Chad - Economic situation and priorities

Report No. 6785-CD Chad Econornic Situation and Priorities October 26,1987 Country Operations Sahelian Departnient Africa Regioni 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.  CURRENCY EQUIVALENTS -/ Currency Unit CFA Franc (CFAF) US$1.00 CFA 302 1/ CFAF 1 million US$3,311 CFAF/US$ (Annual Average) (End Period) 271.7 1981 287.4 328.6 1982 336.3 381.1 1983 417.4 437.0 1984 479.6 449.3 1985 378.1 346.3 1986 322.8 303.2 1987 (8 mo.) 302.3 MEASURES AND EQUIVALENTS 1 meter (m) - 39.37 inches (in) 1 square meter (m2) 10.9 square feet (sq ft) 1 kilometer (km) - 0.62 mile (mi) I hectare (ha) = 10,000 m 2 or 2.471 acres 1 acre - 4,047 m2 or 0.405 ha 1 kilogram (kg) = 2.2 pounds (lbs) 1 pound (lb) = 0.454 kg 1 ton (metric) = 2,205 lbs or 1,000 kgs 1 coro 1 1.7 to 2.3 kg FISCAL YEAR Government of Chad = January 1 - December 31 1/ Average for August, 1987. The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of rF 1 to CFAF 50. The French Franc is currently floating. An exchange rate of CFAF320 = US$1.00 is used for projection purposes in this report.  FOR OMCIL USE ONLY ACRONYMS AND ABBREVIATIONS ADB African Development Bank AEDES Association Europeenne pour le D4veloppement de la Sante ADF African Development Fund AICF Action Internationale contre la Falm BADEA Banque Arabe de D6veloppement des Etats d'Afrique BDEAC Banque de Developpement des Etats d'Afiique Centrale BdL Brasseries du Logone BDT Banque de Developpement du Tchad I3EAC Banque des Etats d'Afrique Centrale BELACD Bureau d'Etudes et de L i.son d'Actions Caritatives et de Dgveloppement BGT Boissons Gazeuses du Tchad BIAT Banque Internationale pour l'Afrique au Tchad BTCD Banque Tchadienne de Credit et de DAp8t CM Caisse Autonome d'Amortissement CCCE Caisse Centrale de Coopgration Economique CEPOD Centre d'Etude et de Formation pour le Developpement CFAF Franc de la Conmunaut6 Financigre Africaine CFDT Compagnie Francaise des Textiles CHACOT Chambre de Commerce du Tchad CILSS Comit6 Inter-Etat de Lutte contre la Secheresse au Sahel CNPS Caisse Nationale de Privoyance Sociale COTONTCHAD Soci6t6 Cotonni&re du Tchad CSPC Caisse de Stabilisation des Prix du Coton CTT Coop6rative des Transporteurs Tchadiens EDF. European Development Fund EIB European Investment Bank ENSPSS Ecole Nationale de Sante Publique et des Services Sociaux FAC Fonds d'Aide et de Cooperation FAO Food and Agricultural Organization FDAR Fonds de Dgveloppement et d'Actions Rurales FIPP Fonds d'Intervention des Produits Pgtroliers HIID Harvard Institute for International Development ICOR Incremental Capital Output Ratio ILO International Labor Organization IHAP International Human Assistance Programs INADES Institut Africain pour le Diveloppement Economique et Social INSE Institut National des Sciences de l'Education IRCT Institut de Recherche du Coton et des Textiles Exotiques LICROSS Ligue Internationale de la Croix Rouge MAS Ministere des Affaires Sociales MADR Minist4re de l'Agriculture et du D6veloppement Rural MAGAVET Magasin GUngral d'Approvisionnement en Produits et Matgriels Vft6rinaires MCT Manufacture des Cigarettes du Tchad MEHP Minist4re de 1'Elevage et de l'Hydraulique Pastorale This document has a retricted 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.  - ii - MIC Ministare de l'Industrie et du Commerce MSA Ministare de Is S6curitg Alimentaire et des Populations Sinistrees MSF Medecins Sans Frontieres MSP Ministere de la Sante Publique MTPHU Ministare des Travaux Publiques de l'Habitat et de l'Urbanisme MTPF Medium-Term Policy Framework NGO Non Governmental Organisation OFCA Office des Carri6res OFNAR Office National des Routes OMVSD Office de Mise en Valeur de Sategui-Deressia ONADEH Office National de Developpement de l'Horticulture ONC Office National de Cgr6ales ONG Organisation Non-gouvernementale ONDR Office National du D6veloppement Rural ONHPV Office National de l'Hydraulique Pastorale et Villageoise OPE Office for Program Execution OPIT Office de Promotion Industrielle du Tchad ORSTOM Office de Recherche Scientifique et Technique d'Outre-Mer ORT Organization for Rehabilitation and Training OXFAM Oxford Committee on Famine PEV Programme Elargi de Vaccination PHARMAT Centrale Pharmaceutique du Tchad PME Petites et Moyennes Entreprises SCET Societe de Conception d'Etudes Techniques SECADEV Secours Catholique au Developpement SEDES Societe d'Etudes pour le Developpement Economique et Social S.HT Societe Hoteliare du Tchad SIMAT Societe Industrielle de Materiel Agricole SME Small and Medium Size Entreprises SMIG Salaire Minimum Interentreprise GUngral SODELAC Societg de Developpement du Lac SONAPA Socigt6 Nationale de Production Animale SONASUT Sociftf Nationale Sucriere du Tchad SOTERA Socigte Tchadienne d'Exploitation des Ressources Animales STEE SociWte Tchadienne pour l'Eau et l'Electricite STT Societg Tchadienne de Textile UDEAC Union Douaniere des Etats d'Afrique Centrale VITA Volunteers in Technical Assistance  - iii - PREFACE This country economic memorandum is based on the findings of a mission which visited Chad in November 1986. The mission was composed of Mr. Bension Varon (mission chief), Mr. Philippe Annez, Mr. Alexander Marc, Mr. James Stevens, Ms. Ellen Goldstein, Ms. Anne-Laurence Dodge (consultant-education), and Ms. Oren Whyche (consultant-private sector). Ms. Rebecca De Bakey was responsible for laying out and processing the various drafts. The report draws on the analyses carried out by the Projects Divisions and the staff of the IMF over the last 18 months. It benefitted greatly from the effective cooperation A the Chadian authorities at all levels, as well as the major donors (bilateral and multilateral) and non-governmental organizations represented in Chad. The report was discussed with the Government in July 1987.  - fy - CHAD: ECONOMIC SITUATION AND PRIORITIES TABLE OF CONTENTS Page No. EXECUTIVE SUMMARY ................... .. ,.#**. ......... xii INTRODUCTION ............... ...... ?**#so .......**s xxv I. BA,CKGROUND..................*.# ...... .... 1 A. General Characteristics ... ......... ,. ...... *...... 1 B. The Economy Since Independence.... 3 1. The First Seventeen Years .. ............. . .....0,. 5 2. The Period 197b-35....,. . . . , . e .......* . *....*.. O 0.0 9 C. The Development Challenge a l l e n ge.10...... .... .............. 10 II. RECENT ECONOMIC DEVELOPMENTS ............................ ......, ,. 14 A. The Cotton Secoe....................... 14 B. The Public Sector .................... ............... 16 1. Overview of Revenues and Expenditures................... 16 2. Controlling the Fiscal Deficit ......................... 21 C. The External Sector.... ...- ....... . ... 24 1. Overview of the Balance of Paymentsy................ 24 2. Increasing Flows of External Assistance,g.........6tc... 26 3. The Burden of External Debt .................. ..... 29 D. Macroeconomic and Sectoral Growtho.... ..... ..,......... 30 E. Money and Credit. . . . . . , .. . . . . . . . . . ... . . ,. . . . ,. . 33 F. Government Actions to Rebuild the Economy ....... .......... 34 G. Donor Support Outook........................ , .......... 39 H. The Current Outok... t ....l ....ook...#*o 40  PaRe No. III. THE RURAL SECTOR .................... .. ..... .......... 42 A. Cotton: How Soon Can Profitabilit be Restored.?............ 42 1. The Rebabilitation Programm........ 42 2. The Improved Outlook of Cotton ........................ 44 3. Cost of Cotton Production at the Producer Level ........., 45 4. Costs at the COTONTCHAD Level......... . 47 5. Financial Projections ............. ............ O , . 48 6. Conclusion .......... 53 B, Food-Crops: Regional Food Self-Sufficiency or Food Securit? 55 1. Introduction ..........., 55 2. Regional Food Self-Sufficiency .................. 57 3. Minimizing Fluctuations in Production ...........,.... 64 4. Agricultural Credit and Institutional Constraints,,,,,,, 67 5. The Potential for Agricultural Diversification......... 68 C. Livestock: What Is Holding Up Development? ............... ,,, 69 2. Investment and Aid .... ...... ........,... ... . *, 70 3, Production Strategy ..................... , 71 4. The Institutional Environment .......................... 72 5. Water Resources Development ............................. 73 6. Export Constraints and Potential.............. 0*0**.. 73 D. Fishing: What Is the Potential?,........ 75 E. Environmental Concerns: The Need for Action ........,,...0,, 76 IV. INFRASTRUCTURE AND INDUSTRY ....................... 77 A. Transport: What Are the Main Priorities and Issues? ....... 77 1. The Transport Network 77 2. Traffic Volume .... ,, ..,. ** **,***...,,.,, 78 3. Transport Carriers and Institutions .................... 81 4 . Se c tor Issu es . .00*00**0#0. . 046es.#04. * . . $ * 8 2 B. Petroleum: What Changes willDomestic Production Bring?.... 84 1. The Sector at Present ... ......... ........ .. 84 2. The Sector Once Domestic Production Begins ............. 85  - vi - Page No. C. Electricity and Water: High Rates and Low Recovery ........ 86 D. The Urban Sector: How Is Chad Coping?...................... 88 E. Trade and Industry: The Constraints Facing Existing and New Enterprises............................ 90 1. The Experience of Chad's Major Industries ........,........ 91 2. Constraints for the Development of SMEs.........,........ 94 3. Creating an Appropriate National and Regional Environment 98 V. THE SOCIAL SECTORS .............................................. 100 A. Education: What Are the Priorities?......,................. 100 1. Background ........ ... ,.,., 101 2. Community Participation ................................ . 102 3. Teacher Training........ 0.................... ........,.. 103 4. Institutional Isus................................105 5. Long-Term Strategy.... 106 B. Health: Status and Efforts to Improve It. .......,.......... 106 1. Health Status.............,.. .,..,...,. .........,, ................... 106 2. Health Administration and the Institutional Framework .... 108 3. Defining Priorities in Health Care....................... 109 4. Personnel and Facilities for Health Care Delivery ........ 110 5. Financing Health Care................................... . 112 VI. DETERMINANTS OF FUTURE TRENDS. ................................. , 114 A. Political Climate .... o ............ o............. 0000000*6 114 B. Domestic Resource Constraints ................*...... . ....,.. O 115 1. Revenue Constraints ........................... 115 2. Implications ........... 117 C. Investment and Develoment Assisance..... .................. 119 D. Economic Management and Technical Assistance..... ,.....,0 .00. 129 1. Public Administration...... ........ ............. 130 2. Public Enterprises ... ..................... 130 3. Public Investment Programming ...o....o................ . 131  - vii - Page No. VII. PROSPECTS AND POLICIES ...................... , , , 133 A. Medium-Term Projections....... ...................... ........, 133 1. Base See n a r i o 133 2. Sensitivity Analysis,.............................., , 138 B. Medium-Term Policy Framework ........ 140 1. Objectives and Policies, .......................... 140 2. Prerequisites for Successful Implementation... t........... 142 C. Beyond the Medium-Term....... ........o ... o , ,o,0 .,..,...0 , ..0 . 143 1. A Complementary Agenda ......o.o..o.. ........... ,........,.. 143 2. Toward a Chadian Future .. *00000#0v 000* ... 0.0*9 145 ANNEXES 1. The World Cotton Situation and Outlook.............,,*... 149 2. NGO Activities in Transition........... 158 3. Policy Matrix, 197-98 7 - 90.. . 162 4. A Complementary Agenda. ............. 168 5 . Bibliography ............ 18 STATISTICAL APPENDIX .......... 