Docunent of The World Bank FOR OFmFCIAL USE ONLY C27Z HoZC 30 -&SO Repor No. P-4995-SO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT OF SDR 54.2 MILLION TO THE SOMALI DEMOCRATIC REPUBLIC IN SUPPORT OF A SECOND AGRICULTURAL SECTOR ADJUSTMENT PROGRAM MAY 2, 1989 This document has a restricted distibution 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 AND EQUIVALENTS Currency Unit = Somali Shilling (So. Sh.) US$1.00 = So.Sh. 377 (Official rate on April 24, 1989) (Export/Import account rate So. Sh. 511 and external account rate So. Sh. 524 on April 24, 1989) SEK Swedish Kroner FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 Meter (m) = 3.28 feet (ft) 1 Kilometer (km) = 0.62 mile (mi) 1 Sq. kilometer (km2) = 0.386 square miles (sq mi) 1 Hectare (ha) 2.47 acres (ac) 1 Metric ton (m ton) = 2,204 pounds (lbs) ABBREVIATIONS ADC - Agricultural Development Corporation AfDB African Development Bank AfDF African Development Fund AIP Agricultural Inputs Program AMF = Arab Monetary Fund ASAP Agricultural Sector Adjustment Program BITS = Swedish Agency for International Technical and Economic Cooperation CIDA Canadian International Development Agency CG Consultative Group CIP = Commodity Import Program CSBS = Commercial and Savings Bank of Somalia ENC = National Commercial Agency (Ente Nazionale Commercio) FEAC = Foreign Exchange Auction Committee FAO Food and Agriculture Organization FRG = Federal Republic of Germany GOS - Government of Somalia GTZ Deutsche Gesellschaft fur Technische Zusammenarbeit HASA Hides and Skins Agency ICB = International Competitive Bidding IMF = International Monetary Fund MNP = Ministry of National Planning MOA = Ministry of Agriculture and Natural Resources MOF = Ministry of Finance and Revenue MTRP - Medium-Term Recovery Program ODA = Overseas Development Administration ONAT = Tractor Hire Agency (Organizzazione Nazionale Agricultura Trattore) PFP = Policy Framework Paper PIP - Public Investment Program PU = Procurement Unit SDB = Somali Development Bank SOMPET = National Petroleum Agency SLA = Somali Leather Agency SPA - Special Program of Assistance UNDP = United Nations Development Program UNICEF = United Nations Childrens Emergency Fund FOR OMCIAL USE ONLY SWAI AGNICULTURAL SICTOI AUWUSTNE PROGM It CREDIT AND PROGRAM SUIMARY Borrower: Somali Democratic Republic Amount; IDA Credit: SDR 54.2 million (US$70 million equivalent); Beneficiaries: Agricultural producers, agro-industry, rural wage earners, and traders of goods and services. Terms: Standard for IDA, with 40 year: maturity Cofinancing: $25 million equivalent from the African Development Fund. Program Description: The program will finance recurrent import requirements of the Somali economy in support of significant policy reforms. These reforms include the continuation of reform in the foreign exchange policies, the decontrol of the financing system, the elimination of subsidies on diesel fuel and tractor rentals, the liberalization of all agricultural marketing, the improvement of land tenure institutions, and the expansion of private sector participation in supplying and distributing inputs and services to the economy. The program will also provide technical assistance for strengthening key Government institutions, mainly in agriculture. Program Benefits: The main benefits from the macroeconomic program to be implemented by the Government are the attainment of a medium term growth rate of around 5 percent per annum, progressively reducing external current account deficits, and a decline in the rate of inflation to about 20 percent by end 1990, and 13 percent by end-1991. The policy measures relating to the agricultural sector are expected to promote increased domestic production, particularly of grains, improve the marketing of grains, a number of high value crops, hides and skins, and expand the role of the private sector. These policy measures are also expected to result in increased exports through official channels, mainly from the livestock and banana subsectors. These results would in turn lead to increases in income and employment in the agricultural sector, including agro- industry. The foreign exchange allocation system will contribute to the efficient allocation of donor financial resources in the economy, and augment productive output of -he economy as a whole by providing a reliable source of financing for imported recurrent inputs. Finally, the program would strengthen Government institutions involved in land tenure administration, domestic grain marketing, food aid management, and statistical analysis. Social Costs of Adjustment Programs Institutional arrangements will be established to evaluate and implement a number of specific action programs to ameliorate the social impact of the adjustment program. In addition, a monitoring program will be put in place. to keep abreast of the social impacts and the effectiveness of action programs. This document has a restricted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriztin. Prosram Risks: The most relevant risk for the operation is that the Government does not sustain and implement its policy and institutional reform measures, or abandons the program because of pressures coming from vested interests. At present this risk is assessed as small since the Government in a real sense claims ownership of the program. Another risk is that the funds available for the foreign exchange allocation system may not be adequate to stabilize the exchange rate and consequently lead to a lack of confidence in the allocation system. However, given the Government's renewed commitment to improved demand management policies, and the likely availability of additional funds through SPA support, the amounts provided are considered adequate to cover that risk through 1990. Another risk is that agricultural production and income may not increase in response to the increased incentives. However, the impact of sustained incentives over the past years provides evidence that a response will continue to be strong. Finally it is possible that the civil unrest in the North West region will not be resolved soon and will create continuing strains on the budget and limit livestock exports. Estimated Costs: Component IDA AfDF Total -- S million)_------- Part A - Importation of Goods & Materials by Public and Private Sector Enterprises (a) Goods & Materials 44.5 17.0 61.5 (b) Diesel fuel & Lubricant Imports by SOMPET 16.5 5.0 21.5 Part B - Imports of Inputs by Government Ministries 1.0 3;0 4.0 Part C - Social Action Program for 2.7 - 2.7 Vulnerable Groups Part D - Technical Assistance 5.3 - 5.3 70.0 25.0 95.0 Estimated Annual Disbursements (IDA fiscal years) Credit FY90 FY91 Total -($ million)---------------- IDA 50 20 70 ADB 10 15 25 TOTAL 60 35 95 SOMALIA AGRICULTURAL SECTOR ADJUSTMENT PROGRAM II TABLE OF CONTENTS PART I - THE ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Background . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Performance in the 1980s . . . . . . . . . . . . . . . . . . 3 Recent Adjustment Programs . . . . . . . . . . . . . . . . . 3 Economic Performance 1980-87 . . . . . . . . . . . . . . . . 5 Developments in 1988 . . . . . . . . . . . . . . . . . . . . 7 PART II - THE MACROECONOMIC ADJUSTMENT PROGRAM . . . . . . . . . . . . 8 A. The Need for Further Adjustment . . . . . . . . . . . . . . . 8 B. Medium-term Macroeconomic Program . . . . . . . . . . . . . . 10 C. External Policies . . . . . . . . . . . . . . . . . . . . . . 11 D. Fiscal Policies .... . . . . . . . . . . . . . . . . . . . 13 E. Monetary Policies .... . . . . . . . . . . . . . . . . . . 15 F. External Financing Requirements . . . . . . . . . . . . . . . 15 PART III - AGRICULTURAL SECTOR ADJUSTMENT PROGRAM . . . . . . . . . . . 17 A. Introduction .... . . . . . . ... . . . . . . . . . . . 17 B. Performance of the Agricultural Sector . . . . . . . . . . . 18 C. Prospects for Growth ..19 D. The Government's Program ..20 Agricultural Marketing Policies . . . . . . . . . . . . . . 21 Grain Marketing ..21 Hides and Skins ..22 Frankincense and Myrrh ..22 Veterinary Drugs and Equipment, and Veterinary Services . . 23 Transportation and Financial Services . . . . . . . . . . . 23 Maritime Transport . . . . . . . . . . . . . . . . . . 23 Banking . .24 Insurance ..24 Land Tenure ..25 Public Sector Management Issues . . . . . . . . . . . . . . 26 Policy Analysis and Planning . . . . . . . . . . . . . 26 Cost Recovery .... . . . ...... . . . . . . . . 26 PART IV -THE IMPACT OF THE PROGRAM ................. . 27 A. Economic Impact .... . . . . ...... . . . . . . . . . 27 B. Social Impact .... . . ... ............ . . . . . 28 C. Measures to Alleviate the Impact of Adjustment on Vulnerable Groups .... . . . . . . . . . . . . . . . . . . . . . . . 29 Institution Building for Social Action Planning . . . . . 29 Social Policy Support ... . . . . . . . . . . . . . . 29 Project Evaluation . . . . . . . . . . . . . . . . . . 30 Monitoring ............. .... .... . 30 Framework for Funding ......... .. ... .. .. . 30 PART V- BANK GROUP OPERATIONS IN SOMALIA . . . . . . . . . . . . . . 31 A. The Bank's Portfolio ...... .. ..... . .. .. . . 31 B. The Agricultural Sector Adjustment Program I Credit . . . . . 31 - it - Agricultural Policy Reform . . . . . . . . . . . . . . . . . 31 Institutional Reform . . . . . . . . . . . . . . . . . . . . 32 Foreign Exchange Auction and Allocation Mechanisms . . . . . 32 C. IDA Strategy . . . . . . . . . . . . .. . . . . . . 32 Improving the Policy Environment . . . . . . . . . . . . . . 33 Strengthening Government Institutions . . . . . . . . . . . 33 Developing Infrastructure . . . . . . . .. . . . . . . . 33 The Resource Base: Environment and Human Resources . . . . . 34 Environment .......... ... ...... 34 Human Resource ............ ....... 34 D. Relationship to Other Aid Flows . . . . . . . . . . . . . . . 34 PART VI -THE ASAP II CREDIT . . . . . . . . . . . . . . . . . . . . . 35 A. Background . . . . . . . . . . . . . . . . . 5 . . . . . . . .5 B. Objectives ......... .... ... ... ... .. . 36 C. Credit Description .................... . 36 D. Implementation and Monitoring ............... . 39 E. Agreements Reached . . . . . . . . . . . . . . . . . . . . . 41 F. Procurement . . . . . . . . . . . . . . . . . . . . . . . . . 42 G. Disbursements, Accounts and Audit . . . . . . . . . . . . . . 42 H. Risks ......... .. ... ... .. ... ... .. . 43 PART VII -RELATIONS WITH THE IMF .................. . 45 PART VIII -RECOHMENDATION . . . . . . . . . . . . . . . . . . . . . . 46 List of Annexes Annex I Somalia Country Data Table 1: Economic Indicators Table 2: Balance of Payments Table 3: External Financing Annex II Status of Bank Group Operations in Somalia Annex III Supplementary Data Sheet Annex IV Matrix of Policy Issues, Strategies and Actions in ASAP I Annex V. Trends in Production, Area Harvested and Yield for Sorghum and Maize Annex VI Social Action Program - Examples of Possible Projects Annex VII Import Verification System - Draft Terms of Reference 9 Annex VIII Draft Letter of Development Policy and Matrix of Policy Issues, Strategies and Actions Annex IX List of Eligible Items under Parts A and B of the Program I REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND AGRICULTURAL SECTOR ADJUSTMENT PROGRAM CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC 1. I submit the following report and recommendation for a proposed credit * the Somali Democratic Republic to help finance a Second AgriculnuLal Sector Adjustment Program. The proposed Development Credit for $70 million equivalent would be on standard IDA terms with a maturity of 40 years. 2. Part I of this report sumarizes Somalia's economic situation. Part II presents the Government's macro-economic adjustment prograi;. Part III describes the issues facing the agricultural sector and the adjiatment program for the sector. Part IV of the Report assesses the economic and social impact of the program. Part V sets this operation in the context of IDA's strategy in Somalia and in the context of past experience with adjustment lending in Somalia. Part VI describes the present operation. PART I - THE ECONOMY 3. An economic report entitled "Somalia - Recent Economic Developments and Medium-Term Prospects' (Report No. 6542-SO), was distributed to the Executive Directors in February 1987. A. Background 4. Somalia is a large and sparsely populated country with a population of 6 million growing at about 3 percent per annum. The climate is arid to semi-arid, a major factor in the economy's agricultural performance and potential. Only a very small portion of the land benefits from largely seasonal flood irrigation with low water use efficiency. Two main rivers, the Shebelli and Juba, provide a potential for major irrigation development. Moderate droughts occur every 3-4 years and major ones every 8-10 years, causing major swings in livestock numbers and crop production. In a rather harsh environment the mainstay of the economy has long been nomadic pastoralism. About half of the population are nomads who depend on livestock for their livelihood and another 25 percent are settled farmers. Livestock production has accounted for about 40 percent of GDP and 60 percent of export earnings. Apart from the traditional export of livestock, commercial agriculture is centered mainly on the production and export of banaiss and the production of sugar, sorghum, and maize for the,domestic market. The agricultural sector as a whole represents about 60 percent of GDP at factor cost; the share of crop production is about 13 percent. - 2 - 5. Somali manufacturing industry, which contributes only about S percent of GDP, is dominated by public sector firms. A large majority of these firms are engaged in the production of consumer goods. Leather and tanning, potentially a major activity based on the abundance of hides and skins, currently accounts for less than 5 percent of total manufacturing output. The existence of several minerals and hydrocarbon resources have been confirmed, but their exploration is still at an early stage. 6. Somalia is entirely dependent on external assistance for the financing of its economic development. It has been successful in obtaining assistance from abroad including from the oil exporting Arab countries. Since the mid-1970s the sources of support shifted from the Eastern bloc countries to multilateral organizations and the OECD countries. Somalia received between US$300 and US$400 million annually of gross Official Development Assistance in the 19809 or about US$55-70 per capita. Another significant resource was the formal and informal remittances of the Somalis working in the Gulf countries which are estimated to average between US$50- 70 per capita per annum. 7. Somalia is neverthelass among the poorest countries in the world and is classified by the United Nations as a least developed country. Per capita GDP in 1988 was about US$170, at market exchange rates. Other indicators of the country's low level of social and economic development includes an average life expectancy of 46 years; an infant mortality rate of 130 per thousand; an enrollment rate in primary schools of around 14 percent; and, a ratio of nearly 16,000 persons per physician. 8. The present regime, following its assumption of power in 1969, adhered to a program of *scientific socialism' whose stated objectives were egalitarianism and social justice, and development through the public sector and cooperatives. In the early 1970s public ownership and management expanded both through nationalization and the creatior. of new public enterprises. During the 1970s, a combination of exogenous factors, including a drought in 1974/75, an armed conflict with Ethiopia in 1977/78, and inappropriate economic policies led to stagnation in production and exports. Mismanagement in the overextended public sector eroded incentives and fostered inefficiencies in resource use. Between 1971 and 1981, the average annual growth rate of GDP was around 3 percent, implying no growth in real per capita income. 