Mali - Economic memorandum

FILE COPY FJR- Report No. 1134a-MLI Economic Memorandum , ,, r on Mali N January 5, 1978 West Africa Region FOR OFFICIAL USE ONLY Document of the World Bank 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.  EXCHANGE RATES 1/ 2/ 1972 US$1 = 504.42 MF (US$1.98 million) 1973 US$1 = 445.40 MF (US$2.24 million) 1974 Us$1 = 480.99 MF (US$2.08 million) 1975 US$1 = 428.64 MF (US$2.33 million) 1976 US$1 = 477.96 MF (US$2.09 million) 1/ Period averages. 2/ Figures in parentheses are corresponding equivalents of 1 billion MF. FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PREFACE The preparatory work for this report started with an Economic Mission to Mali in January-February 1976. The mission was led by Mr. Pieter Bottelier and included Mr. Puran C. Joshi (economist), Mr. Geoffrey Shepherds (industrial economist), and Mr. Rolf Gusten (agricultural economist). The mission's draft reports on Mali's macro-economic situation and prospects and investment priorities and issues in manufacturing and agriculture were discussed with Government officials on several occasions in the course of 1976 and 1977. The draft reports were updated, partially revised in light of Government's comments, and consolidated in this volume following a brief economic mission to Mali in February 1977 by Mr. Puran C. Joshi, chief author of the main report. 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.   MALI ECONOMIC MEMORANDUM Table of Contents Page No. I. MAIN REPORT: PREFACE SUMMARY AND CONCLUSIONS .......................... i CHAPTER I. ECONOMIC DEVELOPMENTS SINCE 1972 ................. 1 - 18 CHAPTER II. MALI'S FIVE YEAR PLAN ..... ....................... 19 - 34 CHAPTER III. MEDIUM TERM PROJECTIONS .......................... 35 APPENDIX NOTE ON DRC .......... . .. . . . . ............................... . 39 - 41 STATISTICAL ANNEX II. ANNEX I: REVIEW OF AGRICULTURAL INVESTMENT PLANS I. AGRICULTURAL DEVELOPMENT OBJECTIVES OF THE FIVE YEAR PLAN 1 - II. PRODUCTION AND CONSUMPTION OF CEREALS 4 - 6 III. RESERVE STOCK 6 - 7 IV. PROJECTION OF DEMAND AND SUPPLY 8 9 V. PROSPECTS FOR CEREALS EXPORTS 10 - 1Z VI. ISSUES OF FUTURE FOOD PRODUCTION POLICY 13 - 15 STATISTICAL ANNEX III. ANNEX II: INVESTMENT ISSUES AND PRIORITIES IN MANUFACTURING I. THE DEVELOPMENT OF MANUFACTURING I - 7 II. THE INDUSTRIAL PLAN 1974-1978 8 - 25 STATISTICAL ANNEX  A  SUMMARY AND CONCLUSIONS 1. The Sahelian drought, the steep rise in import and energy prices in 1973 and continuing international inflation thereafter badly hit the economy of Mali. Even before the onset of the drought, Mali had been experiencing chronic balance of payments difficulties owing to high transport costs, excessive dependence on imports and reliance on a few primary products for most of exchange earnings. Also, in spite of comparatively modest government spending on capital development, fiscal pressures, generated by sizeable and growing expenditure on personnel as well as a relatively inela- stic tax base, gave rise to recurring budgetary deficits. International inflation and drought sharply aggravated the basic problems and weaknesses of the economy. The balance of payments deteriorated rapidly despite emergency food aid and increasing inflow of official grants. Attempts to shield the economy from the impact of international inflation, by setting controlled prices of essential consumer goods and inputs at relatively low levels, imposed heavy losses on state enterprises, which sought to restore their liquidity through increasing recourse to bank credit. The resulting rapid expansion of credit eventually fuelled internal price inflation and further strengthened the already severe pressures on the balance of payments gene- rated by drought-induced shortages and rising import prices. Budget defi- cits widened with rising prices, salary adjustments to cost of living inc- reases and the growing number on government payroll. Savings turned negative as aggregate consumption, and in 1974 even private consumption, exceeded GDP. By 1974, the resource gap widened to nearly a third of GDP. 2. Production levels recovered largely from the effects of the drought in 1975. Thanks to normal rainfall and measures taken to improve crop yields primary production increased by more than 20 percent and GDP by nearly 13 percent. Higher output, however, failed to stabilize the economy. Despite a sharp reduction in food imports the trade and services deficit recorded only a marginal improvement; and the overall balance of payments deficit widened considerably as the inflow of official grants declined with the phasing out of drought relief. Both private and public consumption declined, as a proportion of GDP, but not sufficiently to come down to the pre-drought levels. And although the resource gap narrowed, the economy still did not generate positive savings. Monetary expansion did slacken, partly because of the substantial balance of payments deficit; but, there was no abatement of price inflation. With rising prices, increasing public employment and inadequate growth of revenues the overall financial deficit of the government increased further to 10.2 billion MF, or almost 4 percent of GDP. 3. The economy continued to expand in 1976; real GDP increased by about 5 percent due to higher agricultural production--record cotton and groundnut crops were harvested--and further growth of manufacturing output. Unlike in 1975, however, output growth during the year was accompanied by a general overall improvement in the performance of the economy. The balance of payments registered a notable improvement, albeit largely due to an  - ii - exceptional combination of favorable developments. Exports went up