182  - viii - LIST OF TEXT TABLES Table 1 - Central Government Consolidated Operations, 1983-86 ... 21 Table 2 - Balance of Payments, 1983-1986 ............. ....,..... 25 Table 3 - Debt and Debt Service, 1985-1986.,.....,.................. 30 Table 4 - Gross Domestic Product and Output by Sectors, 1983/1986..... 31 Table 5 - Investment, Savings, and consumption, 1985/1986 .... 60... .. 33 Table 6 - World Cotton Situation, 1984/1985-1986/1987...... 44 Table 7 - Profitability of Cotton Cultivation, 1986, CFAF.O.......... 46 Table 8 - Cotton Production Cost, 1983-1984o.9600... -.. .....,.... 48 Table 9 - Operating Deficit/Surplus of COTONTCHAD and Cotton Sub-Sector ......................... o .......... o ........... * 53 Table 10 - Food Crop Production, 1983-84 to 1986-1987.**#..*.*..*.. ...* 56 Table 11 - Cereals Prices in N'Djamena, 1983-1986.... o................ 59 Table 12 - Per Capital Cereals Production, by Zone, 1984-1986....1..986 60 Table 13 - Ownership of Manufacturing Industries.................0000 91 Table 14 - Volume Indices for Industrial Production..ducti......n....... 92 Table 15 - Health and Population Indicators.......... 00O..0.. .... . 107 Table 16 - Health Problems in 1985,,....,,..,............*.o... ,... 108 Table 17 - Health Personnel and Facilities, 1985.o .....,............ 111 Table 18 - External Aid: Estimated Disbursements by Sector and Objective ........,.,. , ... . . . . . ........... .. . ....... 123 Table 19 - Growth in Aggregate Output, 1986-1995.......*.*** .......... 135 Table 20 - Projected Merchandise Trade ... o *................ ...... 136 Table 21 - Projected Aid and Debt Service..,,,,,G..................... 137 Table 22 - Projected Balance of Payme atse .... ...........138  - ix - LIST OF CHARTS Page No. 1. Food Needs, Cereals Production and Livestock Herd, 1965-85...,. 7 2. Seed Cotton Production and Producer Price, 1960-8404..... 11 3. World Cotton Production, Consumption and Stocks, 1980-86....... 17 4. World Cotton Price, 1980-87 .............,............. e ....ev 19 5. Composition of External Assistance, 1985-87.,.............. 27 6. World Cotton Price, Short-Term Outstanding Debt to COTONTCHAD, and Net Foreign Assets of the Central Bank, 1984-86 984-. .8. . ....... .......... 35 7. Projected World Cotton Price and COTONTCHAD's Production Costs, 1986/87-1994/95.................... ................. 51 8. Aid Projects: Estimated Disbursements in 1987, by Type of Activity ................. .......................... 121 9. Aid Projects: Estimated Disbursements In 1987, Distribution by Geographic Location .......................... 127  COUNTRY DATA: CHAD AREA POPULATION DENSITY 1,284,000 sq km 6.12 million (mid-1988 est.) 4.0 por square km Rate of Growth: 2.4 POPULATION CHARACTERISTICS (1986) HEALTH (1986) Crude Blrth Rate (per 1,000) 44 Population per physician 38,482 Crude Death Rate (per 1,000) 21 Population per nursing person 3,441 Total Fortility Rate 6.7 Irfant Mortality R&z.e (per 1,000) */ 139 INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP Not available Not available ACCESS TO PIPED WATER ACCESS TO ELECTRICITY Not available Not available NUTRITION EDUCATION Not avellable Primary school enrollment % 38 CNP PER CAPITA in 1986: USS1I8 GROSS NATIONAL PRODUCT IN 1988 ANNUAL RATE OF GROWTH (X, constart prices) US$ MIn. % 1988 ________ ------- ---- GNP at Market Prices 811.0 100.0 -1.7 Gross Domestic Investment 87.0 10.7 72.3 Gross National Saving -106.2 -13.0 Current Account Balance -177.4 -21.9 Export of Goods, NFS 142.8 17.6 Import of Goods, NFS 379.6 48.8 OUTPUT, EMPLOYMENT AND PRODUCTIVITY IN 1988 ------------------------------------------- Value Added Labor Force b/ V.A. Per Worker US$ Min. X Min. X US I X Agriculture 880.0 48.8 2.4 83.0 158.3 54.4 Industry 147.0 17.9 0.1 6.0 1044.0 368.6 Services 293.0 36.7 0.3 12.0 887.1 297.8 Total/Averoge 820.0 100.0 2.8 100.0 291.2 100.0 GOVERNMENT FINANCE __________________ Contral Government ----------------------------------- (CFAF Bln.) X of GDP 1988 1988 1976 Current Receipts 16.8 6.9 14.3 Current Expendltures 24.8 8.6 16.1 Current Surplus -7.6 -2.7 -0.9 Capital Expenditures c/ 30.0 10.6 ---------------------------------------------------------------------__------__----------------------------- a/ Official figure. Health workers estimate actual IMR at around 200 per 1,000 live births. b/ 1980 estimates of size and distribution of labor force are merely Indicative, being based on 190 percentage estimates applied to 1986 population estimates. c/ 1986 capital expenditures were entirely foreign-financed and are estimated at around CfAF 30 billion.  - xi - COUNTRY DATA: CHAD MONEY, CREDIT and PRICES 1982 1983 1984 1986 1986 (millions of CFAF outstanding, end of period) Money Supply 84,849 42,889 87,769 71,898 72,918 Bank Credit to Public Sector 11,888 10,936 10,498 3,473 7,061 Bank Credit to Private Sector 29,991 32,465 45,930 84,960 76,004 (percentage or index numbers) Money as X of GDP 18.0 19.1 80.2 24.1 26.8 General Price Index (1977=100) 162.6 166.9 178.2 184.0 178.5 Annual percentage change in: General Price Index 8.9 8.8 7.4 3.3 -3.0 Bank Credit to Public Sector .. -7.8 -4.0 -68.9 103.3 Bank Credit to Private Sector .. 