9. In the second half of the 1970s. the Government's finances also deteriorated rapidly, maiLly because of expenditures resulting from the border conflict with Ethiopia, the cost of maintaining a large number of refugees, and a growing wage bill associated with a rapid increase in public sector employment. While foreign aid declined significantly, the Government's recourse to Central Bank financing rose to record levels in 1979. This, in turn, led to a rapid increase in prices in 1980. Meanwhile, the stagnation of exports and a surge in imports associated with weak domestic production and a rapid growth in domestic demand resulted in large deficits in the current 4;ount of the balance of payments. Thus, Somalia entered the 1980s facing an economic and financial crisis characterized by high inflation, stagnation in production and exports, - 3 negative domestic savings, depleted foreign exchange reserves, and growing external debt-service obligations and arrears. B. Performance in the 198Qs Recent Adjustment Programs 10. The 1980-1987 period has been characterized by repeated attempts on the part of the Government of Somalia to address the serious economic and financial crisis facing the country. Each attempt met with initial success but ultimately succumbed to a combination of external shocks and domestic policy slippages. During this period, Somalia has moved from a highly controlled economy to a market-oriented economy with a progressive dismantling of controls. Thus, many of the *difficulties" facing the economy today relate to the "officially recorded' economy and do not reflect the underlying vibrance of the unofficial economy which has responded positively to the reduced role of the State. 11. During 1981-83 and again during 1985-1987, Somalia undertook policy ieforms within the framework of Fund suipported programs. Two stabilization programs were successfully implemented in 1981-83. The programs included adjustment of the exchange rate, fiscal and monetary restraint, and significant liberalization of domestic agricultural pricing and marketing. A Consultative Group for Somalia was convened in 1983 which pledged substantial support for Somalia's public investment and policy reform program. The positive effect on the economy of these policies and the accompanying additional donor support proved temporary as the introduction of a ban on Somali cattle exports by Saudi Arabia on health grounds, and a halving of the sorghum output due to a major drought had a severe adverse effect on output and exports in 1983. The government's failure to correct for the decline in revenues with expenditure reductions or other measures caused a sharp increase in the fiscal deficit and fuelled inflation, thus contributing to a reversal of the modest depreciation of the real effective exchange rate that took place in 1982. The accompanying deterioration in the balance of payments resulted in a substantial increase in arrears on external debt service. 12. During 1985-1987, the government resumed its adjustment program supported by a further Fund stand-by arrangement initiated in 1985. The program was aimed at reducing the large internal and external imbalances that had reappeared as well as strengthening the structural measures launched in the earlier program. The centerpiece was a major devaluation of the exchange rate, the introduction of a foreign exchange retention scheme for exporters, and the establishment of a legal free market for foreign exchange. The Government restored more liberal marketing policies by dismantling remaining price controls and removing restrictions with respect to foreign trade with the notable exception of fuel and veterinary drugs imports and the exports of hides and skins, and frankincense and myrrh. These measures accompanied by good weather resulted in a strong growth performance in 1985 and a decline in inflation. However, problems emerged - 4 - in the external sector resulting from the shortfall in anticipated foreign exchange inflows from reduced workers" remittances. Coupled with a delay in the release of previously agreed external assistance, this led to a shortfall from the target level of imports and the emergence of new external payment arrears. This in turn resulted in a temporary suspension of the InF standby and reduced drawings on loans from various multinational sources and governments. The lower aid receipts and trade related revenues also adversely affected the fiscal situation and, together with a rapid expansion in credit to the private sector, resulted in a larger than planned monetary expansion in this period. 13. The IMF Standby was extended through 1986 when Somalia cleared its arrears with the Fund in April 1986. This paved the way for the processing of the Bank's first Agricultural Sector Adjustment Program (ASAP 1) Credit which was approved by the Board in June 1986. The ASAP I credit, while supporting the government's policy reforms, provided funds for a foreign exchange auction which a.lowed traders to bid for foreign exchange for a wide range of imports. Under the then prevailing system, three main exchange rates were being used: namely the official exchange rate, the auction rate and the free market rate as determined by transactions between foreign exchange account holders at the Commercial and Savings Bank. 14. Unification of tbhse three exchange rates in an enhanced auction embracing most transactions was the key element of a new IMF Standby Arrangement and Structural Adjustment Facility approved in June 1987. These programs aimed at supporting further adjustment policies set out in a Policy Framework Paper covering the period 1987-89. A second IDA Agricultural Sector Adjustment Credit in support of the new policy framework was being appraised when Somalia's program implementation came to an abrupt halt towards the end of September 1987. The Government terminated the auction system and fixed the exchange rate at US$l = 100 So. Sh. This represented a 37 percent appreciation of the So. Sh. in local currency terms from its level at the last auction in mid-September 1987. An export retention scheme was put in place which allowed exporters to retain 40 percent of their foreign exchange earnings. Following the directives of the Party, the Government declared its intention to reintroduce price controls, which were eventually imposed in February 1988, on a large number of imported and domestically produced goods. Further processing of IDA's ASAP II operation was stopped. In the meantime, disbursements from ASAP I and the IMF program were suspended. 15. The reason given by the authorities for abandoning the auction system was that the Government was concerned about the rate at which the So. Sh. had depreciated in the previous weeks, and its adverse effect on the cost of living. The main contributing factor to the escalation of the price of foreign exchange in the auction was a relaxation ir. monetary and fiscal discipline in the second half of 1987. The budget deficit grew while credit to the public sector increased dramatically. This led to the expansion of demand for imports over and beyond the anticipated levels. Moreover, the resulting decline in the value of the So Sh in the auction reinforced expectations of further depreciation and, together with the move to 100 percent surrender of foreign exchange earnings, prompted exporters - 5 - to withhold their earnings from the Central Bank. A reduced supply of foreign exchange, facing an increased demand, produced the decline in the value of the So. Sh. However, it soon became clear that, after a period of experimentation with 'liberalization ir the economy, the views of those opposing it did prevail. Part of this opposition was clearly ideological. It became obvious also, that the loss of Government control over the foreign exchange allocations had made the authorities uneasy. Economic Performance 1980-87 16. Somalia's economic performance between 1980 and 1987 (see Table 1) under this stop-go policy environment has been mixed. On the one hand, with the exception of two drought years, economic growth has been encouraging. This growth has been stimulated by the agricultural sector (see para 53). which has clearly responded well to the liberalization of pricing and marketing policies during the 1980s, in contrast to the 19709 when the policy framework depressed farmgate prices and discouraged production. On the other hand, in almost all other respects, economic performance has been poor. The investment to GDP ratio has been high throughout the 19809 (around 30 percent), due to an ambitious public investment effort financed largely by donor assistance. However, the efficiency of resource use in the public sector was low with projects selected without sufiicient consideration of economic viability. Hence the returns on this investment have been low. Private investment levels have been low, reflecting the uncertainties in the policy environment. For most of the period the availability of substantial external assistance and the large inflows of workers' remittances have eased the burden on domestic savings. Domestic public savings rate have been negative throughout this period (ranging from -2 to -5 percent of GDP), while the rate of national private savings for the most part has fallen short of private investment. 17. On the fiscal side, revenues net of grants have averaged a low 6- 8 percent of GDP, while expenditures have varied from 18-31 percent of GDP resulting in large deficits and a heavy reliance on domestic bank financing. The low revenue yield reflects weaknesses in tax administration combined with the large volume of transactions taking place outside the official economy. This is particularly true of the trade transactions. The large variations in public expenditure have been primarily on the investment expenditure side; recurrent expenditures have been more stable (averaging 11-14 percent of GDP) and rather low, resulting in a substantial decline in real wages for civil servants (with attendant problems of morale and efficiency) and a compression of expenditures for essential social services like health and education. As a result of large fiscal deficits and generally weak demand management, inflation has averaged about 50 percent per annum between 1980 and 1988. Short term interest rates remained substantially negative in real terms throughout the period and this contributed to the very large expansion of credit to the private sector particularly in the last two years. 18. The lack of fiscal and monetary discipline has had its impact not only on domestic prices but on the balance of payments. Despite frequent devaluations during this period, the real effective exchange rate Table 1t SOMALIA - Key Economic tndiectore m9 iee 11 l2 t 193 1934 1905 130 l 1" 97 1906 109U-4 GDP Gerowth Rat. (at f. 3.3a 5.31 3,5x -12.31 0.0rX U9.21 -3.41 11.2X -2.7X 2.1 of which: Agriculture 0.31 14.31 1.75 -17.75 14.11 12.011 -$.3X 14.31 2.61 3.11 Percent of ODP: Current Account Deficit (Inc. grxnt.): -29.0x -12.51 -16.9X -10.4x -l7.6S -12.01 -19.6 -6.0X -9.91 -18.31 Public Sector SavInga-Inveat. BaIance: -s.71 2.3X 2.11 -7.11 -17.21 -?.5S -12.3X -4.5X -0.2x -?.11 Privet* Sector Savinge-lveetmnt Balance: -11.2X -14.51 -180.1 -12.33 -9.70 .4.41 2.1$ -1.41 *.21 -0.?s CPI (period average, growth rote) 50.ox 44.0X 22.0X 86.4X 02.2X 37.01 85.31 2.11x 32.21 40.7X ReI Effective Exchange Rate (106919) 19.9 113.4 05.2 195.1 167.6 92.0 01.0 51.5 83.0 Annual Change (S) 41.4X1 10.4 -190.6 19.41 50.71 -44.3X -34.11 -16.0x 23.1x R*e a nteret Rates: Min. Short-term Depoxit Rate -3.X -14.61 -20.4x -s4.21 -25.31 -23.05 -14. 1X -42.2X -84.9X Min. Short-tOrm Lnding Rate -84.6X -1.01X -24.4X -69.2X -22.SX -20.31 -18.11 -32.21 -29.31 Rcel Producerr' Pric e (at 1098 pricer): Goat (SoSh per hed) 232.3 340.2 324.1 104.1 172.2 3a4.2 207.0 Sorghum (SoSh per Kg) 2.9 2.8 2.0 4.2 3.1 2.2 2.0 Maize (SoSh per Kg) 2.0 2.2 2.6 5.4 8.0 2.6 8.1 Volume Indx of Export. (10980100) 1990. 142. 144.0 79.9 47.8 92.4 90.9 98.5 59.9 Coc oWity Terms of Trade (19690=19) 19O.9 01.0 92.6 90.2 93.9 90.9 6.2 3.09 95.6 Annual Change (S) -16.1X -8.41 1.31 0.21 -4.41 -8.21 -11.0X 4.3S 14.2S __-- - ---- - - - - - - - -- - ------------- - --- - ------ - - ------ - - - - 7 - appreciated sharply through 1984 before depreciating again in 1985-87. The gap between the effective export exchange rate in the official market and the parallel market rate remained sufficiently wide to encourage substantial smuggling of exports. As a result, exports flowing through official channels stagnated over the period, while imports declined in real terms but remained three to four times larger than exports. The consequent large current account deficits (generally over 10 percent of GDP including grants) contributed to a sharp deterioration in Somalia's extrrnal indebtedness. The stock of debt climbed three fold from $604 million in 1980 to $2,211 million in 1987. This included arrears totalling $313 million. Of the total debt outstanding and disbursed some $891 million is owed to multilateral creditors and therefore cannot be rescheduled. The debt-service ratio has climbed from 42 in 1980 to 1612 in 1987; this reflects largely the failure of exports to grow and the burden of IMF and AMF repurchases and charges. Developments in 1988 19. Following the cancellation of the foreign exchange auction, the econquic and financial situation worsened considerably in the latter part of 1987 and the first half of 1988. The flow of quick disbursing assistance was adversely affected by the disruption in program implementation. Imports were drastically reduced due to a decline in external financing and the diversion of exports to the unofficial market as the real effective exchange rate appreciated once again. The Government announced controls over a wide range of prices in February 1988. As inflation accelerated, shortages of essential goods at the officially controlled prices became widespread; the balance of payments came under extreme pressure; and external payments arrears accumulated. Following a period of expansionary policies, the Government resorted to very tight fiscal and monetary policies beginning in 1988, but tax revenue continued to decline drastically in real terms, reflecting the compression of foreign trade. Inflation, fueled by the large monetary and credit expansion of 1987, kept accelerating until it reached a rate of 150 percent in the second quarter of 1988. 20. In July 1988, responding again to the deterioration in the economic and financial situation, the Government adopted a policy package, prepared with the assistance of Fund and Bank staff, for the second half of 1988. The package aimed at reducing financial imbalances, moderating inflationary pressures, improving export competitiveness, and setting the stage for the reformulation of macroeconomic and structural policies in a medium-term context. The key measures taken at that time included: - a devaluation of the exchange rate by 44 percent in foreign currency terms and 80 percent in local currency terms; - the lifting of the price controls introduced in February 1988; - a continued tight fiscal stance, with specific revenue measures equivalent to one percent of GDP on a full year basis including an increase in the tax rate on rental income, introduction of a -8- withholding tax on the gross income of banana producers, extending the coverage of the service tax, changing the tax on fuel from specific to ad valorem and nearly doubling its effective rate, and imposinR an airport departure tax; and - sharp increases in interest rates: the minimum deposit rate was raised from 12 to 40 percent; the minimum lending rate was raised from 15 to 50 percent; the Central Bank discount rate was raised from 12 to 45 percent. The agreement with the Fund on this policy package triggered the resumption of program assistance to Somalia. The Fund mission that visited Somalia in November 1988, with Bank participation, found that, with some minor deviations, the measures contained in the policy package of mid-1988 were implemented. The initial results were positive. The fiscal deficit was substantially lower and inflation decelerated in the last quarter of 1988. In January 1989, the Government announced a number of new measures, backed by Party approval, which constitute a major strengthening of the economic policies and pave the way for structural changes. The likelihood of the program succeeding this time is much higher, because of a stronger coammitent on the part of Government than before, and the support given to reforms by the Party's Central Committee. The program that has been in place since mid-1988 is described in detail in the following section. PART IT - THE MACROECONOMIC ADJUSTMENT PROGRAM A. The Need for Further Adiustment 21. Somalia made progress in the 19808 in terms of moving from a centralized economic regime of the 1970s to a more liberal economic system. While the implementation of stabilization and adjustment policies has been uneven and frequently interrupted, the incentive system has been rationalized to a considerable extent through the dismantling of agricultural pricing and marketing controls, and changes in the exchange rate management system. While the implementation of the recently announced policies will help change the structure of the economy towards an even stronger market orientation, the economic situation remains precarious. In 1988, the economy continued to face difficulties. The balance of payments remained under severe pressure, as exports fell to an unusually low level of US$58 million in 1988. In addition to inadequate economic incentives, security problems in the Northwest played a major role in the sharp decline In the export revenue from livestock. GDP at factor cost declined by 2.7 percent (net of the large stock accumulation it declined by 5.1 percent). Despite a major slowdown in the second half of the year, the point to point inflation rate at end-year 1988 was 107 percent. 