Niger - Economic and Financial Management Improvement Project

Document of The World Bank FOR OMCIAL USE ONLY Rlu,t N P-3657-NIR REPORT AND RECflNENDAT?I( OF THE PRESIDENr OF 7HE INrElRTIONAL DEVELOENT ASSOCIATION TO T-E EECUTIVE DIRECTORS A. . PROPOSED CREDIT OF SDR 1.0 HELLION TO TE REPUBLIC OF NIGER FOR AN ECMOMIC AND FINAIRIAL XANG-EEN IMPROVE4ENT PROJBCT Nay 17, 1984 This doumnt bm a resiited dktdb.lm, and my be used by repiien_t miy i the pIface of dmir Wcidl dud=es. ls utaeub my nt ntbzrwise be disdaesd without Wod BDak autmdzatia.  CURRENCY EQUIVALENTS Currency Unit CFA Franc (CFAZ) US$1.00 C= AF 430 ClAP 1,000 US$2.33 USS1.00 SDR 0.94 FISCAL TEAM Government of Niger = October 1 - September 30 A EIAONS AiD ACRONYNS iADETE? - Associatlon pour le D-eveloppement des Echanges en Technologie Economique et FInanci5re (Association for the Developuent of Technical Exchange in Economics and Finance) CCCE - Caisse Centrale pour La CooperatIon Economique (French Economic Cooperation Agency) CEO - Communau-te Economique de 1'Afrique de l'Ouest (Economic Commnunity of 'test Africa) ENA - Eco.e Nationale d'Administration (National Administration School) FAC - Fonds d'Aide et de Coop'ration (Fund 'or Aid and Cooperation) FED - Fonds Europeen de D6veloppement (Buropean DeveLopment Fund) FNI - Fonds National d'Investis3ement (National Investmeat Fund) PiU - Project Xanagement Unit UNDP - United Nations Development Project UIDTCD - United Nations Department for Technical Cooperation and Development USAID - United States Agency for International Development  REPUBLIC OF NIGER FOR OMCIAL USE ONLY ECONOMIC AND FINANCIAL MANAGEMENT IMPROVEMENT PROJECT Credit and Project Summary Borrower: Republic of Niger Beneficiary: Ministries of Plan, Finance, and Commerce and Transportation Amount: SDR 11.0 Million (US$11.7 million equivalent) Terms: Standard Project Description: The proposed five-year project will support: (a) economic and financial studies to define a short-term consolidation prcgram and a medium-term structural reform program for Niger; and (b) institutional development to improve the financial and economic planning and management capabilities of the Ministries of Plan and Finance, which will hare the prime responsibility for implementing these adjustment programs. Studies include: (a) a review of the public investment program, the public debt and the government financial situation; (b) a diagnostic study of the parastatal sector and follow-up studies to define rehabilitation programs for selected public enterpeises; and (c) macroeconomic and sectoral studies to define a structural adjustment program. Institutional-development assistance will: (a) strengthen the Statistical and the Public Investment Departments of the Ministry cf Plan, (b) establish a new Financial Planning Department and strengthen the Public Debt Depart- ment and the Fiscal Management Administration of the Ministry of Finance; and (c) provide training to improve staffing of key departments of the two ministries. Project Benefits Benefits expected from the project are two-fold. First, and Risks: the project will lead to further definition of a short-term financial stabilization program being supported by the IMF, and to a structural adjustment program aimed at leading the economy toward a more sustainable long-term economic growth path. Second, the project will improve the economic and finnnc-al management capabilities of key Government agencies. The project faces two basic risks: sustained government commitment to the project objectives and continued technical and financial assistance; and high staff turnover which might become a constraint an the implementation of the project. At present, government's long-term commitment is strong and will be supported by international cooperation. Training and special conditions included in the project will effectively reduce the second risk. This document has a restricted distribution and may be used by recipients only in the performan c of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs I/ Local Foreign Total I. Project Management Unit 36,000 470,000 506,000 II. Economic Studies 180,000 1,897,500 2,077,500 - Public Investment and Financial (87,500) (87,500) Situation study - Structural Adjustment studies (180,000) (1,560,000) (1,740,000) - Project Appraisal studies (250,000) (250,000) III. Institution-building 488,000 3,335,000 3,823,000 - Ministry cf Plan (204,000) (1,055,000) (1,259,000) - Ministry of Finance (284,000) (2,280,000) (2,564,000) IV. Training 120,000 665,000 785,000 V. Provisicn for Additional Studies and Technical Assistance 286,000 2,500,000 2,786,000 - Base Cost 1,110,000 8,867,500 9,977,500 - Phy3iCal Contingencies 55,000 443,500 498,500 - Price Contingencies 205,000 1,919,000 2,124,000 Tstal 1.370,000 11,230,000 12,600,000 Financial Plan Local Foreign Total IDA 470,000 11,230,000 11,700,000 Gcvernment 900,000 - 900,000 TOTAL 1,370,000 11,230,000 12,600,000 1/ Project costs are net of taxes.  - iii - Estimated Disbursement ----------------USS Killion-------- FP84/85 FY86 FY87 FY88 FY89 FY90 Annual 1.6 1/ 1.4 2.9 2.2 1.5 1.1 Cumulative - 4.0 6.9 9.1 10.6 11.7 Rate o' Return: l.A. Staff Appraisal Report: N.A. 1/ including US$1.0 million PPF advance.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF NIGER FOR AN ECONOMIC AND FINANCIAL MANAGEMENT IMPROVEMENT PROJECT 1. I submit the following report and recommendation on a proposed devel- opment credit for the equivalent of SDR 11.0 million (US$11.7 million equiva- lent) on standard IDA terms to the Republic of Niger to help finance a pro- posed Economic and Financial Management Improvement Project. PART I - THE ECONOMY 2. A report entitled -Economic Memorandum: Niger" (No. 11092-NIR) was distributed to the Executive Directors on May 13, 1976. An economic mission visited Niger in July 1983 in connection with an IMF Standby mission, and the main findings of the mission are incorporated in the following paragraphs. These findings were subsequently updated by a mission in December 1983. Annex I contains updated country data. Background 3. With its 1.27 million km2 of land, Niger is about 2.5 time_ the size of France. Niger is a landlocked country with its closest access to the sea about 600 km from its southern border. Nearly 90 percent of the total population is concentrated in a thin band along the southern border. Only 12 percent of the land is considered arable, and only 2.5 percent is actually under cultivation. Rainfall is limited (350-750 mm) and often irregular, and soil fertility is low and declining due to its intensive use. The total population was estimated at 5.7 million in 1982 and is growing at about 3.1 percent per annum. Per capita income was estimated at US$310 in 1982. Niger's social indicators are among the lowest in the world. Life expectancy at birth, which is only 43 years, is low even by African standards. The adult literacy rate is only 8 percent and the primary enrollment rate only 23 percent. 4. Niger belongs to the West African Monetary Union which provides its members with a common currency (the CFA Franc) fully convertible into French Francs. The full convertibility of the CFA Franc and the liberal foreign trade policies pursued by the Monetary Union members have kept the Nigerien economy very open in the past. This openness was further strengthened by the very strong trade links that have always existed between Niger and its neigh- bors, particularly Nigeria as both are members of ECOWAS. Another particularly important characteristic of the Monetary Union is the strong discipline imposed over monetary and fiscal policies of the member -ountries, in return for the guaranteed convertibility of the currency. As is generally the case in open economies, excessive credit expansion quickly leads to increased imports, balance of payments deficits, and a loss of foreign reserves. This being recognized by the Union member countries, their common Centra_Z Bank is empowered with strong controls over domestic credit ceilings.  5. Like other Sahelian economies, Niger's is dominated by subsistence agricultural activities with millet and sorghum accounting for 80 percent of the cultivated area. Livestock is also an important source of income for a large segment of the population and is one of the country's major export commodities. Despite its meager agricultural resource base, Niger has traditionally been self-sufficient in food production except during the Sahelian drought in the early 1970s. The discovery of large uranium deposits in the late sixties, and their subsequent development, propelled the mining sector into an important position in Niger's economy. The sector is nov the country's principal foreign exchange earner and an important source of government revenues. Economic Develcpment in the Seventies 6. During the past decade Niger went from a period of despair to a period of almost unlimited hope for the future. Between 1970 and 1975 Niger experienced one of the severest and 'Longest droughts of its history. Its livestock herd was decimated, and food production declined dramatically. At the height of the drougnt in 1974/75, Niger registered a food grain deficit of nearly one million tons. Real per capita GDP declined at an average annual rate of 0.5 percent during the first half of the decade. On the expenditure side, per capita consumption declined by 6 percent per annum although gross domestic investment grew at a modest annual rate of 3.2 percent with the help of increasing foreign aid. Uranium production and expert began in early 1971, but the impact of the sector on the national economy was only moderate in the first half of the seventies as prices were stable. 