8.2 41.5 41.4 1656 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1984-86) 1988 1984 1986 1988 US$ Min X (millions of USS) Cotton fiber 61.3 67.9 Cattle 28.9 25.4 Exports of Goods, NFS 188.7 185.7 128.1 142.8 Textiles 6.0 4.8 Imports of Goods, NFS 203.9 226.1 347.2 379.8 Beer 0.2 0.2 Resource Gap (deficit=-) -67.2 -80.4 -224.1 -237.3 Other goods 12.6 11.8 Total 106.9 100.0 Interest Payments (not) -4.7 -3.7 -3.1 -3.8 Other Factor Payments (not) -1.6 -4.6 -2.3 -5.8 Not transfers 68.0 49.0 94.1 89.2 EXTERNAL DEBT, DECEMBER 81, 1986 Balance on Current Account -17.6 -19.6 -135.4 -177.3 -------------------------------- US$ MIn Direct Private Investment -1.1 7.3 58.7 83.3 --------- Official Capital Grants 81.2 27.6 4686 128.8 Public Debt, ncl. guaranteed 206.2 Net MLT Borrowing -1.8 -1.0 14.1 17.8 Non-guaranteed Private Debt Disbursement 2.5 8.9 19.8 28.9 Total outstanding and disbursed 206.2 Amortization 4.8 4.9 656 6.1 Other Capital (not) -2.8 6.2 -3.3 -18.4 NET DEBT SERVICE RATIO for 1986 Increase In Reserves (4) 8.6 19.S -24.3 -20.8 Gross Reserves (end year) 29.1 48.6 24.8 8.6 5--- Public Debt, lncl. guaranteed 1.6 Non-guaranteed Private Debt RATE OF EXCHANGE Total outstanding and disbursed 1.6 ________________ Annual Averages End Period IBRD/IDA LENDING, May 31, 1987 (Millions of USS) 1984 1985 1986 Aug. 1987 IBRD IDA Outstanding A Disbursed 0.0 68.1 US I 1.00 a CFAF 487.0 449.8 346.0 802.8 Undisbursed 0.0 58.7 C-A-F C.00 = US 8 0.0023 0.0022 0.0029 0.0098 Outstanding, lnl. Undisb. 0.0 116.8 ----------------------------------------------------- -------------__--------__---------------------------  CHAD ECONOMIC SITUATION AND PRIORITIES EXECUTIVE SUMMARY Background 1. Chad Is one of the world's poorest countries. Its economic development has been held back by a landlocked location and harsh and variable climatic conditions. At Independence (1960), the new nation found itself poorly prepared, even in comparison to other African countries, in terms of physical and social infrastructure, the level of education and health, and the role of nationals in the management of economic activity. Moreover, Independence was followed by internal and external conflict which has lasted until recently. 2. The Chadian economy nevertheless expanded at an annual rate of 2 percent in the 1960s. Climatic conditions were about normal for most of this period, and Chad was self-sufficient in cereals throughout the decade. The first half of the 1970s witnessed a multi-year drought which caused average GDP growth to fall to less than one percent a year. Real GDP shrank by about 30 percent during the 1979-82 war, reflecting the severity of the economic disruptions caused by the war. After the establishment of the current government in 1982, and with the progressive restoration of stability, the economy began to recover. A drought of unprecedented severity in 1984, followed quickly by a sharp decline in the world price of cotton, slowed this progress. 3. Chad has considerable development potential. It has proven to be self-sufficient in food during various periods in each of the last three decades, apd the possibilities for expanding agricultural output are significant and real. Although only 15 percent of the land is arable, the country is so large that this represents nearly ten times the currently cultivated area. There is also significant potential for irrigation. In addition, Chad has substantial petroleum resources which can potentially satisfy nearly all domestic demand. Chad truly has the potentisl to make significant progress. In spite of exceptionally valiant efforts on the part of the people and their leaders, it has hitherto simply lacked a reasonable chance to realize this potential. Recent Developments 4. In 1985 and 1986, Chadians were forced to grapple with an economic crisis of unprecedented magnitude resulting from the collapse of the world market price for cotton. The price of a representative variety of cotton (Middling 1-3/32 inch) fell from a peak of US$1.96/kg in mid-1984 to US$0.83/kg in mid-1986. Depreciation of the US dollar in 1986 exacerbated the decline in the sale price in CFAF terms. Moreover, the price decline coincided with a sharp increase in the production expenditures of COTONTCHAD (the mixed capital enterprise which processes and markets all of the Chadian crop), caused by poor financial and administrative management. As a result, the company sustained huge losses and accumulated arrears to the domestic banking system totaling CFAF 43 billion. Despite the downturn in the cotton industry, Chad's remarkable rebound from the drought -- cereals production more than doubled -- allowed  - xiii - GDP to grow by nearly 30 percent in 1985. GDP growth was reversed in 1986 as the effects of the cotton crisis were felt. They were, however, mitigated by another excellent cereals harvest and continued reconstitution of the livestock herd. The real decline in GDP was held to 2 percent, while nominal GDP dropped by 5 percent as a result of an estimated 3 percent decline in prices. This deflation reflects the sharp drop in cereal prices, as well as the negative effects of the cotton crisis on demand in the economy. 5. The Government and the donors responded to the cotton crisis swiftly by implementing an "emergency program" to support the cotton industry through a period of adjustment. The program comprises a number of measures affecting producers, COTONTCHAD and the Government; they include the phased elimination of input subsidies, the freezing of the producer price, the closing down of redundant ginneries and purchasing centers, reduction of COTONTCHAD staff, and suspension of export taxes paid by COTONTCHAD, Most of the program has already been implemented. Moreover, the regional central bank, BEAC, has undertsken to reschedule COTONTCHAD's domestic debt over a period of 10 years with 5 years grace and a two-year moratorium on the payment of interest. 