22. The need for adjustment in the Somali economy is evidenced by the large number of factors cited in Part I. In an average year, aggregate consumption exceeds CDP. Domestic savings are very low, in part reflecting low levels of private savings and in part negative public savings. -9- Government revenues meet between a half to one third of ordinary budget expenditures. Public investment is two and a half to three times as large as private investment, while the parastatal sector remains, on the whole, inefficient and unprofitable. On the external side export earnings cover less than one-fourth of imports, while total debt is almost twice the GDP, and large arrears have emerged. Even though no viability in the external sector is foreseen in the medium term, the structure of the economy must be transformed to facilitate long term growth and viability. 23. In the absence of other known resources, Somalia's development prospects are in the agricultural sector. The livestock sub-sector will continue to be, in the foreseeable future, the major contributor to Somalia's output, exports and employment. Even though the rangelands are near maximum carrying capacity, livestock offtake can be substantially increased by improving animal health services and marketing systems, and related facilities. The livestock sector can support a much larger consumption of dairy products and the export of specialized livestock products. The crop sub-sector has considerable potential, particularly in high-valued oilseeds, cotton, fruits and vegetables. However, the potential of the sector can be exploited only through better incentives, more efficient irrigation and other infrastructure, and support services, as well as improved marketing arrangements. 24. In industry, the private sector is too small and inexperienced to immediately take over and operate most of the large public enterprises. However, over time, the private sector, which has displayed dynamism in the trade sector, can play a much bigger role if a more conducive business climate is established and the confidence in the economic system, which is lacking due to the frequent reversal of economic policies and to the fear of political instability, is restored. Therefore, a more decentralized and less controlled environment is needed to harness the potential for entrepreneurship. 25. A reorientation and restructuring in the public sector is also necessary. A major effort is needed to increase the extremely low share of government revenue in GDP so that large dependence on external funds for government expenditure is reduced. Government spending has to be reoriented to halt the deterioration of infrastructure for lack of maintenance funds. The share of education and health expenditures in the total must be raised to meet basic needs in the social sectors. Reform of the civil service deserves high priority and the low level of remuneration in public sector employment must be corrected. Wages in the public sector are well below subsistence levels, which has led to widespread absenteeism, low morale and poor performance. Adjustment in the public enterprise sector is also a high priority. This calls for Government divestiture or liquidation of a number of industrial enterprises, while restructuring the few that may remain under Government ownership. 26. As much as these medium- to long-term structural adjustments are needed, in the short to medium term macroeconomic adjustment is essential. Achieving economic stabilization, establishing and maintaining a realistic exchange rate, reducing fiscal imbalances, and limiting monetary expansion - 10 - are the necessary ingredients of achieving sustained growth in the economy. As indicated earlier, frequent changes in macroeconomic policies in the past and the overall inadequacy of these policies have eroded incentives for production, and more specifically for exporting through formal channels. However, the momentum needs to be maintained by continuous monitoring of the designated policies and making further adjustments in the areas of exchange rate, and fiscal and monetary policies. 27. Recognizing this, the Government, with the assistance of Bank and Fund staff, has developed an adjustment program aimed at restoring macro-economic stability. and establishing a macro-economic framework conducive to sustained economic growth. At the same time, the program lays special emphasis on establishing a policy and institutional environment which would maintain and enhance the growth of output and exports in the agricultural sector, which dominates the economy of Somalia. IDA's Second Agricultural Sector Adjustment Program is intended to support the Government's overall adjustment program while helping to sustain and deepen reforms in the agricultural sector initiated under ASAP I and earlier. The remainder of this Part of the Report summarizes the proposed macro-economic framework described in more detail in the Second Policy Framework Paper which was endorsed by the Committee of the Whole on April 25, 1989, while Part III of the Report describes the second Agricultural Sector Adjustment Program. B. Medium-term Macroeconomic Program 28. The Government's macro-economic program provides a consistent and comprehensive package of macroeconomic policies designed to address the goals of stabilization and growth. The key macroeconomic objectives of the program, as spelt out in the PFP, include: (i) raising the rate of growth of real GDP, at factor cost, to almost 5 percent in the medium term; (ii) reducing progressively the external current account deficit; and, (iii) containing the rate of inflation to about 39 percent by end-1989, 20 percent by end-1990, and 13 percent by end-1991. 29. In line with these objectives, the erall fiscal deficit, including grants, will be reduced from the equivalent of about 8 percent of GDP in 1988 to approximate balance during the period 1989-91. The fiscal deficit, excluding grants, will decline more gradually from a little over 18 percent in 1988 to 14.4 percent in 1991. The fiscal adjustment will require a tight lid on expenditures and a substantial revenue effort. Accordingly, the share of total revenue net of grants is projected to rise from an all-time low of 5.3 percent of GDP in 1988 to 10.2 percent in 1991, while total expenditures will remain around 25 percent of GDP before they start to decline gradually in 1991. Given the level of anticipated external financing, including debt relief, this will result in large repayments by the Government to the domestic banking system. This, in turn, will permit a substantial increase in domestic credit to the private sector, while still maintaining a moderate rate of expansion of the money supply. - 11 - 30. On the external side, a relatively modest but sustained export growth is expected to be realized in the medium term through the establishment and maintenance of a realistic exchange rate for the So. Sh.. and the dismAntling of government monopolies affecting the export trade. In 1989, export earnings are expected to grow by about 41 percent from a low base, reaching a level still below the 1987 level. Such a projected increase in exports is based on robust assumptions regarding completion of the Bossasso port construction works by mid-1989, adaptation by livestock traders to alternative marketing routes instead of the traditional port of Berbera, the lifting of the ban by Saudi Arabia on cattle imports from Somalia, the dissolution of state monopolies in the export trade, and much higher price incentives than in the first half of 1988. In the medium term the annual export growth rate is projected at around 10 percent. Much of this growth represents a shift out of unofficial exports to official channels. After recovering by about 26 percent in 1989, import growth is estimated at around 5 percent in 1990, and the growth rate will marginally decline thereafter due mainly to restrained expenditure on public Investment projects. However, non-project imports are expected to nearly double in 1989, and will grow at 7 percent annually in dollar terms in 1990-91. As a result of these developments, the current account deficit will rise to US$337 million in 1989 from a level of US$286 million in 1988. The deficit will gradually decline thereafter, but still remain well over the 1988 level in the medium term. 31. The program calls for moderation in total investment which rose to excessive levels on account of high donor support for the public investment program. While the share of total investment in GDP will marginally decline in the medium term from around the 30 percent level, the share of public investment will fall from about 90 percent of the total to a little over 60 percent, within the next five years. The size of the public investment program is projected to decline from US$190 million in 1988 to US$170 million in 1989, before it goes up to US$175 million in 1990 and 1991, in current dollar terms. A more carefully scrutinized and leaner public investment program will be implemented which will lessen the burden on the fiscal side. Meanwhile, private investment is projected to register a relatively large increase due to enhanced opportunities of economic activity and a high level of import availability compared with 1988. Domestic savings, which were negative in most recent years, are expected to gradually become positive, and together with the anticipated high level of concessional aid flows, to contribute to the financing of investment. C. External Policies 32. A major step taken towards economic adjustment was the devaluation of the So. Sh. by 44 percent in foreign currency terms, in June 1988, and pegging it to a basket of currencies of the country's main trading partners. Since then, the authorities have adjusted the exchange rate weekly to reflect changes in the cross rate of currencies in the basket, and to correct for the relative rate of inflation in Somalia with respect to its major trading partners. Under the current system, exporters are allowed to continue to retain 40 percent of their export earnings to be - 12 - credited to their import-export account with the Commercial Bank to be used only for appi ved I..ports. 33. To rationalize the use of foreign exchange resources, a non- discriminatory and transparent system has been put in place, temporarily, for the allocation of private sector imports financed by the commodity assistance programs. At the beginning of each month, the authorities announce the amount of foreign exchange available under this system. Importers submit their requests for foreign exchange allocation to the Central Bank, accompanied by a nonrefundable fee in domestic currency equivalent to 10 percent of the amount requested. All requests are honored on a prorata basis. The official exchange rate applies to all transactions. The effective application fee will exceed 10 percent when the foreign exchange allocated falls short of the total amount requested. The current system approximates an auction in that the price of foreign exchange rises when demand exceeds supply. Foreign exchange available under commodity import programs will continue to be allocated under the present arrangements, until a further review by the Fund and the Bank. 34. The Government will adhere to the principle that the official exchange rate reflects the supply and demand for foreign exchange. This is imnortant fron the point of view of improving the competitiveness of,the economy, expanding the markets for traditional exports, promoting output of nontraditional exports and import substitutes, and channeling trade and workers' remittances through the formal economy. To further improve the competitiveness of the Somali economy and narrow the gap between the official and free market rates, the Government is commit'ed to make discrete adjustments in the exchange rate, when necessary, over and above the weekly adjustments to reflect the changes in cross rates in the currency basket, and to correct for the inflation rate differential vis-a- vis trading partners. Indeed, the exchange rate was depreciated by a further 10 percent in local currency terms in February 1989, by 5 percent in March 1989. and by a further 5 percent in April 1989. 35. As indicated, the Government places a special emphasis on maintaining the competitiveness of Somali exports through appropriate exchange rate policies. Somali official exports are very sensitive to changes in the effective exchange rate for exports. Any significant deviation from the market rate causes a major decline in exports through the formal channels. Therefore, the maintenance of competitive rates is essential for the realization of the program's export targets. A study is being carried out, with support from USAID, to examine the competitiveness of the main export products, most notably livestock. After the study is completed in June 1989, the changes in export competitiveness will periodically be reviewed by the Government. The Central Statistics Department of the Ministry of National Planning will coordinate these reviews with relevant ministries and institutions. 36. In addition to a flexible and realistic exchange rate policy, the Government will rely on supporting policies to promote and diversify exports, to penetrate new markets and regain old ones. Such efforts have already led to the lifting of the ban on Somalia cattle exports to Saudi - 13 - Arabia in March 1989. With this in view, the Government's January 1989 policy package includes measures designed to enable private participation in banking, insurance, and shipping. Also, the changes in policies with respect to the liberalization of domestic and export trade in hides and skins, as well as in frankincense and myrrh, (described in Part III) will contribute to the promotion of exports in these areas. D. Fiscal Policies 37. The central government's financial operations have generated large deficits in recent years, which required substantial financing from the domestic banking system, with expected consequences on inflation rates. As the revenue performance deteriorated, the share of expenditures in GDP grew noticeably. Moreover, the total expenditures have been biased in favor of investment expenditures at the expense of recurrent expenditures. This has led to inefficiencies in expenditure planning and the deterioration of existing infrastructure and services. In addition, there has been serious underfunding of health and education sectors. Also, the shrinking relative size of wage expenditures has caused difficulties in the management and operation of the civil service machinery. 