make their living from farming and raising livestock, their incomes can be increased only if this sector is developed. Implementing the provisions of the Rural Code on a broad scale constitutes an important component of these efforts as it assures improved access  Annex F Page 5 of 18 to scarce arable land. The same is true of water management, the effort to achieve a sustainable environment, the organization of agro-pastoral production, and its sale within and outside Niger. Moreover, a large share of development projects will be reserved for operations with high labor intensities, patterned after those of NIGETIP (Public Works and Employment Project). 24. Achieving such economic growth and reducing poverty require both macroeconomic stabilization and the implementation of major reforms that were first initiated in 1990-91 and later suspended, in order to stimulate a response on the supply side, especially in the agricultural sector. Monetary and credit policy 25. Niger's monetary policy will continue to be consistent with the one defined at the regional level by the UEMOA authorities. 26. Within these regional guidelines, this policy will be aimed at achieving the national objectives in terms of growth, inflation reduction and balance of payments equilibrium. 27. Credit policy will aim at lowering government indebtedness to the banking system in step with improvements in the country's financial situation, in order to redirect financial resources toward the private sector. The authorities will also continue with their policy of rehabilitating existing financial institutions. III. THE PROGRAM OF PROPOSED ECONOMIC REFORMS 28. The program of proposed economic reforms is built around the following four objectives: to place public finances on a sound footing to restore the Government's ability to provide essential public services; to speed up and complete state divestiture from all production and distribution services; to concentrate government spending on development activities and poverty alleviation; to create an environment conducive to private sector growth. To place public finances on a sound footing and strengthen the state's capacity to provide essential services 29. The present deterioration in public finances is the result of a long-standing lack of budgetary discipline, a shrinking tax base due to reduced economic activity, and growing tax evasion not followed in timely fashion by a corresponding reduction in spending. 30. As a result, the Government's cash flow has shrunk steadily, causing arrears to build up in its payments to both its personnel and its domestic and external creditors, as well as serious disruptions in Treasury functions and a financial deterioration in the public and private enterprises that provide services. 31. Irregular and partial payment of wages and scholarships has led to repeated social tensions that seriously interfere with the regular functioning and the quality of essential public services, notably  Annex F Page 6 of 18 education and health. At the same time, cash shortages have thwarted the execution of many expenditures budgeted for the supplies and services needed to run government departments and maintain the country's infrastructure. However, since 1995, the authorities have been taking a number of measures designed to address these problems. 32. The authorities believe that rapidly restoring public finances to a sound footing is key to the success of any medium-term development program. Therefore, efforts will focus both on mobilizing resources and on strict control of expenditures and strengthening of the tax and budget administration. Revenue 33. The authorities already introduced a number of policy measures in 1994-96 designed to simplify the tax system and improve revenue mobilization. These included: (i) the unification of the three value- added tax (VAT) rates at 17 percent; (ii) the merging of the general income tax (Imp6t General sur le Revenu, IGR) and the schedular tax on wages and income (Imp6t Cedulaire sur les Traitements et Salaires, ICTS) into a single tax on wages and salaries (Imp6t Unique sur les Traitements et Salaires, IUTS); (iii) a comprehensive consolidation of all import levies into two taxes (customs duty and statistical tax), and a reduction in the number of rates to three (10, 15 and 35 percent); (iv) elimination of duties on non-uranium exports and unification of re-export duty rates at 10 percent; and (v) a reform of informal sector taxation through the introduction of a professional tax (patente synthetique) in lieu of all taxes collected previously (business tax, flat-rate profits tax, and flat-rate VAT). In addition, a pre- shipment import inspection system was introduced in October 1996. Future resource mobilization efforts will focus on further simplification of the tax system, strengthening the tax administration and broadening the tax base. Together, these measures should enable the tax to GDP ratio to increase from its present 7 percent to 10 percent. For 1997, a series of measures have recently been adopted by the Government to enhance resource mobilization. Foremost among these are: (i) the streamlining of taxation on petroleum products and improvements in yield through changes in the price structure; (ii) the use of a revised scale for the unified income tax on wages and salaries (IUTS); (iii) and a reduction in the maximum length of tax holidays for certain investors from the current 15 to 5 years, coupled with a tighter definition of the investment operations that qualify for such benefits. 