7. During the second half of the decade, Niger's fortune improved dramatically. More favorable climatic conditions alloyed an accelerated recovery of the agricultural sector. With intensive government programs the Nigerien livestock herd was rapidly reconstituted. Food production steadily increased and by 1979 Niger was once again self-sufficient and even managed to show a substantial surplus. Moreover, the uranium sector experienced a boom. By 1977, uranium exports accounted for 53 percent of total exports of goods and non-factor services, and that share increased to 70 percent at the end of the decade. As uranium prices and quantities exported increased rapidly, Niger's total export receipts from the sector increased from CFAF 12 billion in 1975 to CFAF 85 billion in 1979. The contribution of the sector to public revenues followed the same trend. The share of uranium in total government revenues increased steadily from 18 percent in 1975 to an all time high of 46 percent in 1979. Government uranium revenues grew from CFAF 4 billion to CFAF 25 billion in the same period. As a result of the good performance of the agriculture and mining sectors, real GDP grew at an average annual rate of 7.2 percent; per capita consumption grew at an annual rate of 4.5 percent and gross domestic investment at an average rate of 16.7 percent. 8. On balance, therefore, Niger's economic performance during the 1970s was very good, particularly by Sahelian standards. This was due in large part to the sound economic policies of the Government which encouraged a rational use of foreign aid and export earnings, and which limited pricing and other policy distortions that are common among other West African countries.  The Early Eighties and the Uranium Crisis 9. The decade of the eighties started with serious signs pointing to a long lasting crisis for the uranium sector. Between 1979 and 1982 real prices of uranium experts fe'll by more than 50%. Uranium export earnings stagnated at around CFAF 95 billion and government uranium revenues declined sharply from CFAF 25 billion in 1979 to CFAF 13 billion in 1982. During the same three years, agricultural production also deteriorated. Unfavorable climatic conditions forced Niger once again te supplement its food production by increasing quantities of grain imports. Food grain deficits in 1981, 1982 and 1983 reached about 100,000 tons per year. During 1983, in particular, the country experienced a serious drought. As a result of these developments, * real GDP stagnated in 1981 and 1982 and declined by nearly 3% in 1983. 10. Public Finance. Unfortunate1y the serious slowdown in economic activity was not followed by an equal slowdown in Niger's public expendi- tures. Tne lack cf clear signals from the uranium market experts left the Nigerien authorities uncertain about the future of the sector. Expecting a quick recovery of uranium prices, the Government continued to implement its ambiticus Five-Year Development Plan by increasingly relying on foreign borrowing tc finance public investment expenditures. It was not until 1982 that acticn was initiated to adjust to the reduced export and revenue prospects. 11. As the uranium boom came to an end in 1980, overall Government reve- nues stagnated in 1981 and 1982 at a level of CFAF 75 billion and even de- clined in 1983 tc CFAF 72 billion. Meanwhile, overall Government expenditures continued to grow rapidly, increasing from CFAF 124 billion in 1979 to CFAF 173 billion in 1982. This was not only the result of the Government's aggressive investment strategy but also due to the unsatisfactory financial performance cf the parastatal sector -which had expanded rapidly during the late 1970s. Poor management and frequently uneconomic government policies and regu'ations led tc large operating losses in many public enterprises, adding an additional burden to the government budget. The overall government deficit increased from CFAF 65 billion iz; 1979 to CFAF 103 billion in 1982, requiring progressively higher levels of borrowing which, in turn, created a severe public debt burden. Public debt service as a percentage of Government revenues increased from 2% in 1979 to 20% in 1982. 12. Balance of Payments and Debt. The heavy investments in equipment and infrastructure associated with the opening of a second uranium mine and the - implementation of a large public investment program resu'lted in increasing current account deficits for Niger's balance of payments, in particular after the uranium exports started to stagnate and agricu'ltural imports increased during 1980-82. The financing of this growing deficit forced the country to accumulate a heavy foreign debt which reached CFAF 296 billion in 1983. 