38. Under the program, the Government will aim at reducing sharply the overall cash budget deficit to moderate inflationary pressures, while providing adequate financing to the private sector. This will result in large net repayments by the Government to the domestic banking system, given the level of anticipated net external financing. In the immediate future, reliance on external resources will continue to finance not only investment but also, to a gradually declining extent, recurrent expenditures. However, over the long run, the objective is to realize a surplus on ordinary operations which would partially be directed to finance capital outlays. In an effort to enhance budgetary discipline, quarterly targets for both revenue and expenditure will be established. Also, with the help of technical assistance currently in place, the Government will revamp its accounting practices and increase the transparency of the fiscal data to facilitate a quick response to changing circumstances. 39. On the revenue side, in view of the sharp decline in the ratio of revenue to GDP, the objective will be to raise this ratio from about 5.3 percent in 1988 to 7.3 percent in 1989 and to 10.2 percent in 1991. The increase in 1989 will result mainly from the full-year impact of the 1988 tax measures (described in para 20), the widening of the trade-related tax base due to a depreciating exchange rate as well as higher import volumes, and the impact of the new system of import verification. A committee has been set up in the Ministry of Finance and Revenue, to make recommendations for modification of the tax structure, broadening the tax base, improving incentives, and strengthening tax administration. The work of the Committee will benefit from the recently completed UNDP and USAID sponsored studies. The recommendations of the Committee will be incorporated in stages over the period 1989-91. In addition, the IMF is providing technical assistance in the field of tax administration. - 14 - 40. The Government will put in place an import verification system in the second half of 1989 to control over-invoicing and irregular invoicing which constitute a drain on foreign exchange, and to boost the revenue collection efforts, To this end, the services of an internationally recognized specialized firm will be employed to assist the customs service in verifying the contents and value of all import shipments and in assigning the appropriate duty rate. The same consulting firm will provide technical assistance and training for the local staff. The tariff system will also be reviewed by consultants under ASAP 1I funding, and the Government will make the necessary adjustments based on the consultants' recomuendations. This tariff review will be of an interim nature to ensure that the import verification system is not implemented in conjunction with unreasonable tariff levels. The Government has agreed to complete a thorough tariff review by March 1990 (see Annex VIII). Implementation of a revised tariff structure for Somalia's main imports to be agreed with IDA and a functioning import verification system satisfactory to IDA will be second tranche release conditions under the credit. 41. The Government has asked the Bank to carry out a comprehensive review of public expenditures, with a view to restrain and rationalize the growth in expenditures, and to improve the efficiepcy in resource use. Particular attention will be paid to the sectoral distribution of ordinary expenditures to ensure that the decline in the share of the social sectors is halted and the need for maintenance expenditures is properly addressed. Employment and wage levels will also be closely examined with a view to reverse the declines in real wages, through increases in salaries. Subject to the findings of the aforementioned study, the authorities have already decided to begin a phased reallocation of expenditure in favor of economic and social services, increasing their share to at least 15 percent in 1989, 18 percent in 1990, and 20 percent in 1991. Also an action plan has been prepared to reduce outlays on foreign representation which has a disproportionate weight in public expenditures and takes up a large portion of export earnings. Accordingly these outlays will be reduced by 14 percent in terms of foreign exchange in 1989, and by a further 33 percent over the following two years. 42. In the context of the public expenditure review, the public sector investment program will also be reviewed with respect to its level, sectoral distribution and project content. In particular, preparations on building a multi-purpose dam on the Juba river (the Baardhere dam) have advanced to a stage where a final project appraisal may be done in FY91, subject to the resolution of the riparian rights issue and mobilization of donor support. If realized, the project will have far reaching impact on power supplies, agricultural production, and flood mitigation. The financing of this project will require extraordinary external support for the capital costs and place heavy demands on the Government's own resources. Therefore, if a decision is made to carry out the project, it will affect both the size and distribution of public expenditures. Although the bulk of these expenditures are likely to fall beyond the program period, the forthcoming public expenditure review will assess the financial implications of the dam construction and its macro-economic effects. - 15 - 43. The public expenditure review vill be completed in time for its recommendations to be incorporated into the 1990 budget. Agreement with IDA on the three-year public investment Program covering 1990-92, and incorporation in the FY1990 budget of measures agreed with IDA based on the review of public expenditures, will be second tranche release conditions of the credit. E. Monetary Policies 44. The objective of the monetary and credit policies is to help reduce the high rate of inflation in combination with a more prudent fiscal policy, and to alleviate the pressures on the balance of payments. To achieve the target of reducing the inflation rate from 40 percent in the last quarter of 1988 to about 20 percent by end-1989 and to 10 percent by end-1991, the rate of domestic credit expansion will be reduced sha,ply, and the increase in money supply will be limited to 28 percent in 1989. However, due to the projected large net repayments to the banking sector by the government, the productive private sector will have adequate access to the banking system. The expansion of credit to the private sector is projected at 89 percent in 1989. , 45. The Government will continue to pursue an active and flexible3 interest rate policy. As noted in para 20, the interest rate structure was simplified in August 1988, and deposit and lending rates were raised to 40 and 50 percent respectively. Interest rates became positive in real terms in the last quarter of 1988. The Government stands ready to adjust the rates in either direction in the coming months depending on inflation trends, to ensure that the real rates remain positive. In parallel with interest rate policy, reserve requirements will be kept under close review to absorb liquidity of the Commercial and Saving Bank, as necessary. 46. The financial situation of the government-owned Commercial Bank was seriously weakened due to the unprecedented credit expansion in late 1987. Currently, an international accounting firm is under contract to audit its accounts for 1987 and 1988. Based on this audit, the Government will prepare an action plan by mid-1989 to address the Conmmercial Bank's financial problems. Also, a law was enacted recently opening the banking system to the private sector and to foreign banks and financial institutions, to enhance competition in the banking area. The Government will design effective control mechanisms to ensure that the commercial banks observe overall credit ceilings and provide timely information about their credit operations to the Central Bank. At the same time, the Central Bank will strengthen its monitoring and supervision procedures in order to detect deviations on a timely basis. F. External Financing Requirements 47. Somalia faces a serious external debt situation in the medium term. More than 40 percent of total outstanding external debt, including the arrears of principal, is owed to multilateral institutions ($973 - 16 - million). At the end of 1988, total arrears amounted to US$428 million, of which US$168 million was due to multilateral institutions, including US $77 million to the Fund. Arrears, excluding those on "frozen" debt to some Eastern-bloc countries, estimated at US$266 million, are projected to be eliminated over the period 1989-91 with a rescheduling of all bilateral arrears in 1989 and a gradual reduction in multilateral arrears. The settlement of these arrears, in addition to current obligations, will not be possible without substantial cash assistance in addition to debt relief on exceptionally favorable conditions. 48. The balance of payments and external financing requirement projections for the program are shown in Annex I. Under these projections, the total financing requirements are US$1,578 million in 1989-91, including current account deficits of US $966 million. Somalia will begin reducing arrears to bilateral creditors in 1989 and eliminate all outstanding arrears by 1991. To this end, Somalia will seek debt rescheduling from the Paris Club and all other official bilateral creditors for all outstanding arrears and interest, as well as principal falling due during the 1989-91 period. After 1991 the external situation is expected to become more manageable as debt service obligations decline substantially. Financing expected from existing and anticipated new committpnts is mainly in the form of commodity aid, project financing and general import financing amounting to US$925 million in 1989-91. The total level of SPA support expected in 1989-91 amounts to US$328 million. The SPA pledges already identified for 1989 and 1990 total US$112 million. Anticipated new commitments will likely cover all residual import financing requirements. While this level of financing will meet Somalia's import financing requirements, tha program permdts only a modest increase in per capita private consumption and would clearly benefit from a higher level of import support. 49. Somalia has accumulated sizeable arrears with the Fund during the course of last year. However, because the country's foreign exchange reserves have been virtually depleted and the balance of payments is severely constrained, the solution to the problem of overdue obligations to the Fund will have to coev mainly from Somalia's donors. A Support Group for Somalia is being formed to mobilize cash resources needed to clear, in late 1989 or early 1990, the overdue obligations to the Fund frozen at end- 1988, thereby opening the way for the Fund's active contribution to filling in Somalia's financing gap in 1990. Meanwhile in 1989, the program has a cash financing deficit of US$172 million, of which US$76 million corresponds to the frozen arrears to the Fund outstanding at end-1988 after adjusting for exchange rate fluctuations. This leaves a cash financing gap of US$96 million for 1989. Even with the projected cash support from Italy and the US amounting to US$30 million and a freeze on arrears to the Fund at end-1988, there remains an unfinanced cash gap of about US$66 million. The Support Group for Somalia is expected to address the issue of closing the remaining gap, in the coming months. - 17 - PART III - AGRICULTURAL SECTOR ADJUSTMENT PROGRAM A. Introduction 50. The agricultural sector is the backbone of the Somali economy, since it accounts for nearly 60 percent of GDP, 95 percent of exports, and about 80 percent of employment. The domination of the economy by the agricultural sector will continue for many years because of the extremely small size of the manufacturing sector and the unpromising prospects for its rapid growth. Agricultural activities are built on relatively abundant resources in relation to the population of Somalia, but their exploitation requires judicious management, sound support services, and adequate infrastructure, as well as a policy environment conducive to private initiative. Therefore, because of its relative size, its prospects for growth, and the urgency of the issues to be addressed, the agricultural sector has been the main focus of the Government's adjustment program. 11 51. In the 1980s, the Government has taken a number of steps to improve the overall policy environment for agricultural production. The first ASAP credit supported the Government's policy initiatives in a number of areas ( Anne= IV). Despite encouraging developments, however, further actions were needed to achieve the objective of removing controls and government monopolies on trade and services. The momentum on these actions was lost when the implementation of the program was interrupted in September 1987. However, as indicated in Part II, there has been a major turnaround in the Government's attitude towards the necessary reforms since mid-1988. Liberalization policies with respect to trade in hides and skins, frankincense and myrrh, removal of restrictions on the importation of veterinary drugs, and removal of monopolies on banking, insurance and maritime transportation have long been on the agenda for policy dialogue between the Government and IDA. By taking these significant up-front actions, the Government demonstrated its commitment and paved the way for further deepening of the reform process. 52. Policies aimed at improved performance of the agricultural sector would have only limited success unless they are backed by an appropriate macroeconomic policy environment. Therefore the ASAP prog-am will rely heavily on the maintenance of such a framework. An important element of the macroeconomic program is the exchange rate policy, as described earlier. Without an appropriate exchange rate, it would not be possible to maintain agricultural incentives. Also without sufficient foreign exchange, the availability of which is closely relited to increases in export earnings and the steady flow of external assistance, the objectives of ASAP could not be achieved. Therefore, these two aspects of the Government's adjustment program are closely interrelated. 1/ The Bank has prepared a review of the agricultural sector in Somalia. See report No. 6131-SO, 'Somalia - Agricultural Sector Survey - Main Report and Strategy', December 30, 1987. - 18 - B. Performance of the Agricultural Sector 53. Over the period 1980-88, the agricultural sector, including crops, livestock, forestry and fishing, contributed on average 63 percent of GDP at factor cost. Livestock and livestock products accounted for about 47 percent, crop production 13 percent, forestry 2 percent and fisheries about one percent. Total GDP growth in agriculture over these years w3s about 3.1 percent per annum. The growth of GDP from livestock production has been relatively slow at around 2.3 percent per annum which was partly *,he result of limited carrying capacicy on the rangelands, but also due to an adverse policy environment, which reduced productivity and market opportunities. Crop production, after many years of stagnation, increased rapidly in the early 1980's following deregulation of the grain market. Since 1980 the value of crop production has increased at about 6.1 percent per annum, while the output of sorghum and maize increased by about 5.1 and 15.3 percent respectively. 