34. The authorities will also seek to strengthen the system of real estate taxation by enforcing the property tax, harmonizing the real estate laws, and strengthening the cadastre services. These measures will be accompanied by a strengthening of the tax and customs departments and the introduction of a simplified, computerized system for identifying taxpayers, as well as increased training for staff in the tax administrations to reduce fraud and evasion. In this connection, budgetary allocations for the functioning of these departments have been raised by 74 percent in 1997. Efforts to harmonize customs and investment incentives within the UEMOA will also be pursued. A personnel redeployment program for the tax and customs departments is ongoing in order to bring the government closer to the taxpayer. 35. The Nigerien authorities are aware, however, that all efforts to mobilize resources will be limited unless economic growth is restored and, at the same time, a series of measures are taken to contain government spending. Expenditures 36. Efforts on the spending side will focus on reducing the share of the wage bill and scholarships and on increasing allocations to the priority areas of education, health and infrastructure maintenance.  Annex F Page 7 of 18 37. The most important recent measure taken by the Government in this area has been to reduce the wage bill (excluding the contribution to the FNR, the National Pension Fund) by 11 percent, from CFAF 49.7 billion in 1995 to CFAF 44.1 billion in 1997. This reduction will first be achieved through a cut in base salaries and fringe benefits. In this connection, a new salary scale was adopted by the Government in February 1997, which defines wage levels for each staff category and promotion criteria. These measures have been discussed with the labor unions. 38. Over the medium term, the wage bill will be kept within limits consistent with the availability of funds by strictly controlling the size of the civil service. For 1997, the authorities have decided to keep recruitment in line with retirements and in giving priority for new hires to the social sectors. Savings will also be made on scholarships (affecting both their amounts and the number of recipients and lowering the cost to the state from CFAF 4.5 to 3.6 billion), as well as from stringent control over other outlays. Control of government spending will also require that advance payments be authorized only for emergency expenditures of an unforeseeable and exceptional nature. 39. Reducing the wage bill and keeping it within affordable limits require the rationalization of the civil service and payroll system, with emphasis on the following components: (i) reform of compensation (salary scale, see para. 37) and promotion procedures; (ii) streamlining of procedures for deploying staff to the different departments and relocating human resources in line with set priorities; and (iii) rationalization of personnel management within the civil service with the establishment of a central personnel data base and definition of precise personnel evaluation and promotion procedures. A civil service census will be completed before May 31, 1997. 40. Savings on the wage bill and on transfers and subsidies will allow the reallocation of public expenditure to the social sectors. Thus, in the 1997 Budget allocations for equipment and supplies in the education and health sectors have been increased by 14 percent, from CFAF 4.6 to 5.3 billion and from CFAF 7.2 to 8.2 billion, respectively. A similar increase will occur in 1998 in comparison with 1997. A Public Expenditures Review with IDA assistance is expected to start in April 1997 in order to provide the authorities with an accurate estimate of financial requirements in these key sectors. The recommendations from this review will be reflected in the 1998 Budget. Moreover, appropriations for the road fund will increase from CFAF 2.6 billion in 1996 to CFAF 3.1 billion in 1997. Finally, in the 1997-99 Public Investment Program priority is being assigned to rural development, the social sectors, and labor-intensive activities. Settlement of arrears 41. The settlement of arrears is essential to redress public finances and is receiving priority attention from the Govermment. A plan has been prepared to settle in 1997 CFAF 19.2 billion of domestic arrears inventoried by the Treasury (see Annex 5), with arrears owed to the water, power and telephone utilities as the first priority. It is also committed to avoid the recurrence of new arrears and to make timely payments for services supplied to different government departments. An inventory is currently under way to identify other accounts payable in the expenditure pipeline and within the ministries responsible for payment. 42. In the case of external payment arrears, members of the Paris Club agreed to an overall reduction of CFAF 64.6 billion in debt service, including CFAF 36.1 billion for 1996 arrears and CFAF 28.2 billion for maturities falling due in 1997, 1998 and 1999. Negotiations are under way with other bilateral and multilateral creditors in order to secure debt rescheduling on similar terms.  