Madagascar - Emergency Economic Recovery Credit Project

Report No. PID11488 Project Name MADAGASCAR-Emergency Economic Recovery... Credit Region Africa Regional Office Sector Central government administration (100%) Project ID P080345 Borrower(s) GOVERNMENT OF MADAGASCAR Implementing Agency Address MINISTRY OF ECONOMY AND PLAN Contact Person: Mr. Modeste Raveloson Tel: +261-20-2232949 Fax: +261-20-2228508 Environment Category C Date PID Prepared October 8, 2002 Auth Appr/Negs Date October 3, 2002 Bank Approval Date November 14, 2002 1. Country and Sector Background From 1997 to 2001, Madagascar's growth rates were among the highest in Africa, with inflation declining to below 10 percent. Underpinning this high-growth and low-inflation developments were the prudent fiscal and monetary policies, accompanied by substantial external assistance, a program of structural reform, and accelerated inflows of foreign direct investment. However, at the beginning of 2002, Madagascar plunged into a deep political crisis. The crisis started following contested first round elections in this Indian Ocean country, which is the fourth largest island of the world and has a population of 16 million, on December 16, 2002. The two major candidates, the then-incumbent president Didier Ratsiraka and the mayor of the capital Antananarivo, Marc Ravalomanana disagreed on the outcome of the elections. Mediation attempts of the Organization of African States [now African Union] failed and the stand-off grew more and more fierce with large parts of the highlands isolated from the coastal areas through the destruction of bridges and road blocks. Two parallel Governments with two Central Banks were established, leading to a freezing of Madagascar's assets abroad, a suspension of foreign exchange trading and a closure of the treasury bond market for several months. Violent clashes were seldom but did claim several hundred lives.International recognition of the new Government of President Marc Ravalomanana in June and July 2002 ended the political crisis. Domestic and foreign support for Mr. Ravalomanana grew steadily during the political crisis and until the end of June, his supporters were able to capture all but one of the six provinces of the country in a peaceful way. Widespread international recognition, an unfreezing of Madagascar's foreign assets and control of the last province ended the political crisis in July. The economic embargo of the highland areas has ended, roads have been reopened, all ports have started to operate normally, and destroyed bridges are being rebuilt. Similarly, the foreign exchange market and the treasury bond market function normally now. Integrity of the public financial system has been re-established and key public services - at a standstill during  the crisis - are being restored.While the country finds itself in a deep socioeconomic crisis, there are signs of hope. First, Madagascar did not descend into military or ethnic conflict. Attacks against individuals' lives and their properties remained limited. Now the country stands united behind the new government. Second, the new government was voted into office on an anti-corruption platform. The government has already undertaken actions to attack corruption, including the preparation of a report examining the massive overspending of the presidential special funds and the creation of an anti-corruption task force at the presidency. Currently, the Government is preparing a decree that requires all public officials to regularly declare their assets. Third, after initial hesitation the international community has strongly supported the government's reconstruction and development program. 2. Objectives The World Bank proposes to make available US$ 40 million for an Emergency Economic Recovery Credit (EERC) to address urgent financing needs until mid-2003 which cannot be provided through other instruments. The EERC would provide quick-disbursing liquidity to assist Madagascar in rebuilding its social, economic and physical assets. 3. Rationale for Bank's Involvement The EERC would provide vital financial support for Madagascar's post-crisis recovery period. An EERC provides the most flexible and timely instrument to help mitigate the existing social crisis and support economic recovery. The main conditions to make this assistance effective, namely a united country and a committed government, are in place. The EERC would also present a critical test of the new government's commitment to manage public funds transparently and effectively. Early engagement in post-crisis situations is critical to help stabilize crisis-torn countries and avoid contagion of existing arrears problems. The World Bank is in the unique situation that it can respond very quickly because it was able to avoid suspension during the crisis. Under extremely difficult circumstances, the projects have continued to operate, already addressing some of the most urgent social needs. 4. Description The EERC would finance imports that the country needs for its short-term recovery program while at the same time supporting the government's reconstruction program. The counterpart funds of the credit would provide important budgetary funds to enable Government to implement its priority spending program. The EERC would provide complementary funding for those activities that cannot be financed through the existing Bank portfolio or through planned, new lending. This would for example apply to Government's new and extensive public works scheme to create short-term employment or to the waiver of fees for primary schools. 5. Financing Total ( US$m) BORROWER $0.00 IBRD IDA $40.00 Total Project Cost $40.00 6. Implementation -2-  The overall management and coordination of the EERC would be entrusted to a project implementation unit (PIU) set-up within the Ministry of Economy and Plan (MOEP). The PIU would be a lightweight structure including a national Coordinator, an accountant and procurement specialist who has been selected on a competitive basis, in conformity with the Bank/IDA procurement procedures. 7. Sustainability The project would provide short-term liquidity to the Government to assist in the financing of a priority recovery program that would otherwise go under-funded. It is expected that the budget planning exercise that is now under way for 2003 would return the country to a more stable environment in which budget gaps could be identified and mitigated in a timely fashion. 8. Lessons learned from past operations in the country/sector In designing this Emergency Credit, the team drew from experience of other post-conflict countries, particularly in Africa. For a general overview see Michailof, Serge, Kostner, Markus and Devictor, Xavier; "Post-Conflict Recovery in Africa. An Agenda for the Africa Region, Africa Region Working Paper Series, Number 30, April 2002. The team reviewed in particular the Comoros Emergency Economic Recovery Credit (August 2001), the Burundi Economic Recovery Credit (March 2000), the Rwanda Emergency Reintegration and Recovery Credit (October 1997), and OED-review of the Haiti Emergency Recovery Credit (Review: May 1997; Credit: May 1995). From these sources the following key lessons were incorporated in the formulation of this credit: (i) Early engagement is key to success. While there are risks associated with timely emergency operations, potential rewards would be higher, too. The EERC would therefore aim at supporting economic recovery already in 2002; (ii) Emergency post-conflict assistance should have a simple streamlined design. In the aftermath of crisis, liquidity needs to be injected rapidly to mitigate social and economic crisis. Complicated implementation arrangements would overburden an already weak administration and slow down the transfer of resources. The EERC therefore only contains a quick-disbursing component; and (iii) Emergency operations should complement other Bank and donor post-crisis assistance. The EERC effectively complements the suggested portfolio restructuring, which takes into account more complex investment needs after the crisis (for example second Private Sector Development and Microfinance projects) and new lending (Rural transport and mining). 9. Environment Aspects (including any public consultation) Issues : None; the project is classified as "C" 10. Contact Point: Task Team Leaders Susanne Holste The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: +261-20-2256000 Fax: 261-20-223338 -3-  Wolfgang Fengler The World Bank 1818 H Street, NW Washington, D.C 20433 Telephone: 202-458-0538 Fax: 202-473-8179 11. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending October 11, 2002. -4-