54. As shown in Annex V the longer term trend in the major food grain production is heavily influenced by increases in area harvested, although in recent years yields have been increasing appreciably. An important underlying factor leading to Increases in production for maize and sorghum was the introduction of a free market for all grains in 1983/84. Prices paid to producers by the Government grain purchasing monopoly had been falling significantly in real terms during the 1970s; the Government purchased between 20 to 35 percent of total production. The increased producer prices after decontrol had a substantial impact on production. Although historical data are at times suspect, statistical analysis indicated that, while rainfall and other environmental factors were important, production increases for maize could be explained in large part by the previous year's average price received by farmers. The same data suggested that the area of maize harvested was also influenced by the increased prices to producers. The data on sorghum indicated that price had a similar influence on area harvested and output. It is expected that in future yield increases will make a greater contribution to production growth than area. 55. Rapid changes in crop production had a major impact on grain imports. The years of stagnation had resulted in increasing annual grain imports which peaked at almost 400,000 tons in 1981, about equal to domestic grain production. About half of this volume was food aic. Since that time dependence on external food grain supplies h.as declined markedly. ln recent years total imports have fallen to an average of about 250,000 tons per annum, including food aid going to refugees. The share of food aid in external supplies has varied considerably; in 1985 it was the dominant source of external grain supply accounting for at least three quarters of the total. However in 1986 and 1987 the share decreased to a more regular level of about 55 percent; half being food intended for refugees. Per capita consumption of grain and cereal products does appear to have increased also since the late seventies when it vas measured at about 117 kg. per annum In a household survey in Mogadishu. In another household survey in Mogadishu in 1984/85 per capita consumption per annum - 19 - was measured at 120 kg. Estimates of food consumption in rural areas indicate much higher per capita consumption levels. 56. The impact of the grain marketing and pricing policy changes on output stands out as an important demonstration of the impact of the decontrol of markets on production. This is important also because a rapidly growing and more diversified crop production will provide additional employment opportunities. The past success with the decontrol of grain markets and the objective of increasing the rate of growth in the economy have been contributing factors leading to the Government taking further steps to eliminate the remaining controls on agricultural pricing and marketing. C. Prospects for Growth 57. The main sources of growth for the agricultural sector are the livestock and crop sub-sectors. Currently, the livestock sub-sector is heavily dependent on the carrying capacity of the natural range. There are indications from ongoing research work, however, that the rangelands are at or near their limit of carrying capacity. Nevertheless growth in offtake from the rangelands is projected to increase because selling age can be reduced when marketing facilities are improved and livestock health enhanced. There are also substantial opportunities for increased livestock production in mixed farming areas in Southern Somalia where animals can graze on crop residues and improved pastures could be developed. In addition, particularly in the southern areas, there will also be a trend towards a younger age of turn off resulting in a short term increase in output. In future the rangelands will remain heavily involved in the export sector but with an increased proportion coming from the southern mixed farming areas. The livestock sub sector will continue as the most important component of agriculture, growing at a projected average rate of 2-3 percent per annum. In the short to medium run, growth may be higher if younger animals can be sold. 58. Sound output performance of the crop sub-sector was a major cause for improved incomes and employment in rural areas, and the substantial reduction in food aid. The main source of growth in crop production in the past was area expansion; in general, yield improvements were either non existent or very small with the exception of irrigated maize and rice. In the coming years, crop production will benefit from new incentives that will stimulate intensification of grain production based on rehabilitation and development of irrigation, and the exploitation of the opportunities for diversification of rainfed crop production. While about 1 million ha are used for crops at present, it is estimated that this area could be at least doubled in the foreseeable future. It will take time before this potential area is developed, but a significant proportion of the additional area will be in the Shebelli and Juba valleys where the rehabilitation and development of irrigation systems will be taking place in future. On the basis of known technology and prospective irrigation rehabilitation crop production is expected to increase by at least 5 percent per annum over the next five years. - 20 - 59. In addition to its contribution to income and employment, increased crop production will have other beneficial effects on the economy. It will encourage import substitution in rice, oilseeds, and cotton. Second, it will help diversify exports, by first increasing banana exports and later increasing exports of other fruits, and in the longer run, possibly vegetables and flowers. Finally, it will provide 4ditional feed supplies for animals on mixed farms. This supplementary feeding will enable younger turn off age for live animals for export and domestic consumption, as well as increased domestic supplies of milk and poultry products. 60. The longer run achievements will not be possible without considerable technical progress. The Government is therefore placing renewed emphasis on research. Agricultural research in Somalia has lagged behind improvements in the agricultural extension service. In the short term research strategy in Somalia needs to be directed to adapting technologies to make maximum use of existing capacity for food crop production and improving water management in irrigation areas. The longer term strategy includes institution building for manpower training and development, the formulation of programs for improved animal health, diversification and increased crop yields, and improved farming systems. Extension programs should reinforce progress already made, with an emphasis first on irrigated areas and later support to rainfed areas while reducing extension delivery costs for the whole program. A second IDA-assisted Agricultural Extension project (Cr. 1794-SO) was approved in FY89 following the completion of the first extension project (Cr. 905-SO). Also, major commitments have been made by USAID and CIDA to the strengthening of research through investment in facilities and manpower development, and an IDA-assisted Agricultural Research Project is being considered for FY92. D. The Government's Program 61. The Government sees agriculture continuing as the leading sector of the economy, growing at around 4 percent per annum, becoming more diversified, increasing export income and contributing more to domestic food supply and employment. The Government's program aims to remove or alleviate constraints tc stimulate growth in the agricultural sector. The constraints to increased livestock output include: the inefficiencies in the marketing of livestock and animal products; the scarcity of veterinary drugs and services; the inadequacy of shipping and insurance facilities; and, the low carrying capacity of the range and limited supplementary feed supplies. Constraints on growth in the crop sub-sector are: the insufficient development of the extension support system; the inadequacy of agricultural research capacity with respect to a number of techniques (crop rotation, crop management practices, and diversification opportunities); the inefficient use of the existing irrigation system; and, the inadequate land tenure policy and cumbersome administration. 62. The Government's program addresses a large number of these issues, particularly those in the area of policy. In fact, most of the required policy changes have been made up-front. The proposed credit will - 21 - closely monitor the actual implementation of these policies in the coming months. Other constraints are dealt with under specific projects. In addition to the agriculture-specific policy issues, the present program also addresses public sector management issues in selected areas. These includet the review and restructuring of the public expenditures, including public sector investments; cost recovery in the public sector; public enterprise restructuring, rehabilitation and where appropriate divestiture; and improvement of the Government's policy analysis and planning capability. Agricultural Marketing Policies 63. Grain Marketing. An important step in the liberalization of the agricultural markets was the elimination of the Government's monopoly on grain marketing in 1984. Until then, farmers were legally required to sell all production to the Agricultural Development Corporation (ADC). The ADC now operates as a buyer of last resort in the market for coarse grains. As part of this strategy, the Government announces minimum support prices at or before planting time; these prices have usually been between import and export parity. This policy aims at ensuring that incentives for private sector grain trade are not detrimentally affected by ADC intervention, while at the same time ensuring that the food security of low income groups is not jeopardized because of increases in the prices of staple grains. In addition, ADC, together with the National Commercial Agency (ENC), handles sales of food aid. Currently, about 50 percent of food aid goes to refugees. About 25 percent is sold in the local market through ENC and ADC and the remainder is distributed to government agencies such as the army, jails and ministries for the feeding of employees. Under ASAP I, the Government has made improvements in food aid management in order to avoid undermining of local grain production. All food aid in the form of grain and flour, as well as vegetable oils, was sold at prices determined in a food aid auction with a floor price set at import parity. In accordance with ASAP I conditions, the Government also transferred food aid to public institutions at prices no less than those determined at the most recent food aid auction. The continued implementation of these agreed actions will be monitored under the proposed credit. 64. Recent developments, however, show that r i issues have opened up concerning the grain marketing arrangements. T e financial status of both ADC and ENC is precarious; their losses are increasing every year as business volumes decrease and they have become a burden on Government resources. The organization and management structures are obsolete, and there is a considerable amount of excess capacity, both in terms of manpower and storage facilities, given the reduced functions the two agencies are performing. There is also a duplication of functions as food aid management is increasingly the responsibility of the Ministry of Finance and Revenue. The role of these two agencies and the need for their existence need to reassessed. In addition, Somalia's food aid management can be improved through better coordination between GOS and donors on the timing of arrival of food shipments, and a defined strategy on how to use food aid to improve food security. - 22 - 65. A study financed under the ASAP I credit is being carried out on the management and operations of ADC and ENC. The study will contain recommendations on an action plan for the future of the two agencies. Under the proposed ASAP II credit, the Government will review the recommendations of this study jointly with IDA. ABreement between the Government and IDA on an action plan for the institutional development of ADC and ENC will be a condition of release of the second tranche of the credit. The action plan will include measures to improve the management of food aid. Criteria for an acceptable plan include: (i) establishment of a strategy for changing the current institutional structure of grain marketing; (ii) definition of the future need for and role of ADC and ENC; (iii) identification of those responsible for implementing the institutional change; (iv) assessment of the costs of the institutional change and identification of the sources of funding; and (v) timetable of specific implementation steps. 66. Hides and Skins. Since 1973 the Government has held monopoly control over the domestic and external trade in hides and skins through the Hides and Skins Agency (HASA) and since 1981 the Somali Leather Agency (SLA). The reasons the Government gave for its control of the trade were to ensure the quality of exports, and eliminate smuggling and the sale of skins from protected animals. However, the monopoly led to increased smuggling and a decline in the official value of hides and skins exports, thereby reducing the country's official export income. Official sheep and goat skin exports were only about half the annual slaughtering. Under ASAP I the Government agreed to the preparation of a study of the hides and skins trade which would form the basis of an action plan for reforms in the hides and skins industry as a condition of the second tranche for ASAP I. The study was completed and the Government agreed to decontrol the domestic hides and skins trade, but not the export market. As a result, there was no significant increase in official exports. 67. In January 1989 the Government decided to decontrol both the export and domestic trade in hides and skins. The objective of this policy change is to increase the exports of hides and skins traded through the official market. In the short run the value of official hides and skins exports could double from an annual average of about US$6 million to US$12 million, assuming effective exchange rates move to realistic levels. Local Government and private capacity already exists to process about 60 percent of all sheep and goat skins available from domestic slaughtering. As the use of these facilities increases and private tanning capacity is expanded, the annual value of hides and skins exports could increase to about $20 million, within five to ten years. 68. Frankincense and Myrrh. Somalia is the largest world producer of frankincense and myrrh (two different types of gum resins). These products are produced from trees in north and south west Somalia. There has for many years been a monopoly in the marketing and exports of these products, through the Frankincense and Gums Trading Branch in the Union of Somali Cooperatives. The Branch had, until February 1989, the sole right to buy gums from the 54 collection cooperatives. The recorded annual value of official exports is about $2 million at present. It is estimated, however, _ 23 - that the actual total trade value through Djibouti and Aden is about $12 million per annum. The Government removed the monopoly powers of the cooperative officially in February 1989. The decontrol of the marlket, coupled with realistic exchange rate policies, is expected to stimulate more trade through formal channels. 69. Veterinary Drugs and Equipment, and Veterinary Services. It is estimated that about $4 million worth of veterinary drugs is used by the livestock industry in Somalia at present. In February 1989, the Government officially announced the complete decontrol of all trade in veterinary drugs. Formerly, imports of most of these drugs were through Government channels. The controls created black markets for drugs which were sold at highly inflated prices. Substandard veterinary drugs were also unofficially imported from Kenya and Djibouti. It is anticipated that decontrol of the market, coupled with the availability of private veterinarians to advise on and sell drugs, will result in improved availability of veterinary drugs at open market prices and improved animal health. This, in turn, will help increase production and facilitate exports by addressing the concerns of importers from Somalia who have in previous years complained about the health of Somali livestock. The Government needs to establish the necessary regulations to ensure that qualified veterinary drug importers can be registered in a non discriminatory fashion and ensure that safety standards are maintained. The Government has also announced that qualified veterinarians will henceforth, following establishment of a licensing procedure, be allowed to practice freely. Transportation and Financial Services 70. The above program of policy measures in agriculture is important because it should provide increased opportunities for production and trade for agricultural and livestock producers. The Government has gone further, however, and has taken steps to remove controls on transportation and financial services which have a direct impact on producers and traders of crops and livestock, as well as a number of other products. The Government's actions in these areas are described below. 