Annex F Page 8 of 18 Public enterprises 43. The authorities believe that the State should divest itself as quickly as possible from the production, distribution and service delivery activities performed by public enterprises. It intends to concentrate on providing essential public services and maintaining major infrastructure works which cannot be carried out by the private sector and to create an environment conducive to private sector development in those productive activities, which it handles very effectively. 44. In this context, the Government has already defined an action program to liquidate unviable public enterprises and restructure and/or privatize others, starting with the water supply, power and telecommunications sectors. 45. For 1997, the Government has decided to place an emphasis on privatizing the 12 key enterprises listed in Decree 96-062 of October 22, 1996. The main objectives of the Government's program are: (i) to mobilize private investment financing to take over from the state and provide more effective service; (ii) to promote private sector development through the reduction in factor costs that privatization will bring about, in particular, of the major utilities; and (iii) to simply transfer to the private sector, which is better positioned to perform these functions, all state activities in directly productive and competitive sectors. 46. In this connection, on February 13, 1997 the Council of Ministers adopted the definitive privati- zation strategies and timetables for SNE (water supply), NIGELEC (power generation and distribution), SONIDEP (petroleum products import and storage), and SONITEL (telecommunications)(see Attachments 1-4). The options selected will enable the private sector to make the investments needed for the maintenance and sound operation of these enterprises, thereby assuring consumers of quality services at competitive prices. 47. In addition to these four large companies, the list of enterprises to be privatized contains other small and medium-sized companies. These are SNC, SPEHG, SONITEXTIL, OLANI, ABATTOIR, RINI, ONAHA and OFEDES, where the state will divest itself fully and transfer its equity to the private sector. 48. In November 1996, the authorities established a privatization agency to implement the State's divestiture program. This agency has been staffed with non-public sector personnel and investment advisors whose mandate is to act as contract negotiators with private sector investors. Creating a favorable climate for private sector development 49. Initial progress toward liberalizing the economy has been made in the context of programs supported by bilateral and multilateral agencies. Already in 1988, a Round Table organized on this issue recognized the dominant role which the private sector ought to play in the country's development. Support for private sector development 50. The Government has started revising the legal framework governing private activities. Thus, virtually all monopolies have been abolished, the third book of the Commercial Code has been adopted,  Annex F Page 9 of 18 as have a new Labor Code and its implementation decrees which bring more flexibility to the labor market, the state monopoly on mining freight was abolished, and a single foreign trade window opened. 51. These efforts to liberalize prices, trade, and legal and administrative procedures continue. For example, ONPPC's monopoly on drugs import has been abolished. Similarly, petroleum products can now be freely imported by any company with the requisite capacity. 52. The regulatory framework applicable to economic agents is gradually being liberalized as evidenced by the increasing flexibility of the labor market, the simplification of private sector taxation, the creation of conditions favoring the expansion of private education, the creation of a central purchasing agency by private pharmacists (under the new pharrnaceutical legislation), and the adoption of legis'ation supplementing the Rural Code providing improved access to scarce arable land. 53. Despite the progress made to date, the modern private sector today is still finding it hard to operate between a public sector that is being restructured and an expanding informal sector. The Government is, therefore, planning to continue its two-pronged effort to reform the public enterprises and promote the private sector. 54. A comprehensive program to develop the private sector is to be implemented shortly. It will provide new companies with the support they need to promote their initiatives, and will form part of the supply-side incentives designed to preserve the competitiveness gains which resulted from the January 1994 currency adjustment. Operations to help develop private initiatives will thus be included in the public investment program. Particular attention will be paid to studying the feasibility of the special trade zones that are intended to exploit Niger's strategic location vis-a-vis the Nigerian market. IV. FINANCIAL ASPECTS AND PROGRAM MANAGEMENT Financing needs 55. Despite its improved financial situation, Niger will still need substantial external financial assistance during the period 1997-99. Its overall financing needs are estimated at CFAF 530 billion. Aside from the external debt relief of CFAF 66 billion (including arrears) which it obtained from the Paris Club in December 1996, part of its financing needs will be met as follows: CFAF 255 billion from grants, CFAF 40 billion from the IMF's ESAF, and CFAF 130 billion from other loans. Over the period, there will still be a residual gap of CFAF 190 billion for which additional financing will need to be mobilized. Program management 56. This program will be implemented under the supervision of the Inter-ministerial Committee on Economic and Financial Reforms charged with monitoring the design and implementation of medium- term reform programs. The Committee is chaired by the Prime Minister and assisted by a technical group. 