6. The loss of export taxes on cotton is estimated to have contributed to a decline of more than 20 percent in government revenues in 1986. The decline would have been even greater but for new taxes introduced during the year. The Government also implemented austerity measures which succeeded in reducing current expenditures, already at a critically low level, by 3 percent in nominal terms. The budget deficit is nevertheless estimated to have increased from CFAF 3.8 billion in 1985 (on a commitment basis) to CFAF 7.5 billion in 1986, or from 1.3 percent of GDP to 2.6 percent. The deficit was financed largely through budgetary aid. In the absence of cotton revenues, the avenues open to the Government for reducing the fiscal deficit are to trim expenditures or to generate additional revenues through improvements in the fiscal system and tax administration. There is little room to maneuver on the expenditure side, because revenues are insufficient to cover even the most basic expenditures. Public investment, estimated at 10-12 percent of GDP, is entirely financed through external assistance, as is a significant portion of the associated recurrent costs. Most civil service salary payments are equivalent to 60 percent of their 1967 level in nominal terms. And the Central Government does not subsidize the parapublic sector in any way, barring the possibility of compressing government expenditures in this area. 7. Chad's external current account deficit, which had been modest in 1983 and 1984 rose to CFAF 60 billion, equivalent to about 25 percent of GDP, in 1985. In 1986, the deficit equaled that of the previous year but disbursements of capital grants more than doubled. The focus of aid also changed -- from emergency food aid to development assistance. Budget support has also increased in response to the impact of th3 cotton crisis on public finances. In 1987, disbursements are estimated to reach CFAF 77 billion (US$240 million) -- a 50 percent increase over the 1985 level -- raising per capita aid from about US$23 to US$48 over a period of two years. This would boost Chad above the per capita average for low-income Sub-Saharan Africa, but it is still quite low for a country as poor as Chad, with such critical post-war reconstruction needs.  - xiv - 8. Chad's actual debt service ratio in 1985 and 1986 was quite low at about 5 percent. Payments did not, however, fully cover the debt service due, and arrears were accumulated in both years. By end-1986, arrears amounted to about US$80 million, Scheduled debt service is on the order of US$10-13 million in 1987-89, or approximately twice what the Government has been able to pay in recent years. Although the debt service ratio (5-7 percent) is low by most standards, it represents a heavy financial burden for the Chadian economy; the debt service due in 1987 amounts to about 15 percent of expected government revenues for the year. Current Situation 9. The Chadian economy has, in many respects, recovered from the devastation of the war. Rapid growth, from an exceedingly low base in 1982, has brought many economic indicators back to pre-war levels. The cotton crop has been quite variable but well within the production range of the past several decades. At the same time, in years of adequate rains, foodcrop production has achieved or surpassed pre-1977 levels, with minimal inputs. Althougl' manufacturing suffered a setback in 1986, all the major industrles have the capacity to produce at or above 1977 levels and have done so in the 1984-85 period. Overall, real GDP has risen to nearly its 1977 level, although it must be shared among an estimated one million more people. Most striking is the limited expansion of the public sector, which has remained, in real terms, much smaller than In previous decades. 10. There are many non-quantifiable aspects of recovery as well, including an atmosphere of dynamism and growth in the informal sector, where Chadians have been exploring ways to fill the gaps in their economy. The number of formal sector, small- and medium-scale enterprises may have declined compared to the 1970s, but more may be owned by Chadians, rather than expatriates. The overwhelming impression is that Chadian entrepreneurs have a wealth of ideas and a dynamic entrepreneurial spirit, but there is a severe shortage of capital and the technical skills needed to turn these ideas into reality. 11. Having recouped many of the losses to the economy in the years following the war, Chad is now moving beyond a period of ->latively "easy" growth associated with immediate reconstruction efforts. The task is now more difficult, especially when the traditional "engine of growth" -- the cotton sector -- is unable to fulfill its former role. The paiallel difficulties of restructuring the cotton sector and defining an appropriate plan for economic development and diversification will limit real growth in the short-run. Similarly, the risk of recurring drought or a resumption of the conflict in the North casts a shadow over prospects for growth. However, the outlook for 1987 and 1988 has several encouraging aspects. First, the world price for cotton is recovering more rapidly than anticipated: it more than doubled in nominal terms from June 1986 to June 1987. Second, incentives for livestock marketing and export will improve with the resumption of exports to Nigeria, which were interrupted in late 1986/early 1987. In general, trade relations with Nigeria should improve as a result of recent bilateral discussions, Third, and finally, donor support is increasing, particularly aid for investment. This will allow Chad to lay the necessary foundation over the next few years for modest but sustained growth.  xv - Sectoral Constraints and Priorities 12. Cotton, Cost estimates and financial projections used in this report, indicate that cotton remains a viable crop over the medium- and long-term in Chad. However, this viability is contingent on implementing the reforms defined in the Emergency Cotton Program. Indeed, efforts to improve COTONTCHAD's efficiency must be reinforced. Furthermore, given Chad's over-dependence on cotton, economic diversification must remain a high priority, regardless of the prospects for the world cotton market. Also, policies should be developed to make the volume produced and the price paid for seed cotton more responsive to world market conditions. At the same time, mechanisms and systems must be strengthened to prevent a reoccurrence of the poor financial management and excessive expenditures which inflated COTONTCHAD's production costs beyond profitable levels -- even if world market prices had not collapsed. 