71. Maritime Transport. Until the Government announcement in February 1989 to decontrol all maritime shipping services, the Government had regulated maritime transport since 1974. It exercised these powers through the Ministry of Marine Transportation, Ports and Fisheries. The Ministry controlled three separate agencies namely, the Somali Shipping Agency and Line, the Somali Shipping Corporation and the Somali Port Authority. The two shipping agencies had powers over all coastal shipping including charters, issuing bills of lading, providing ships' provisions, and preparing arrival and departure manifests. They also issued visas to ships. The centralized system of control over charters was particularly cumbersome, and caused considerable delay and uncertainty. Delays resulted in additional costs for livestock feeding in holding yards, and the uncertainties had detrimental effects on markets for Somali sheep and goats. These difficulties were compounded as sheep and goat exporters were charged set fees of US$6 per hea'd for freight from Berbera to Jeddah - 24 - compared to rates about two-thirds this figure quoted by private charter companies. The decontrol of maritime shipping which removes the exclusive powers of the agencies mentioned above should result in substantial improvements in shipping transport efficiency and lower costs for agriculture (particularly livestock exports) and other sectors of the economy. 72. Banking. Until recently, the banking sector has been limlited to only two Government banks, the Commercial and Savings Bank of Somalia (CSBS) and the Somali Development Bank (SDB). Only one of these banks, the CSBS, has branch offices and accepts deposits. It lends short-term (10-12 months). The SDB, which has a centralized management structure, is mainly involved in medium-term lending (2-6 years) for development purposes. There is virtually no long-term lending. There are many shortcomings in CSBS and the SDB originating mainly from their limited capacity to adequately evaluate loan proposals, monitor use of funds, recover repayments and implement credit ceilings. IDA has provided assistance to SDB in the past to strengthen the institution, but the results fell short of expectations. Subsequently technical assistance has been provided to SDB and CSBS by the Federal Republic of Germany through GTZ. 73. In February 1989, the existing banking law was officially amended to allow the establishment of private banks; the Government, with the assistance of the Fund, is in the process of revising the banking regulations. Private banks, when established, are expected first to provide credit services for trading activities, particularly exports, and subsequently perform a wider range of banking services. 74. The existing Government banks will continue. However the CSBS financial status needs to be ascertained more precisely and consequently an audit of accounts is underway (see paragraph 46). There are also plans to arrange for further management assistance to the CSBS. The most important issues in rural and industrial finance are the need to: improve the institutions responsible for creuit; stimulate savings; provide more opportunities for credit for the financing of production and trade in all sectors of the economy; and achieve positive interest rates for lending. Steps currently being taken to maintain positive real interest rates were mentioned in paragraph 4S. 75. Insurance. In February 1989 the Government officially announced that it had decided to relinquish its monopoly over insurance services in Somalia. This is a major change which will lead to more competition and efficiency in an area where confidence was seriously eroded. Many trading activities were insured only because of Government requirements, but without any expectation of recouping losses should they occur. Under the new arrangements, private insurance companies will be permitted to establish and operate in Somalia. It is, therefore, also no longer compulsory to use the Somali Insurance Agency for all goods traded to and from Somalia. - 25 . Land Tenure 76. The Government is committed to improving land tenure policies and laws as well as land administration. The present land tenure system 2. Somalia is based on a law enacted in 1975. It provides that all land is owned by the State, but that individuals and families can register one piece of land. The law provided for procedures whereby land occupants could register leaseholds for 50 year duration on agricultural land. There are a number of shortcomings in the law and its administration. For example the limit of one parcel of land reduces flexibility in land use and constrains the farmer's risk aversion strategies. In some cases small parcels of land currently farmed jointly under traditional arrangements may, if the law is strictly applied, not be deeded to one individual. The legal opportunities for joint registration of land by husbands and wives is not specified in the law; current deeds show that husbands are invariably the holders of legal rights to land. Also, while applicants for registration are required to show whether land they want to register is already occupied by others, this is not always done adequately and the law is unclear as to the legal entitlement of existing users of land. Hence land being used legitimately under traditional agreements may be taken over by outsiders with limited legal recourse by the traditional occupants. These types of inadequacies in the law and its administration need to be corrected for orderly development of agricultural areas. Further land tenure administration is weak and cumbersome. So far, less than 5 percent of land in Somalia has been registered. Most of these registrations have been in the Shebelli and Juba valleys where land and irrigation development are most intense. 77. The Government considers that accurate, equitable and rapid registration of land is an important pre-condition to further agricultural development in the two important river valleys in Somalia. It will also be important for rangeland areas where conflicts over land rights, particularly over areas being enclosed for grazing and cultivation, are becoming more numerous. The Government has decided to move rapidly to review the existing land tenure laws and land administration, and prepare an action plan for irrigated land. The preparation of an action plan to improve land tenure policy and administration for irrigated land, satisfactory to IDA, will be a condition of the second tranche of the credit. Criteria for an acceptable action plan include that its (i) adequately safeguards traditional rights; (ii) provides security of tenure; (iii) enhances transferability and liberalized access to land; (iv) protects the rights of spouses; (v) is enforceable with appropriate remedies; and (vi) prescribes an administrative framework. The criteria for an acceptable administrative arrangement are that it: (i) is simple, rapid and easy to understand; (ii) provides land holders with clear title; (iii) is cost effective and can be funded from the ordinary budget; (iv) provides records and information which is easily accessible to land holders and others with bona fide interest. - 26 - Public Sector Management Issues 78. The Government's program addresses a number of key issues to improve the effectiveness of policy formulation and planning, to rationalize public expenditures and investments, to improve cost recovery in the public sector, and to restructure public enterprises. The need to improve public expenditure planning has already been pointed out, and the actions to be taken by the Government have been outlined (para. 43). 79. Policy Analysis and Planning. The Government has lacked a strong policy analysis capacity and adequate statistical data on agriculture, as well as on the economy as a whole. UWDP has for a number of years supported a program of technical assistance to improve the Government's policy analysis capacity in the Ministry of National Planning. Discussions are being held in respect of a follow up project. GTZ and PAO have financed assistance to strengthen policy analysis in the Ministry of Agriculture and Natural Resources. There have been considerable efforts recently to improve the statistical base. In 1987, USAID financed a population census which is now being analyzed. Also, a series of support programs havf been directed at the Central Department of Statistics in the Ministry of National Planning and to improve the statistical base for the whole economy. ASAP I provided much of the financial support for this work with matching contributions from the Government of Sweden through the Swedish Agency for International Technical and Economic Co-operation (BITS). ASAP II will continue this support jointly with the Government of Sweden. 80. Cost Recovery. The Government is committed to improving cost recovery in the public sector through various service charges. Currently, under the IDA-assisted North-West Agriculture Project (Cr. 1538-SO), a cost recovery system is being implemented. Farmers benefiting from the soil and water conservation measures are required to repay a portion of the costs of earth works and project implementation. A similar cost recovery arrangement is in place in IDA's Semi-mechanized Rainfed Project (Cr. 1774- SO). Under ASAP I the Government agreed to achieve full cost recovery for tractor rental services as a condition of the second tranche. The operating costs and charges levied by ONAT (the Government tractor and machinery hire agency) were reviewed and a report was produced. On the basis of that report rental charges were increased; they have been regularly increased since, in line with assessed costs and the commitments made under ASAP I. OMAT has also restructured its operations by closing loss making branches and is now operating at a profit. It should be noted that the Government is also pursuing cost recovery policies in setting electricity and water charges. - 27 - PART IV - THE IMPACT OF TEE PROGRAM A. Economic Impact 81. An important objective of the Government's adjustment program is to achieve and maintain economic stabilization. The Government is fully aware that the rate of inflation must be brought down to enable markets and prices to play their allocative role effectively. The stabilization components of the program focus on correcting the fiscal and external balances through a combination of demand and supply measures. Reduction of the fiscal deficit, stricter monetary policies, and exchange rate adjustments are expected to bring aggregate demand in line with available resources. Supply side measures such as the reorientation of domestic credit toward the private sector, an increase in the volume of imports, and improved export incentives are expected to stimulate output. With the implementation of these policies, Somalia should achieve the stabilization objective with moderate annual price increases. 82. Under the program, the Government aims to achieve an annual output growth rate of almost 5 percent. After taking into account the projected increase in real indirect taxes at market prices, GDP is expected to grow at about 5.5 percent per annum. This would allow an annua* per capita income increase of about 2.5 percent. Given the resource availability, and the performance record of the economy, this annual rate of GDP growth is achievable under the new policy environment. Crop production can be expected to increase at 5 percent annually and livestock by between 2 and 3 percent (paragraphs 57 and 58) while construction and transportation are projected to grow each by 6 percent, manufacturing 10 percent, and fishing 15 percent per annum. These sectors will benefit from the liberal.zation measures, as well as the higher import availability under the program. Reflecting both the expansion in production and imports, per capita domestic consumption will increase by about 6 percent in 1989, partially offsetting the 11 percent fall registered in 1988. In the medium term, per capita consumption will increase at an annual rate of a little over 1 percent. 83. The process of stabilization and adjustment is likely to require several years. During this period, the Government needs to hold to a steady course of economic policies, follow through on announced intentions, and avoid abrupt changes in policies, to increase investors' confidence over time and to improve the climate for private sector participation. Also, the success of the program will depend, to a large extent, on the availability of sufficient external resources. Within a hospitable policy environment for private initiative and given a steady flow of external support for projects and balance of payments, Somalia has sufficient physical resources to be able to make a turnaround, and the economy can be put on a viable growth path in the long term. 84. The success of the current program is heavily dependent on the availability of external support and the export performance of the economy. Any significant shortfall in anticipated foreign exchange receipts would - 28 - have a major impact on all program objectives. To the extent that foreign exchange receipts are lower, the growth rate for 1989 would not be realized, and the economy would continue to be under constraint because of a severe shortage of imports. Moreover, on account of the very high share of government revenue generated by external assistance, the budgetary deficit would proportionally widen with damaging consequences for stabilization and other program objectives. 85. Failure in the implementation of the adjustment program would manifest itself first and foremost on exports. A shortfall in export receipts would reduce the amount of foreign exchange available to both the private importers and the Central Bank for Government needs. To the extent of the shortfall in imports, growth targets would be imperiled, and unplanned accumulation of arrears by the Government could threaten commodity import programs and general import financing. The impact of a shortfall in external resource availability would be dramatic. For example a 30 percent shortfall in grants for commodity import programs would result in reducing the projected growth in GDP, no growth in per capita income, and negative growth in per capita consumption. The impact on the budget would be more severe on account of much lower counterpart funds. To maintain the monetary and credit targets of the program, expenditures would have to be cut by 10 percent in real terms, from their already constrained levels. B. Social Impact 86. The Government's adjustment program aims at improving the well- being of all income groups and providing incentives for more gainful employment. However, some of these measures may have negative short term effects on consumers, primarily by raising prices of food, water, transportation and other services. Such effects will fall more heavily on those who are at present benefitting from subsidized prices for food and services, and whose incomes do not rise immediately. These effects are lik3ly to be experienced most acutely in the urban areas. 87. Some elements of the adjustment program may partially counteract these negative effects. Elimination of the Government monopoly in shipping, insurance and exports will benefit producers and infuse new income into the urban and rural economies. Re-allocation of government expenditure in favor of economic and social services shoulV result in more and better services for the poorest groups, although tze full benefits of this will be realized only gradually. The ASAP II credit will include a component to support the est.ablishment of an institutional framework to plan, and a fund to finance a number of specific actions to address the cost of adiustment being borne by vulnerable groups. 