57. This Committee will prepare and submit to the World Bank a bimonthly economic report covering all the points listed in the attached matrix.  Annex F Page 10ofl8 ECONOMIC POLICY MATRIX Objective Measures taken Program measures Responsible authority and timetable 1. Public finances 1.1 Revenue - Simplify the tax system and - Unification of the three VAT rates at 17% - Enforce the property tax and the tax on rental Ministry of Finance broaden the tax base - Merging of the general income tax (IGR) and the income 1997 - Strengthen the tax and schedular tax on wages and income (ICTS) into a - Harmonize the real estate laws customs departments single tax on wages and salaries (IUTS) - Strengthen the cadastral services - Improve collection - Consolidation of all import levies into two taxes - Reduce the volume of exemptions procedures and provide the (customs duty and statistical tax), and a reduction in - Strengthen supervision over the system of collection services with the number of rates to three (10, 15 and 35%) exemptions and special conventions means of bringing coercive - Elimination of duties on non-uranium exports and Ministry of Trade action against tax defaulters unification of re-export duty rates at 10% 1997 - Increase budgetary revenue - Reform of informal sector taxation through from 7.3% of GDP in 1996 introduction of a single professional tax (patente to 9.8% in 1997 synthetique) encompassing all former taxes - Establishment of a pre-shipment import inspection system (October 1996) - 74% increase in budgetary allocations for tax and customs department operations in 1997 - Redeployment of tax and customs department staff - Streamlining of taxation on petroleum products through a change in the price structure - Application of revised grid for the unified income tax on wages and salaries - Reduce the maximum length of tax holidays for new investments from 15 to 5 years and restrict the number of qualifying investments eligible for such treatment  Annex F Page 11 of 18 Objective Measures taken Program measures Responsible authority and timetable 1.2 Expenditure - Reduce the share of the - Reduction of the wage bill from CFAF 49.7 billion - Keep the wage bill within limits compatible - Ministry of Finance wage bill and scholarships in in 1995 to CFAF 44.1 billion in 1997 through a with revenue growth, assigning priority to the - Ministry of the Civil total expenditure reduction in base salaries and benefits social sectors Service - Increase the share of non- - Adoption of a new salary scale - Continue to implement cuts in scholarships - Ministry of wage current expenditures - Cuts in scholarships (from 4.2 billion to 3.5 billion and subsidies Equipment for the basic social services, in 1997) and in transfers and subsidies - Exercise strict control over all public 1997 (education and health) and - 14% increase in allocations for non-wage current expenditure for the tax administration expenditure in the education and health sectors in - Revise the civil service regulations agencies 1997 - Carry out a civil service census - Rationalize the civil - Increase in allocations to the Road Fund from 2.6 - Apply a restrictive hiring policy service and payroll system billion in 1996 to 3.1 billion in 1997 - Introduction of a central computerized civil service (personnel and payroll) database - Increase non-wage expenditure in the health and education sectors in line with the recommendations of the Public Expenditure Review 1.3 Payment arrears - Restore the Government's - Adoption of a plan to reduce the domestic arrears on - Implement a settlement plan for 19.2 billion - Ministry of Finance credibility and solvency the Treasury's books at December 31, 1996 by 19.2 in 1997, and continue this operation in 1998 billion - Inventory of other accounts payable  Annex F Page 12 of 18 Objective Measures taken Program measures Responsible authority and timetable 2. Public Enterprises - Government divestiture to - Adoption of the ordinance establishing conditions - Ministry of Economic lessen the burden of for privatization and its implementing decree Reforms and nonviable public enterprises - Creation of a privatization agency to implement the Privatization on public finances privatization program - Bring to the point of sale OLANI, SNC, and - June, September, and - Reduce factor costs and - Adoption of a divestiture strategy and timetable for ABATTOIR October 1997, increase enterprise SNE, NIGELEC, SONIDEP, and SONITEL respectively competitiveness - Abolition of