by about 50 percent as the excellent cotton crop was sold at unusually high world market prices, while, following two good crop years, Mali re-emerged after many years as a net exporter of cereals. Imports, on the other hand fell slightly, partly because of stricter credit curbs. The overall balance of payments deficit, though much smaller than in 1975, remained, however, Quite large, both in absolute terms and in relation to the size of GDP (5.5 percent). And Mali's balance of payments continues to be vulnerable to fluctuations in agricultural production or international prices of its principal exports. The rate of credit expansion slowed down markedly, out- standing bank loans and advances to different sectors of the economy increas- ing at less than half the rate recorded in 1975. There was a further decline in the rate of growth of money supply; and inflationary pressures subsided considerably, prices rising only about half as fast as in the two preceding years. The resource gap narrowed again, aggregate consumption continued to decline relatively to GDP and the economy generated positive savings for the first time since the commencement of the drought. The growing deterioration in Government's finances was arrested; and, in spite of another sharp increase in expenditure on personnel the overall financial deficit is likely to be of much the same order as in 1975. 4. The general improvement in the economic situation is only partly attributable to favorable weather or world market conditions. It also reflects the steps that had been taken since 1974 to improve the functioning of the economy. Producer prices of cash and cereal crops were substantially raised in 1975, while consumer subsidies through administered prices were reduced by a series of price increases since 1974 affecting a large number of essential commodities. Stricter ceilings were imposed on credit expansion in 1976, and credit control measures were supplemented by a general rise in the structure of interest rates at the beginning of this year. A major tax collection effort raised Government revenues by about a fifth in 1976 which helped absorb a 33 percent increase in the salary bill and reverse the trend towards the relative decline in development expenditure. However, the improvement in the budgetary position is unlikely to be sustained without some restraint on the growth of public employment and better financial performance of state enterprises, which so far have not been able to add significantly to the national budget in the form of direct taxes or as contributions from net profits. 5. In spite of the resumption of growth since 1975 and the recent improvements in the general functioning of the economy, both budgetary and balance of payments deficits are still quite large. Greater control over aggregate domestic spending, through stricter fiscal and credit measures, to eliminate internal and external financial deficits, thus appears unavoid- able for ensuring viable growth in the future. For, excessive fiscal and balance of payments imbalances can, by generating severe resource constraints, abruptly slow down the pace of growth and development. Financial stabiliza- tion can be attained through an absolute reduction in private and Govern- ment consumption. But the budget and balance of payments deficits are too large to be corrected by any feasible reduction in aggregate consumption  - iii - over a two or three year period. A more practical strategy would be to aim at budgetary and balance of payments equilibrium over a longer period by restraining the growth of private and Government consumption through modification of public employment policy, stricter celings on credit expan- sion, elimination of the subsidy element in administered prices and improved management of state enterprises. But till such time as the economy is financially rehabilitated, external assistance would be required to finance budgetary and balance of payments deficits. As such, foreign budgetary aid that is being received as well as the compensatory balance of payments financing extended by France will provide the necessary flexibility in steering the economy to a viable financial position. 6. In 1974, Mali embarked on an ambitious Five-Year Economic and Social Development Plan which aims at meeting the basic needs of the popula- tion and correcting the structural weaknesses of the economy. The GDP target (of 269.3 billion MF in 1972 prices) set for the terminal year of the Plan, implies an annual average growth rate of 7.3 percent between 1972 and 1978. According to the most recent Government estimates, investment outlays required, including the portion to be incurred after the end of the Plan period, would amount to 800 billion MF (or approximately $1.63 billion). High priority is accorded to agriculture, water and power development, industries processing agricultural materials and road transport. 7. Progress towards the attainment of Plan output and investment targets have been much slower than had been projected. Except for crop production, output by the end of the Plan period is likely to fall con- siderably short of objectives; and real GDP so far has grown at an average annual rate of 3.6 percent. The implementation of the Plan investment program too has lagged far behind schedule owing to financial and other constraints, often resulting in delayed investment starts. By mid 1976, financing commitments had been secured for about 45 percent of the revised cost of the investment program, while actual investment outlays amounted to a little over 10 percent of it. The Plan investment program has been re- appraised, and is to be recast in the light of projects and investment starts considered to be feasible. The structure of investment priorities is likely to be reconsidered at the time of the preparation of the next Five Year Plan commencing in 1979, which will include a number of projects spilling over from the current Plan period. 