13. These concerns will be the focus of the next phase of the rehabilitation program for the cotton sub-sector. A number of flexible solutions are being considered, some of which have recently been adopted by neighboring cotton-producing countries. These might include, not exclusively: (a) differentiating producer prices by region, to favor production in more profitable areas and minimize COTONTCHAD's pre-processing transport costs; and (b) indexing producer prices for seed cotton to world cotton prices, to increase supply responsiveness to market conditions, or partial indexing to mitigate the risk to producers associated with fluctuating prices. 14. COTONTCHAD's profitability and competitiveness on the international market will depend on government actions in certain other sectors as well. In particular, government investments in the road network, transport policies, and transport arrangements with neighboring countries will significantly affect the FOB price of Chad's cotton fiber. In the course of supervisory meetings for the on-going Emergency Program -- and assisted by several consultants' studies of the sub-sector -- the Government, COTONTCHAD, and the donor community have begun to shape the second phase of the cotton program, although more profound discussion is now needed to define the necessary policy reforms and formulate a precise action program. 15. Fooderops. The 1984/85 drought, which produced a serious national cereals deficit, also underlined a chronic problem in Chad: the regions of the Sahelian zone are generally cereal-deficit regions, while those in the Sudanian zone are self-sufficient or in surplus. However, inter-regional marketing is underdeveloped in Chad, constrained, in large part, by communication and transport problems. Therefore, in defining its strategy for foodcrop production, the Government must address two key issues which are interrelated: (i) minimizing production fluctuations and increasing output at a rate which maintains cereals self-sufficiency; and (ii) encouraging marketing, and especially inter-regional transfers, to alleviate regional supply/demand disequilibria. To define an appropriate strategy, the Government needs, first, to clarify its overall goal with respect to food production and food security.  - xvi - 16. The Covernment's 1985-88 Interim Plan established regional food self-sufficiency as a p-riuirity objective. (iven the current isolation of some of Chad's regions, the idea of self-suifficiencv on a regional basis is an attractive one. However, it may he unattainable, or attainable at too high a cost, making Inefficient use of scarce investment resources. There is certainly a value inherent in assuring a degree of regional self-sufficiency, and it justifies exploration of alternative production methods in a variety of settings, hut the emphasis on regional self-sufficiency should not overshadow the importance of making efficient investments in production, and, where feasible, in efficient inter-regional trade. A broader objective of ensuring food security is warranted. To this end, the Government needs to make the medium- to long-term Investment in facilitating inter-regional marketing by the private sector in order to (i) provide incentives for increased food production, and (ii) avoid excessive regional price fluctuations and localized food shortages. Given Chad's exceptional transport problems, opening up inter-regional marketing channels will be a lengthy and difficult process. However, in the long run, it is the most efficient and most sustainable means of stabilizing prices and avoiding localized food emergencies. 17. In addition to expanding marketing channels, the Government will have to focus on appropriate research, improved seeds and cultivation techniques, better water management, greater credit availability, and development of support institutions in order to minimize the risk associated with fluctuations in foodcrop production and increase output to maintain Chad's overall cereals self-sufficiency. 18. Although food aid is essential in Chad to overcome periodic aggregate food deficits, it has the potential to depress market prices and discourage cereals production in years of good rains. Chad has made relatively good use of its food aid, but currently -- after two bountiful harvests -- most such aid is no longer needed. However, much of the food aid linked to development activities is difficult to eliminate without jeopardizing its developmental benefits. Such is the case for a number of agricultural projects which are not yet self-financing and for school-feeding programs which provide the primary motivation for sending children to school. In addition, certain non-governmental organizations (NGOs) have a vested interest in the continuation of food aid programs which are the mainstay of their operations. These issues are not easy tu resolve, although donors might consider replacing food aid with surplus local cereals. Regardless of the source of cereals, given Chad's internal and external transport constraints, an in-country security stock is warranted, although the optimal size and location of this stock needs to be determined. Adeqtuate planning for emergency interventions is also necessary. 