monopolies on imports of petroleum - Request bids for concession contract for - January 1998 - Increase private sector products and drugs NIGELEC activities - Liquidation of FIPMEN (Small and Medium-Size - Request bids for lease contract for SNE - January 1998 - Restructure enterprises Enterprise Promotion Fund) - Bring to the point of sale majority of shares - January 1998 remaining within the of SONITEL government portfolio - For SONIDEP, creation of a private company - July 1997 - Liquidate nonviable to manage storage facilities and adoption of enterprises regulatory framework for private imports of petroleum products - Bring to the point of sale SPEHG, - October 1997 SONITEXTIL, RINI, ONAHA, and OFEDES - Restructuring of 8 enterprises remaining in - 1997 the government portfolio: ORTN (Radio and Television Office), CPCT (Credit Agency), Credit du Niger, SONICHAR, SONUCI (Urban Planning and Real Estate Building Company), ONPPC, SNTN (National Transportation Company), CNUT (Council of Public Transportation Users) - Liquidation of 3 enterprises: ONT (National - 1997 Tourism Office), SONHOTEL (Hotel Management Company), and LABOCEL (Central Livestock Laboratory)  Annex F Page 13 of 18 Objective Measures taken Program measures Responsible authority and timetable 3. Legislative and regulatory framework - Create an environment - Revision of the Labor Code and its implementation conducive to private sector decrees development - Abolition of the monopoly on mining freight - Simplify the regulatory and - Adoption of Book 3 of the Commercial Code legislative framework (Contracts and bankruptcy laws) - Adoption of pharmaceutical legislation and abolition of the monopoly on drugs import - Legislation supplementing the Rural Code (decree regulating the development of rural natural resources, decree governing herders' access to grazing lands, decree governing organization, functions, and operations of institutions enforcing the guiding principles of the Rural Code)  Annex F Page 14 of 18 ATTACHMENT 1: PRIVATIZATION STRATEGY FOR NIGELEC I. The Govemment has adopted a strategy whereby NIGELEC will be managed under a concession awarded for the interconnected zones. Under this new arrangement, power generation, transmission, and distribution will remain integrated. Following are the basic principles of this strategy: (i) creation of a holding company possessing all of the sector's public assets, which will sell the electricity supplied by the National Electrical Power Agency (NEPA) to the concession-holder and plan and implement an investment and maintenance program for the secondary centers; (ii) an Electricity Fund will be established in order to maintain a uniform domestic tariff. This will take place on the basis of transparency of transfer (equalization) between interconnected areas and secondary zones. This Fund will also serve to finance investments; (iii) management of electricity transmission and distribution in the interconnected areas will be done under concession contracts awarded to the highest bidder. The concession-holder will be responsible for investments and maintenance in these interconnected areas; (iv) a contract for management of the secondary centers will be awarded by competition to a service company, preferably Nigerien, or set up by NIGELEC employees. 2. The authorities have agreed that the entire system be regulated by an institution govemed by the principles of autonomy and independence. Also, the Govemment is well aware that one of the key conditions for the successful achievement of the objectives of this reform (competitiveness of the energy sector) is linked to the efficiency of the current tariff system. Moreover, particular consideration will be given to the possibilities for exploitation of all other sources of electrification from which the rural areas might be able to benefit.  Annex F Page 15 of 18 ATTACHMENT 2: PRIVATIZATION STRATEGY FOR SONIDEP The Government has undertaken to privatize SONIDEP on the basis of the following modalities and procedures: Abolition of the fuel import monopoly subject to obtaining official authorization based on appropriate criteria (safety, etc.). Studies will start promptly in association with the stakeholders in this sector to establish explicit conditions regulating import activities. Creation of a private management company (without transfer of assets) to manage the storage facilities (both SONIDEP-owned and private), in which all approved importers and distributors would be required to participate. Storage in the depots managed by this company would be mandatory. Liberalization of petroleum product distribution subject to obtaining official authorization. A timetable of actions to implement the sector reform program has been adopted. The process will start in early February with the adoption by the Government of a communication laying down the broad lines of the plan for restructuring of the sector's downstream activities and of SONIDEP. This operation is scheduled for completion by mid-July 1997.  