13. Altheugh official development assistance to Niger more than doubled between 1977 and 1981, nearly 50% of its foreign debt was contracted on commer3ial terms. As a result, debt service payments increased dramatically from $9 million in 1977 to $180 million in 1983, equivalent to 11% and 46% of  the country's exports of goods and services, respectively. This ratio is expected to continue to increase rapidly during the next two years. Niger's Reaction to the Crisis 14. Faced with the rapid deterioration of the country's economic and financial situation, Niger's Head of State instructed his Government in 1982 to 'a) introduce urgent austerity measures in the 1982/83 budget and (b) prepare a consolidation program for 1983/84 and 1984/85 aimed at restoring balan-e to the financial situation of the public sector. Subsequently, in 1983, a number of changes in the Government's organizational structure were made which strengthened the Ministries of Plan and Finance and gave the Prime Ninister overall responsibility for the economic and financial management of the country. 15. A strict austerity program was implemented in 1982/83. Government wages and salaries were frozen at the level of the previous year. Some bene- fits provided to high school students were discontinued, and government purchases of goods and services were tightly controlled. Most importantly, public investment expenditures were reduced by 21% and a tighter control on foreign borrowing was imposed. As a result of these measures, the Government's overall deficit was stabilized at the previous year's level, despite a 33% increase in public debt service payments. The measures also had a favorable effect on the balance of payments by reducing the trade and current account deficits by 50% and 40%, respectively. however, Niger's economy remained depressed during 1983 due to the continuing sluggish performance of the uranium sector and the low level of agricultural production as a result of the severe drought. 16. During 1983, the Nigerien Gcvernment prepared, with the assistance of the World Bank, a two-year consolidation program for the period of 1983-85 to help the domestic economy adjust further to current financial constraints. The first phase of this program (1983/84), which is supported by an IMF Standby Arrangement of SDR 18 million and a CFF of SDR 12 million, calls for a 35% reduction in the overall government budgetary deficit and a further 25% reduc- tion in the current account deficit of the balance of payments. To achieve these objectives, the Government is committed to: (a) implement a fiscal reform program and improve tax collections; (b) limit the growth of current expenditures to 5%; (c) initiate measures to stabilize the financial situation of seven major public enterprises; (d) reduce public investment expenditures by nearly 40%; and (e) reschedule the public debt due in 1984. The Paris Club met in November 1983 and approved Niger's request for a rescheduling of its official debt. The Government is currently preparing for debt rescheduling negotiations with the country's private creditors later in 1984. 17. As for the second phase of the consolidation program, the Government is scheduled to start discussions on a new IMF program for 1984/85 in July. In addition, it has requested the assistance of the World Bank to formulate a medium-term program of structural reform to lay a sounder foundation for economic growth and development in the future.  -5- Structural Adjustment 18. The resources needed for the development of Niger -- human and financial, domestic and foreign, public and private -- are likely to remain severely constrained duri.ng the remainder of this decade and beyond. Major changes in domestic policies focused on increasing the efficiency with which these scarce resources are used are, therefore, critical if a significant turnaround in Niger's growth prospects is to be achieved. Broadly, this involves a reduction of distortions in the structure of economic incentives in the country as well as imprevement in the allocation of public resources. 