8. Plan investment priorities, which broadly conform to resource endowment of the economy need to be modified in some important respects in order to eventually strengthen the balance of payments. Greater emphasis should be placed on the development of export crops and animal husbandry. The livestock sector is one of the most efficient earners of foreign exchange and this situation is likely to further improve with rising international meat prices and expanding export markets. With regard to food crop produc- tion the Plan seems to overemphasize irrigated rice development and not to pay enough attenti on to the promotion of millets, sorghum and maize. The shift in consumption patterns from traditional staples to rice is likely  - iv - to be slower than is projected; and as export prospects for rice too are not very encouraging, the rice production program should be carefully reviewed. 9. As regards the manufacturing sector, the Government's investment plans for cotton-seed oil extraction, textile manufacturing (for export), sugar production and some other projects with a high probability of economic efficiency deserve full support. Further expansion of groundnut oil extrac- tion capacity for export as also that of assembly from imported components, should be avoided; these activities, for reasons that are largely beyond Mali's control, tend to be net foreign exchange losers. The Plan does not pay enough attention to the potential for improvement in technical and economic performance of existing industries through relatively minor rehabi- litation and "balancing" investments. The maintenance of existing productive assets generally deserves greater emphasis in industry as well as in other sectors. Investment in large infrastructure projects, including Selingue dam, should be supplemented by more quick yielding small scale irrigation projects. There also appears to be a need to place greater emphasis on the development of human capital through improved health and education services.  - 1 - CHAPTER I Economic Developments since 1972 Production 1. The economy of Mali was severely disrupted by the recent Sahelian drought and the steep rise since 1973 in international prices. As a result of the sharp fall in agricultural and livestock production GDP recorded an absolute decline in 1973 and increased only marginally the following year. Drought induced production problems, rising import and oil prices and in- adequate adaptation of economic policies to scarcity conditions aggravated the existing structural imbalances. Consumption outlays exceeded GDP after 1972 and savings turned negative. As investment, and to some extent con- sumption as well, were maintained through increasing inflow of external assistance, the resource gap widened to reach almost a third of GDP in 1974. GDP increased at an exceptionally high rate in 1975, and there was further improvement in the performance of the economy during 1976. With the recovery of production levels from the effects of the drought, the resource gap was substantially reduced; and, for the first time in four years the economy generated positive savings in 1976. 2. Following three years of steady growth, GDP fell by 3.0 percent in 1973 because of the sudden drop in primary production, by nearly 18 percent. In the following year there was a further, though smaller, decline in the primary sector output; but C-DP increased by 0.7 percent owing to continued growth of the secondary and tertiary sectors. With the return to normal rainfall in 1975 there was a substantial rise in the production of cereals and export crops. Primary sector output went up by about 23 percent (still below the level attained in 1972) and GDP increased by nearly 13 percent in real terms. In 1976 primary production, even though it exceeded the pre-drought level, grew at a much slower rate. Real GDP too increased, although from a higher base than in 1975, by only about 5 percent. The effect of fluctuations in primary production on GDP growth was dampened by continued expansion of the secondary and tertiary sectors. However, secondary sector growth was somewhat more uneven; expansion of the sector slowed down sharply in 1974 as shortages of agricultural raw materials began to affect the output of processing industries, and again in 1976 as a result of capacity and demand constraints. The tertiary sector, which consists of Government services, transport, commerce and banking, continued to expand fairly steadily except for the fall in growth rate in 1976.  -2- Table 1: GDP and Sectoral Growth Rates, 1969-76 1969 1970 1971 1972 1973 1974 1975 1976 Primary Sector -3.6 7.8 2.2 1.5 -17.8 -6.9 22.7 7.6 Secondary Sector 1.4 10.6 2.4 13.6 14.8 4.7 9.9 3.4 Tertiary Sector 2.1 3.5 6.5 6.3 4.9 4.9 7.1 3.3 Gross Domestic Product -0.5 6.3 4.0 5.3 -3.0 0.7 12.7 4.8 Source: Recent Economic Developments in Mali, IBRD, September 1973; mission estimates from 1972 through 1975; IMF estimates for 1976. 3. The drought turned out to be catastrophic for animal husbandry. From an estimated 5.5 million heads in 1971 the cattle population fell to about 3.5 million heads by 1974. The reconstitution of the herd, inevitably a rather slow process, commenced in 1975; and by 1976 the cattle population increased to only about 3.9 million heads. The sheep and goat population, however, did not suffer much during the drought; their number had risen in 1976 to about the same as the in 1972. The catch of sweet water fish fell sharply during the drought years; it recovered by 1975 and in 1976 significantly exceeded the pre-drought level. 