Annex F Page 16 of 18 ATTACHMENT 3: PRIVATIZATION STRATEGY FOR SNE 1. The program adopted by the Government for SNE combines the advantages of a lease and a concession contract. The basic objective of this reform is to ensure that the urban water supply subsector becomes financially autonomous and viable, capable of supplying the urban centers with drinking water of acceptable quality at minimum cost and in sufficient quantity. The successful accomplishment of this basic objective is conditional upon achievement of the following specific objectives: (i) improve the subsector's technical, commercial, and financial performance; (ii) increase access to drinking water; (iii) achieve financial autonomy for the subsector; and (iv) attract new investment into the sector to finance the rehabilitation and development of its infrastructure. 2. The Government undertakes to revise personnel size to match current needs and to revise the subsector's staff regulations. 3. The urban centers currently managed by SNE will be included in the reform program. 4. The tariff policy will be determined by the Government. The principle of a unified tariff grid for the whole country has been retained. A tariff study and tariff adjustments will be carried out before the reform is implemented. To guarantee the sector's financial equilibrium, the Government undertakes to periodically make the necessary tariff adjustments. Mechanisms will be established to perform periodic tariff revisions taking account of current inflation. 5. The Government undertakes to privatize the management of this subsector by January 1998 at the latest.  Annex F Page 17 of 18 ATTACHMENT 4: PRIVATIZATION STRATEGY FOR SONITEL 1. The Government has undertaken to reform the telecommunications sector through: (a) a merger of the companies providing domestic and international telephone services into SONITEL; (b) the grant of a long-term license to SONITEL, with a fixed-term exclusive monopoly on basic phone services; (c) liberalization of the telecommunications sector for other services, including the award through public competition of at least two cellular phone licenses; (d) creation of an autonomous regulatory agency; (e) sale of a minimum of 51% of shares in SONITEL to a strategic investor, followed by a sale of shares both on the Abidjan Stock Exchange and to employees; (f) elimination of all cross-subsidies during the four years of the monopoly; and (g) a hiring freeze at SONITEL and institution of an early retirement plan. 2. The objectives of this reform will include: (a) a substantial increase in the number of telephone lines; (b) improvement in service quality; (c) gradual extension of telephone line coverage nationwide, and cellular phone development; (d) reduction of international tariffs to match the regional average.  Annex F Page 18 of 18 ATTACHMENT 5: PLAN FOR THE SETTLEMENT OF DOMESTIC ARREARS 1. Within the framework of the structural adjustment program supported by the Enhanced Structural Adjustment Facility and concluded in 1996, the Government undertook to clear CFAF 26 billion of its arrears, comprising accounts payable prior to December 31, 1995. The accounts payable (1995) included in preparation of the settlement plan are those appearing at the end of the regular expenditure procedure which cannot be settled by the Treasury for lack of liquidity. Their total at December 31, 1996 was CFAF 19.184 billion. These accounts payable are owed to resident and non- resident private enterprises, public enterprises, associations and nongovernmental organizations, foreign enterprises and the foreign public sector, banks and financial institutions, the public sector (excluding the Treasury), international organizations, civil servants, and government scholarship-holders. 2. The largest portion of the amounts payable is owed to resident enterprises (CFAF 11.4 billion, of which 5.2 billion to the private sector subject to VAT; CFAF 3.3 billion to other private enterprises; 2.9 billion to public enterprises). Then come embassies and foreign services: 3.7 billion; non-resident enterprises: 1.8 billion; banks: 1 billion, and other creditors: 1.3 billion. 3. The Government has drawn up a plan to clear these domestic arrears, giving priority to the public enterprises, whose cash-flow situation has reached alarming proportions. Likewise, commitments to French hospitals must be rescheduled rapidly. Then come embassies and resident private enterprises. The authorities intend to settle 7 billion of accounts payable through an emergency plan which will leave a remainder of 12.9 billion on which the Government will not be able to make cash repayment in 1997. The Government proposes to deliver negotiable debt instruments to creditors in that category, although these may not be used to offset current tax or customs obligations. Such debt instruments may be converted into shares or assets or used in transactions. 4. The Government needs to keep a strict check on the regularity and volume of its spending and not effect any extrabudgetary expenditure. Expenditure authorization will be given without delay for settlement of the Government's current obligations: payment of wages, scholarships, transfers to autonomous agencies and local authorities. The other payments will be made by reasonable deadlines, observing all regular expenditure control procedures. The Government will have to make an effort to manage its consumption of goods and services, particularly in the areas of electricity, telephone, water, and transportation.   IMAGING Report No.: P 7074 NIR Type: PR