19, Livestock. The livestock sector of Chad can make a significant contribution to the countrv's economic growth provided that well-focused actions are taken to promote the productive environment, develop water resources, create an appropriate institutional climate, and reform the system of livestock trading and export. Livestock raising and marketing are carried out strictly on a traditional basis, with the fam.ily constituting the basic production unit and ethnic relationships defining migratory patterns. Care must be taken to improve the production environment without drastically altering the sector's socioeconomic  - xvii - patterns. The actionis iieoded include: (i) support for animal health; (ii) teclhnical and organizational assistance; (iii) breeding research; (iv) train1ing for extension agents; and (v) the creation and support of producer groups, based on existing socia] structures, which can progressively assume fiull responsibility for distribution of veterinary drugs and( other inputs, and a role in marketing. The present system of livestock trading poses a serious constraint to sector development. First, it cons1st, largely of exports of live animals. Second, the taixed-ownership enterprise SO1ERA has an official monopoly on exports of livestock and meat products; this monopoly needs to be relinquished. Third, trade and marketing efficienev is also hindered by a complex system ol export taxes and licenses, which should be reviewed and streamlined as soon as possible. The Government is currently preparing (with the support of IDA and FAO) a national livestock project which will provide critical institutional support whlle encouraging a larger role for the private sector. 20. Fishing. Chad's fisheries sector is based on the unsystematic exploitation of lake and river resources. Direct interventions in support of this sector have been few and have had little impact. As with the livestock sector, strong ethnic and social traditions have worked against the introduction of organizational structures from outside. Future interventions should be designed to utilize and build on traditional structures through which technical advice and production inputs can be channeled. Given the sector's potential with respect to food self-sufficiency and employment and income generation, fisheries components should be considered for all rural development interventions near major rivers. 21. Industry and Trade. Chad's industrial sector, which contributes about 20 percent of GDP, is dominated by seven enterprises which produce cotton and textiles, sugar, cigarettes, beer and soft drinks, and agricultural equipment. Although five of these are mixed-ownership companies, government interference in the management of industry and trade is minimal. Industrial growth is constrained by weak domestic demand, lack of raw materials, and high production costs, which are attributable, in turn, to over-dependence on imports and the diseconomies of small-scale operations. Moreover, locally-produced goods have to compete with unofficial, untaxed imports which set market prices. However, in order to generate employment and income, Chad needs to give priority to the development of viable, small-scale industries and enterprises. The factors which constrain this development include lack of access to credit and a shortage of management and technical skills. A number of NGOs, particularly Volunteers in Technical Assistance (VITA), have been very helpful in alleviating these constraints. However, greater efforts are needed to channel Chad's considerable entrepreneurial energies from trade to industrv. The Government has a special responsibility for creating an appropriate institutional environment, both at the national and regional level, which encourages domestic production and helps to promote trade through legal channels. This requires actions in the following areas: (i) trade relations, particularly with Nigeria and Cameroon; (ii) fiscal reform, (iii) revision of the Investment Code (to extend tax and customs advantages to Small and medium-scale enterprises); (iv) streamlining of administrative procedures concerning industry and trade; and (v) implementation of an appropriate transport sector strategy.  - xviii - 22, Transport. Chad's transport sector, which is dominated by road transport, is so underdeveloped that it hampers not only agriculture, industry and trade, but also hinders the provision of social services. Long distances, difficult terrain, widely dispersed population, lack of suitable construction materials, and high energy prices contribute to high construction and transport costs, which cannot be fully supported by current low volumes of traffic. Chad's highest priority is the restoration of critical road communication between different parts of the countrv. A priority rehabilitation network has been identified for that purpose, although it needs further review. Another priority is the selection of suitable design standards for the various regions. It is also important to ensure that the benefits of rehabilitationi are not lost through lack of miaintenance. Although there may be some scope for increasing the revenues (petroleum tax) earmarked for that purpose, donors will need to assume a major share of maintenance costs in the foreseeable future. The efficiency and development of the sector would be assisted by the removal of the monopoly enjoyed by CTT, the truckers' cooperative, and by elimination, if possible, of the various contrc-.s and fees imposed on Chadian traffic in neighboring countries, 23. EergyZ. Petroleum resources were discovered in 1974 east of Lake Chad and, more recently, in the South as well. U'ntil these resources are exploited, petroleum products have to be trucked over long distances, which greatly increases their landed cost. In 1985, Chad's petroleum import bill was about US$50 million, equivalent to about 27 percent of merchandise imports and 8 percent of GDP. Because the cost of bringing finished products to Chad exceeds the cost of extracting and refining domestic crude, it is economically justified to exploit Chad's oil reserves (in the North) even at prevailing low world prices. Preparation of a project to achieve that was resumed in 1986. If the project proceeds on schedule, Chad should be able to satisfy 80 percent of its demand for petroleum products beginning in the early 1990s. Production for export will have to await a reconfirmation of reserves and a major improvement in world prices. 