88. A comprehensive study of disadvantaged groups in Mogadishu was carried out in 1986 by the Municipality of Mogadishu. The study which included household surveys in six different areas was recently published by UNICEF. Since the completion of the study, the Ministry of Health and UNICEF have jointly carried out nutrition surveys in four areas of the - 29 - city. supplementing the food expenditure data that were originally reported. Overall it was estimated that between 7 percent and 12 percent of households were in poverty, defined in terms of insufficient expenditure to purchase a minimum food basket. The nutritional surveys have indicated malnutrition rates of 3.4 percent of children under five in middle income areas but up to 6 percent in the poorest communities. The results of these surveys provide valuable baseline data on a number of dimensions against which changes in the quality of life of households in the city can be measured in the coming years. C. Measures to Alleviate the Impact of Adjustment on Vulnerable Groups 89. In the Policy Framework Paper (1989-91) the Government has stated the need to pursue growth with equity, that is, to provide the poor with access to services which meet their basic needs, and to ensure their ability to effectively participate in the growth process by increasing their access to employment and income generating opportunities. The Government has established a Social Action Committee, responsible to the Ministry of Finance and Revenue, to examine the position of vulnerable groups, evaluate possible measures to address the problems of vulnerable groups, and monitor implementation of approved measures. The establishment of this Committee was an important step in a process which will enable the Government to design policies and programs to address the social dimensions of adjustment. 90. The actions planned to address the impact of the adjustment program on the vulnerable groups will have two major parts. The first part will concentrate on institution building for social action planning to: (i) strengthen the capacity of existing institutions to analyze social action policy programs and to identify and design social action projects which are to address the problems caused by adjustment policies; (ii) evaluate the benefits and costs of social action programs and projects; and (iii) monitor the living standards of households in Somalia. The second part of the program is to establish the institutional framework for the financing of the projects and programs. These actions under ASAP II are seen as a start to a longer term program. Institution Building for Social Action Planning 91. Social Policy Support. Analysis of social action policy will be carried out by a unit (Social Action Unit) in the Ministry of National Planning (MNP) which will be assisted by long and short term consultancies. The role of this unit will be to formulate policies for dealing with the problems of the poor and vulnerable groups. The unit will also identify and formulate specific actions. In summary the work of the unit will be to li) identify and explore ways in which equity issues can be protected in the context of macroeconomic policy reform; (ii) formulate actions which can address the problems of vulnerable groups in particular sectors such as agriculture and the civil service; and (iii) communicate to the vulnerable groups the social services and support which they are entitled to. The social action unit will be responsible to the Social Action Committee. The - 30 - appointment of the head of the Social Action Unit, satisfactory to IDA, will be a condition of effectiveness of the credit. 92. Project Evaluation. This activity will be supported by technical assistance for two years and a series of seminars and training to evaluate the proposed interventions. A number of potential actions have already been identified (see Annex VI). They are amongst the possible sub- projects which will be implemented under the social action program in ASAP IT. The criteria for choosing the specific actions will be, inter alia, that (i) they are directed at the poor; (ii) are simple to implement (iii) can be completed over a short time span; (iv) are not inconsistent with longer term programs; and tv) do not divert staff from their current activities. Arranging for the evaluation of the proposed projects will be the responsibility of the social action unit, 93. Monitoring. The monitoring of living conditions of the poor in Somalia would be done by first a further analysis of the existing household budget survey, second, conducting base line studies to obtain further information on nutrition and housing, and finally implementing as a separate operation a permanent household survey with funding provided by a bilateral donor. The first of these activities will be the responsibility of the Central Department of Statistics in the MNP. This latter activity is at present unfunded, but it is anticipated that a bilateral donor will be prepared to consider financing the longer term permanent household survey and that the survey would become part of the social action program. Framework for Funding 94. The ASAP II credit will establish a social action fund, to be managed on a day to day basis by the social action unit, to finance the approved social action projects. Establishment of the social action fund will be a condition of effectiveness of the credit. The approval process for use of the fund will be through the Social Action Committee. The Government and IDA anticipate other donors would be interested in contributing to this fund. The committee will be provided with permanent support by the social action unit and additional technical support financed from the ASAP II credit arranged and approved by the Committee as necessary. All approvals for the use of money from the social action fund by the Committee will be subject to the approval of IDA on a no objection basis. Approved withdrawals from the social action fund will only be made under arrangements to be agreed with IDA. The aim will be to provide a close relationship between funding and action. Some of these activities identified in Annex VI are well advanced in terms of their preparation. In some cases it may be appropriate for ASAP II to cofinance ongoing social action programs. It is likely that most projects will be implemented on behalf of the Social Action Committee by a Government agency, private contractor, or non government agency. - 31 - PART V - BANRK GROUP OPERATIONS IN SOMALIA A. The Bank's Portfolio 95. Bank Group commitments to Somalia to date total US$ 398 million, consisting of 36 IDA credits and two IFC investments. Fourteen projects are under implementation. Over 30 percent of total IDA lending has been for agriculture, 25 percent for transport and the rest about equally divided among education, water supply, ports, energy, industry and technical assistance. The list of current projects in the portfolio is given in Annex II. The ASAP I credit, the predecessor to this operation, was approved in June 1986. 96. Progress in implementing development projects in Somalia has varied. Two agricultural projects have suffered severely from the civil unrest in the north west. Some projects have suffered from over-ambitious design, and co-financing arrangements have not always been easy to implement. Projects for roads, ports, and water were more successful initially than those in the agricultural sector, but implementation of agriculture projects has improved. Somalia's disbursement performance on projects assisted by the Bank group has been satisfactory. The FY88 disbursement rate was 29 percent as compared to 26 percent for the Africa Region and 25 percent Bank/IDA wide. B. The Agricultural Sector Adjustment Program I Credit 97. The first Agricultural Sector Adjustment Program (ASAP I) of $70 million was approved by the Board in June, 1986. The program was financed through an IDA credit, a Special Facility for Africa Credit and the Special Joint Facility (the United Kingdom Government). The Government of Sweden contributed to the technical assistance program. The main objective of ASAP I was to support continued policy reform in the economy with a particular focus on the agricultural sector, to strengthen a number of institutions in the agriculture and planning ministries, and to finance the import of inputs and other goods for the economy. Annex IV provides a summary of the Government's compliance with the covenants in ASAP I. The original closing date was December 31, 1988. This has been extended by one year because disbursements were stopp*d when the Government interrupted the program implementation (see paragraph 14). Once the Government reversed its position on economic policies and restored funds drawn incorrectly from the special account, disbursements from the ASAP I credit resumed. The main elements of implementation of ASAP I are given in more detail below. Agricultural Policy Reform 98. Despite interruptions in macroeconomic policy which were described in Part II of this report, the credit achieved most of its objectives in respect of agricultural policy. Reform of hides and skins trade was not achieved as rapidly as had been hoped, but the Government's recent announcements have now provided for full decontrol of markets. The - 32 - tractor hiring agency (ONAT) pursued the policy of achieving full cost recovery and, as a result of a contraction of its service coverage and regular increases in charges, is now covering all its costs. Real interest rates on credit to borrowers in agriculture rose during the first part of implementation (up to September 1987) because the inflation rate declined. Grain pricing and marketing policies were effective, while food aid management did not disrupt domestic food markets. Institutional Reform 99. Technical assistance provided under ASAP I has contributed to improvements in a number of institutions. The Central Department of Statistics (CDS) in the Ministry of National Planning has grown in stature and become a reliable source of national statistics. The study of ONAT costs was successfully completed and led to improvements in staff competence and restructuring of ONAT operations. The Agriculture Development Corporation (ADC) and the National Commercial Agency (ENC), which are both involved with grain and food trading, have been examined with the help of technical assistance financed from ASAP I with the objective of achieving institutional improvements. The successful technical assistance activities financed under ASAP I have led to renewed understanding and acceptance by the Government of the importance of institutional reform. Foreign Exchange Auction and Allocation Mechanisms 100. The foreign exchange auction introduced under ASAP I ran for 12 months and was successful in a number of ways. First, it was efficiently and fairly administered and hence enhanced the reputation of the Central Bank. Second, it showed that a market for the allocation of foreign exchange provided by donors can work in Somalia. Third, it established a reliable estimate of the premium for "free' foreign exchange which was not encumbered by major limits on its use. There were, however, some major problems. First, the auction rate did fluctuate more than expected due to periodic uncertainties about the likely future supply of foreign exchange for the auction. Second, the loss of control over credit from the banking system (see paragraph 15) resulted in a rapid devaluation of the Somali shilling. As discussed in Part II, the Government abandoned the auction in September 1987, a decision which led to a halt in the flow of funds to importers from donors until November 1988. In July 1988, however, agreement was reached with the Fund and the Bank on substantial reforms in economic policy, which inter alia resulted in a new foreign exchange allocation mechanism (described in paragraph 33) which simulates the auction by allocating foreign currency to bidders in proportion to total demand. C. IDA Strategy 101. The objective of IDA's strategy in Somalia is to achieve faster sustainable growth with equity. The major constraints to achieving this objective have been inappropriate policies, weak institutions, undeveloped - 33 - or dilapidated infrastructure, and unskilled human resources. A strategy to relieve these constraints would strengthen the Government's ability to define and maintain stable economic policies, coordinate and make better use of donor assistance, stimulat- efficient production-oriented investments, improve the utilization of past investments, and establish the key conditions for sustained economic growth. Accordingly, IDA assistance includes a program of policy dialogue and project-based support to address these constraints. ASAP $$ will be a major instrument in this strategy, reinforcing the policy reforms achieved so far, supporting new reforms, contributing to the technical analysis and institutional development needed for future economic adjustments, and providing a framework for dealing with the social costs of adjustment. The main thrusts of IDA strategy are discussed in more detail below. Improving the Policy Environment 102. IDA will continue to work with the Government to develop macroeconomic and sectoral policies more conducive to growth, and support it in sustaining recent reforms during a time of serious economic crisis. ASAP II would contribute by relieving short term input constraints on growth while the economy adjusts to recent and ongoing policy reforms, and by providing technical assistance for formulation of improved fiscal, trade and exchange rate policies. A Public Expenditure Review is now underway, and a proposed Technical Assistance Project will further contribute toward improving the policy environment. Strengthening Government Institutions 103. While it is important to introduce policy reforms as soon as possible, in the longer run it is far more important to strengthen the government institutions responsible for formulating policies, implementing public investments, and providing basic economic and social services. Such strengthening contributes not only to a more stable policy environaent, since local authorship of policies fostere local support, but also to higher returns on public investments, better coordination of foreign assistance, more efficient public services and ultimately more rapid economic growth. The IDA strategy provides support for strengthening of planning and budgeting functions, civil service reform, parastatal restructuring, agricultural marketing reform and land reform. ASAP II will contribute to this strategy through support for agricultural sector institution strengthening, mainly through technical assistance and training for the Ministries of Finance and Revenue, National Planning, and Agriculture and Natural Resources. Institution strengthening is also the major goal of a proposed Technical Assistance Project and an important element of virtually every IDA-supported inv4stment project. Proposals are also being discussed with Government to achieve reform of the industrial public sector e; prises. Developing Infrastructure 104. The third major element of IDA's strategy involves assisting in the provision and rehabilitation of critical public infrastructure. IDA has - 34 - in the past supported infrastructure lending including transportation, energy and water supply. Planned lending will continue the transportation and wdter supply thrusts, but place more emphasis on power (thermal and hydroelectric) and irrigation. The largest potential investment is the construction of the Jaardhere dam, which would provide a major increase in power as well as water control, and for which feasibility studies are well advanced. These investments are critical to improving and sustaining the supply response to policy reforms. The Resource Base: Environment and Human Resources 105. Environment. The Government recognizes the importance of improved management of the natural environment. Somalia faces long-term problems of over-grazing and desertification of rangelands, salinization of irrigated farmlands, deforestation of small remaining woodlands, and extinction of some species of wildlife under pressures from farmers and hunters. To address these problems, the Government is implementing a Bank- financed rangeland management project, which includes a wildlife protection component, an irrigation management program along the Shebelli River, and a program to extend soil protection measures to rainfed areas. The Government is also reviewing, with the assistance of various donors, the environmental impact of the planned Baardhere Dam. ASAP II will not have any detrimental impact on the environment. 