4. Both cereals and export crops were badly hit by drought. The output of millets and sorghum fell from 715,000 tons in 1972 to 624,000 tons in 1973, while paddy production declined from 157,000 tons to 116,000 tons. Cereal production recovered somewhat in 1974, but the harvested tonnage of the two main export crops, cotton and groundnuts, continued to decline. Cotton production in 1974 was only 55,000 tons (seed cotton) as compared to 74,000 tons in 1972. The groundnut crop in 1974 (100,000 tons) was about a third lower than in 1972. Thanks to normal rainfall agricultural production rebounded in 1975. The production of millets and sorghum rose to 800,000 tons, -W-4le paddy output nea-'- Aoubleda The phenomenal increase in paddy output occurred partly as a result of polder development in Segou, Mopti and Sikasso regions during the drought years, which greatly increased the cultivated area with the return to normal precipitation levels. The production of cotton and groundniuts also went up, by about 30 and 50 percent respectively. Yet, unlike cereals both cotton and groundnuts crops in 1975 fell short of the levels attained in 1972. Livestock sector output still suffered the effects of herd losses in drought years. Primary production as a whole in 1975 was about 7 percent lower than in 1972. 5. With continued favourable weather conditions paddy production increased further in 1976, while record cotton and groundnut crops were  harvested. Production of both cotton and groundnuts went up by about 50 percent to 106,000 and 227,000 tons respectively. This sharp increase, for the second year in succession, in the output of export crops is attributable to intensified development efforts undertaken by the "Operations", the agricultural support organizations responsible for implementation of produc- tion programs based on the extension of improved cultivation techniques, the use of fertilizers and dissemination of better seed varieties. Livestock production, however, did not increase much. But, for the first time primary sector production exceeded the pre-drought level. 6. The secondary sector expanded more rapidly since 1972 than other segments of the economy. Simple processing of agricultural materials, like rice milling, cotton ginning, oil seed crushing, and agro-based industries, such as textiles and sugar, account for about half of the secondary sector's contribution to GDP. As such, the performance of the secondary sector is partly determined by agricultural production trends. The output of cotton lint and textiles, vegetable oils and oil cakes declined in 1974 owing to bad harvests, but production of sugar, bicycles, motorcycles, cigarettes, water and power continued to expand. Power generation, in fact, became the leading sub-sector within the secondary group. Power production increased from 44.7 million Kwh in 1971 to an estimated 73.2 million Kwh in 1975, or by about 14 percent per year. Production of agro-based industries rose again in 1975 as raw material supplies increased. From 14.3 million square meters production of cotton fabrics went up to 24.4 million square meters in 1975. There were also significant increases in the production of bicycles, motorcycles, cement and cigarettes. A number of new industrial units went into production in 1976, including a second sugar refinery of 15,000 tons capacity. There was some improvement in the utilization of existing manu- facturing capacity as well. However, the rate of industrial growth during 1976 is estimated to have been lower as output of some important industries was constrained either by inadequate domestic demand or by capacity bottle- necks. Sales of textiles, soap and groundnut oil dropped markedly following substantial increases in the retail prices of these products. On the other hand, power and cement plants had already attained near full capacity working in 1975. Any significant increase in power generation and cement output, accordingly, will have to await the commissioning of the Selingue hydro- electric power station and the construction of a second cement plant or the expansion of the existing one. Other industries, which did not encounter demand or capacity constraints, fared much better S-gar pr d-uction dcutled while production of cotton lint, cigarettes, matches, bicycles and motor cycles is estimated to have recorded increases ranging from 25 to 77 percent. Savings and Investment 7. Between 1969 and 1971 private and Government consumption increased less than GDP and rate of domestic savings went up from 11.6 to 12.9 percent. Over the same period there was a slight fall in the rate of investment, and the resource gap narrowed from 6.2 to only 2.3 percent of Mr. Th- rate of savings, however, declined to 7.7 percent in 1972; and as the rate of investment increased marginally the resource gap widened to 8.0 percent. The  -4- changes in the composition of gross domestic expenditure that occured after 1972 show how seriously the resource balance of an economy, already having a sizeable trade and services deficit, can be upset by natural calamities and a sudden rise in import prices. Savings gave place to dissaving as con- sumption outlays increased to 101.2 and 118.2 percent of GDP in 1973 and 1974 as a result both of the sharp fall in agricultural production and unusually sharp rise in the prices of imported foodstuffs. The resource gap widened to 17.2 percent of GDP in 1973 and to as much as 31.9 percent of GDP in 1974. Table 2: Gross Domestic Expenditure, Savings and Resource Gap 1969 1970 1971 1972 1973 1974 1975 1976