19. The structure of prices in Niger is considerably less distorted than in many of its neighboring countries because of the relative openess of the economy. Prices of agricultural inputs and outputs, for example, are broadly in line with world markets as are energy prices. However, the overall incen- tives structure has favored a rapid expansion of the public sector to the detriment of private initiative. A large number of parastatals have been established to enable the Government to intervene directly in the domestic economy. But the efficiency of the public enterprises has generally been low. In agriculture, in particular, parastatal organizations have become both highly costly and inefficient in providing input supply services and marketing outlets to farmers so making greater private sector involvement necessary if the sector is to fulfill its leading role in the country's long-term development. Similar problems exist in other key sectors of the economy. A major reform of the parastatal sector, its policies, and its institutional framework is thus an important component of the structural adjustment program. 20. In addition, Niger's current industrial incentives system has considerable shortcomings. Industrial promotion policies, together with the trade regime, have favored activities which are not necessarily in line with the comparative advantage of the country and have resulted in an inefficient use of capital and only limited employment opportunities. Also, the allocation and administration of industrial incentives has, de facto, discriminated against small- and medium-scale industry development and have given the Government excessive control over private investment decisions. 21. In general, the Government will need to focus its scarce financial resources and administrative capacity on only a limited and selective set of production growth and poverty alleviation problems for which market forces alone would be insufficient. Moreover, much more efficient allocation of budgetary resources will need to be achieved througlh improved planning/ programming procedures to ensure that existing development projects are more fully utilized and maintained, and that new investments are only commenced when they are of the highest priority. Besides taxation, public resource mobilization must also be improved through the introduction of new cost recovery mechanisms. Finally, the Government will need to restructure its large accumulated debt, which threatens to jeopardize the country's future economic and social development. 22. The Government of Niger fully recognizes the need for a program of structural reform if the country is to have any hope of maintaining a minimum level of development momentum. However, the formulation and implementation of  - 6 - the necessary policy changes will take considerable time and will require high levels of external technical and financial assistance. The Economic and Financial Management Improvement Project, which is outlined in detail in Part IV of this report, constitutes a first step in this process. Besides the strengthening of country's public administration, the Project will assist the Government in defining a mvdium-tera adjustment program to complement its short-term stabilization efforts. Niger' s Future Development Prospects 23. Whereas structural adjustment is essential in Niger to permit the economy to realize its productive potenial, it is, in itself, not a sufficient condition to achieve sustainable long-term growth. A concerted development effort is required to reduce the country'a severe real resource constraints and expand the production base of the economy. Primarily, this will involve further development of the agricultural sector and, to a lesser extent, of the energy and mining sectors. It also requires the accelerated development of Niger's human resources in combination with an active program to slow population growth. 24. With the fundamental change in its economic outlook as a result of the downturn of the uranium sector, Niger will, once again, have to rely pri- marily on its limited agricultural resources for its economic development in the medium term. However, the future of its agriculture is uncertain. Past increases in production were achieved through more intensive use of better soils and greater use of marginal lands. Continuation of these practices would severely reduce soil fertility over time. The maintenance of food self- sufficiency in the eighties and beyond can only be achieved through gradual improvements in yields on lands that are already under cultivation. Given past low levels of investment in human resources and the limited state of the existing agricultural technology suited to Niger's conditions, the needed improvements will be very difficult to achieve without major and continuing support from the international community. Also, support for greater use of modern agricultural inputs, the development of small scale i-:igation schemes, and applied research will be crucial to the future development of Niger's agriculture. 25. Other development potential might exist in (non-uranium) mining and energy. Timited geological surveys and exploration have produced mixed results. An important coal deposit of apparently good quality was identified in