24. Flectricity production costs are high in Chad, mainly because of the large share of petroleum products in the cost structure and the high cost of imported petroleum. The national electricity and water company (STEE) has been experiencing serious financial difficulties which are attributable to (i) significant technical losses, and (ii) problems in billing and collection. The company is currently defining a rehabilitation plan to deal with these and other problems such as cross-arrears with the Government. Furtlhermore, the construction of a power plant, to be supplied with domestic fuel , is under consideration. 25. Education. Chad's education sector ceased to function during the period 1979-82. Schools throughout the country were looted, destroyed or converted to military use; nearly the entire stock of teaching materials was lost, as were all education statistics and records. Only limited progress has been made since then in restoring minimal acceptable operating conditions in the sector. To meet the country's most basic educational requirements, Chad will have to conicentrate its scant resources on the development of primary education. The Covernment s strategy for this sub-sector should focus on: (i) encouraging community participation in the cost and management of the sub-sector; (ii) strengthening and expanding teacher training, particularly in-service training; and (iii) reinforcing the planning and monitoring capacities of the institutions involved. Once  - xix - the basic requirements of the primary education system have been assured, Chad should address the long-term priorities for secondary and post-secondary education. Specific areas which merit examination include the development of a core curriculum suited to the countrv's educational environment and human resource needs, and the potential for private sector participation in vocational training. 26. Health. Infant, child .nd maternal mortality rates are very high in Chad, reflecting poverty, chronic malnutrition, lack of access to safe water, little or no health education, limited access to health care, poorly trained health personnel, and inadequate health facilities, equipment and medical supplies. Health care has been the focus of numerous, sustained interventions by donor agencies, NGOs and church-related groups. Many have created delivery systems which operate for the most part independently of the national health care system. These parallel systems, though essential and laudable, have made the coordination of health services and the definition and implementation of a national health sector strategy more complex. Such a strategy is needed in order to arrive at the most appropriate allocation of scarce resources among competing needs. Moreover, new aid commitments in the health sector are declining as donors diversify into other sectors; the Government is, therefore, faced with the need to develop alternative methods of health care financing. Here, as in education, cost recovery offeis possibilities. The growing number of community and church-sponsored dispensaries and pharmacies that do charge fees suggests that access may be a bigger constraint to health care than willingness or ability to pay, provided that fees are kept very modest. Medium-Term Prospects 27. According to this report's projections, the Chadian economy is expected to expand at an annual rate of 2 percent through 1989 -- slower than the population growth rate of 2.4 percent. This is largely because of the gross under-investment which has occurred over the last 10 years; the inevitable focus of recent and on-going investments on reconstruction and rehabilitation; the short-term recessionary impact of the cotton crisis; the already high level of fooderop production as a result of generally favorable weather; and the rormal lag between policy decisions and results. However, as the policy and institutional changes on which the projections are predicated take hold and, in particular, as the focus shifts from emergency operations to development-oriented projects, the growth rate of CDP can be expected to accelerate to 2.4 percent a year in 1989-92 and to receive a further boost by the projected start of domestic refined-petroleum production in the early 1990s. Thus, GDP growth is projected to overtake population growth beginning in 1991 and to average 4.7 percent a year in 1992-95, with petroleum, 3.2 percent without petroleum. 28. Under the same base scenario, Chad's external current account deficit is anticipated to double in absolute terms by the mid-1990s, but it would remain at roughly the present share of GDP, namely 23 percent. -he projected aid flows, moreover, should be sufficient to finance the deficit. Total assistance to Chad (grants and loans) would increase from about US$148 million in 1986 to nearly US$450 million in 1995, implying a trebling of per capita assistance. Despite this rapid growth (14 percent  - xx - in nominal terms a year), by 1995, per capita aid to Chad would be US$52 in 1986 US dollars -- a figure significantly lower than the recent level of assistance to a number of low-income African countries, none of which have suffered similar devastation. 29. The sensitivity of the above projections was tested by considering six alternative sets of assumptions regarding cotton prices and output, cereals production, and aid flows. The analysis revealed that variations in aid flows have the biggest impact on aggregate production. This is not surprising because 65 percent of aid is estimated to consist of development assistance, which "drives" investment; moreover, aid is the biggest "sector" of the Chadian economy, being equivalent to more than 2.5 t