106. Human Resources. The final major strategy element overlaps with institution strengthening because much of the latter requires training and improvement of skills among civil servants. The strategy goes beyond this, however, to address weaknesses in basic primary education (addressing a long term development requirement) and skills of producers (in agriculture. livestock, fisheries, industry and financial services, for a short to medium term supply response). ASAP I1 and the proposed Technical Assistance Project will support the institutional aspect of human resource development as noted above. The proposed Primary Education Project will be IDA's main instrument for improving basic public education, and a number of projects address the skill requirements of producers. These activities are fully justified for IDA support because of their contribution to the basic goal of growth with equity. D. Relationship to Other Aid Flows 107. To secure effective donor coordination, in addition to the periodic Consultative Group meetings, the Bank and UNDP jointly sponsor regular donor meetings in Mogadishu, to coordinate activities in various sectors. The ASAP program has also provided a focal point for donor coordination. Other donors (e.g. Italy, USAID, ODA) have already been involved in financing various aspects of ASAP I and the African Development Fund will contribute to the financing of ASAP II. The Italian Government will also provide parallel financing. Donor consensus will be strengthened in future through the Joint Coordinating Comnittee, established at the last CG meeting in April 1987, to Improve donor coordination and thereby direct - 35 - resources to the highest priority uses. Following the negotiation of ASAP 1I with the Government and the discussion by the Executive Directors of the PFP, Somalia became eligible for inclusion in the SPA initiative which is expected to provide additional external resources for meeting nonproject imports. Further, as noted in paragraph 49, a Support Group is being formed to assist Somalia with its cash requirements. 108. IDA disbursements represented about 17 percent of total aid flows to Somalia in 1988, and are projected at 20 percent in 1989. IDA obligations represent about 14 percent of Somalia's total outstanding and disbursed debt up to December 31, 1988. Debt service payments to IDA represent a very small proportion of Somalia's total debt service obligations. In 1989, payments to IDA were estimated at only about 3 percent of scheduled debt service payments for that year. This trend is expected to continue in the future. PART VI - THE ASAP II CREDIT A. Background 109. The proposed ASAP II credit supports the Government's recent substantial policy changes. These policies have already been described above in Parts II and III. It is worth emphasizing, however, that there has been a considerable change in the Government's approach towards development policy. The quality of dialogue has improved and there is a new level of underswanding and greater energy and enthusiasm to discuss and address the issues. 110. This project was first appraised in September 1987. However, its processing could not be continued when the Government abandoned the foreign exchange auction system and revalued the So Sh. The shelving of the adjustment program resulted in an interruption of disbursements on bilateral and multilateral assistance, including the ASAP I credit. Despite the worsening of the economic situation, the Government stuck to its position and, as noted already, price controls were reintroduced in February 1988. Throughout this period of uncertainty, which lasted about nine months, Bank and Fund staff maintained an active dialogue with the Government. A number of Bank and Fund missions visited Mogadishu, between September 1987 and June 1988, and exchanged views with the authorities on issues regarding the need for change in economic policies. Coupled with a realization that problems were originating from inappropriate policies, this interaction on economic policies has influenced the Government's decision to resume the adjustment program. As pointed out earlier, in July 1988, the Government put together, with assistance from the Bank and the Fund, a policy package including strong actions on the exchange rate, foreign exchange allocation system, interest rate structure, new expenditure and revenue targets, and commitments to make structural changes in industry and agriculture. Also, price controls were declared to be inoperative. - 36 - 111. The resumption of program implementation triggered disbursements from the ongoing bilateral and multilateral assistance programs, including the remaining funds from the ASAP I credit. In September 1988, the Bank convened a one-day informal meeting in London, to update Somalia's donors on developments. Meanwhile, a joint Bank-Fund mission in November-December 1988 established that program implementation was on track. During the same visit, Bank staff carried out a post-appraisal of the proposed ASAP II credit. In January 1989, the Government announced new and more sweeping reforms aimed at the removal of remaining government monopolies in trade and services. In early March 1989, a second PFP covering the period 1989- 91 was discussed and agreed with Bank and Fund staff. 21 Based on these developments it was decided to proceed with the proposed ASAP II Credit. Negotiations were held in Washington DC on April 13 and 14, 1989. The Somali delegation was led by His Excellency, Mohamed Hassan Barre, Vice Minister of Finance and Revenue. B. Objectives 112. The broad objective of this credit is to support the Government's adjustment program and policies with a particular focus on agriculture. Moving forward with this credit is in recognition of the many actions already taken by the Government recently to decontrol trade and services in important areas of the economy. Actions such as the decontrol of the important trade in hides and skins, frankincense and myrrh, and veterinary drugs are now part of Government policy and will be followed up with the necessary actions. Decontrol of the banking system, insurance and maritime transport, while also requiring enabling regulations, is now also established Government policy and will remove many bottlenecks in the economy. 113. The recently launched economic policy reforms and the Government's stated strong commitment to these reforms are the basis for the ASAP II Credit. It is aimed to help achieve and maintain economic stabilization; increase private sector participation in supplying and distribtuting inputs and services; strengthen key agricultural institutions; provide foreign exchange fo. the import of much needed agricultural ani industrial inputs as well as other goods and services; improve monitoring of imports through trade verification; and ameliorate the impact of adjustment programs on vulnerable groups. The Government's Letter of Development Policy and a matrix showing the relationship between policy issues and strategies in the economy and in agriculture, and the actions under this program, are presented in Annex VIII. C. Credit Description 114. IDA and the African Development Fund would support the adjustment program with an IDA credit of SDR 54.2 million ($70 million 2/ The PFP was endorsed by the Coimittee of the Whole on April 25, 1989. - 37 - equivalent) and a c'edit from the Arican Development Fund equivalent to $25 million. The Govea-menot of Sweden, through the Swedish Agency for International Technical and Econmic Cooperation (BITS) will provide SEK 3.1 million (about $0.5 million) for the financing of technical assistance to support the statistical work in the MNP on a grant basis. 115. The allocation of funds to be provided by the credits are summarized in Table 2: Table 2s Estimated Costs and Financing Plan Component IDA AfDF TOTAL ------- Trmillion)- Part A - Importation of Goods and Materials by Pub- lic and Private Sector Enterprises (a) Goods and Materials 44.5 17.0 61.5 (b) Diesel Fuel and Lubricant Imports 16.5 5.0 21.5 by SOMPET Part B - Imports of Inputs by Government 1.0 3.0 4.0 Ministries 1/ Part C - Social Action Program for Vulnerable Groups 2.7 2.7 Part D - Technical Assistance (a) Ministry of Finance and Revenue 4.1 4.1 - Procurement Unit - Import Verification - Tariff Review - Adjustment Advice (b) Ministry of National Planning 0.6 - 0.6 21 - Statistics (c) Ministry of Agriculture 0.6 0.6 - Land Tenure Action Plan - Machinery Rehabilitation Sub Total 5.3 .3 TOTAL 70.0 25.0 95.0 1/ Ministries of Agriculture, Livestock, Forestry and Range, and F'sheries 2/ Excludes SEK 3.1 million (about $ 0.5 million) of parallel financing from the Government of Sweden. - 38 - Part A (a) will provide financing for the import of goods through a foreign exchange allocation system for private importers and public sector enterprises (except SOMPET) as described in paragraph 33. The eligibility of imports will be subject to a limited negative list because, the credit is aimed at supporting a broad range of macroeconomic adjustments on policy reforms. The amount of foreign exchange allocated to this component over two years will increase the availability of foreign exchange for private sector and public sector enterprise imports by about 25 percent above its current level. (b) will provide foreign exchange for the import of fuel and lubricants by SOMPET. the Government owned petroleum company. Standard ICB procedures will be used. The exchange rate used for the calculation of the local currency deposits by SOMPET will be the official exchange rate at the time letters of credit opened. Part B will provide finance for the import of goods by the Ministries of Agriculture, Livestock, Forestry and Range, and Fisheries to assist them to carry out their support for the agricultural sector. The list of goods which would be eligible for these purchases is provided in Annex IX. The exchange rate used will be the official exchange rate at the time letters of credit are opened. Part C will finance a social action program for vulnerable groups. Implementation will be the responsibility of the Ministry of Finance and Revenue. It is possible that other donors will contribute additional funds for this component. Part D will finance technical assistance as followss (a) Ministry of Finance and Revenue. Technical assistance will be provided to the Ministry of Finance and Revenue for staffing of the Procurement Unit. This Unit, already established under ASAP I, will ensure that procurements under this program are carried out efficiently and consistent with the credit agreement. The Ministry will also use this allocation for training and consultancies (e.g. auditing and staff development). An "import verification, system will be financed by the credit to be implemented by a qualified inspection company. The purpose of import verification is to determine and verify the quantity, quality and prices of goods to be imported into Somalia at the port of origin. This technical assistance will also provide a training program so that eventually the Department of Customs can independently carry out adequate inspection procedures and tariff assessments in Somalia. Part of the funds allocated to this component will be used to undertake a review of tariff rates and their incidence. Amendments to tariffs for Somalia's main imports will be introduced at the same time as import verification. - 39 . Finally, funds from this component would be available for technical assistance to the Ministry to enable it to provide advice on transition problems for various enterprises during the adjustment process. (b) Ministry of National Planning. The Central Statistics Department in the Ministry of National Planning will receive continued support, to develop and improve its statistical collection, analysis and report preparation. The Swedish Government will finance about 50 percent of the costs through a grant. The work program will consist of analysis of the household budget survey for Mogadishu and major cities, implementing a household budget survey for nomadic populations, improvement of industrial statistics, developing a CPI for areas outside Mogadishu, undertaking (with lAO support) an agricultural and livestock census, improving national accounts, and continuing staff training. (c) Ministry of Agriculture and Natural Resources. The Ministry will be assisted to implement an action plan to improve land policy and land tenure administration for irrigated land. A number of studies of land tenure issues, financed by USAID, have been completed and they all point to the need to develop an action plan to up$ate the 1975 Land Law and formulate a streamlined land administration system. Further work on policy and administrative issues is being financed by a USAID supported project. Most of the future irrigation development in the Shebelli and Juba Valley depends, inter alia, on improved land laws and institutional arrangements for land tenure. Agro-pastoral development in rangeland areas is also creating strains in existing land laws and traditional land rights, but the necessary research on which to base the changes in policy and administration have not yet been done. Those studies are to be financed under a proposed Technical Assistance Credit. Another component will be technical assistance to support 'hands on' practical training in the rehabilitation of agricultural machinery used for the support and service responsibilities of the Ministry. D. Implementation and Monitoring 116. Funds provided for private sector and public sector enterprises (except SOMPET) would be allocated through the foreign exchange allocation system already established under ASAP I since November 1988 (paragraph 33). All imports will be eligible except those on a negative list which will include luxury goods, military equipment, and food, except a number of basic staples (see Annex IX). Government's diesel fuel purchases under the program will be financed at the official exchange rate at the time of opening letters of credit. The IMF has been consulted on the system for foreign exchange allocations envisaged under this program and has endorsed it. In addition, the IMF has also agreed to provide advice to the Government and IDA on the allocation system as it proceeds. Another donor - 40 - (Italy) has reached agreement with Government to use the same foreign exchange allocation system for the disbursement of funds to finance commodity imports other donors are using similar systems. The Government, IDA and the Italian Government have agreed that the use of such funds will be coordinated with funds from the ASAP II credit. IDA will administer the Italian Grant Agreements. The local funds generated by the foreign exchange sales of the ASAP -I credit will be placed in a separate GOS account in the Central Bank. Establishment of such an account will be a condition of effectiveness of the credit. 117. Imports made and the services rendered by the Ministries will be valued at the prevailing official exchange rate. Technical assistance will be implemented under the responsibility of relevant ministries. However all procurement related to technical assistance will be arranged through the Procurement Unit, which was set up under ASAP I credit in the Ministry of Finance and Revenue on behalf of the .Vplementing Ministries. 118. Monitoring. The Ministry of Finance and Revenue will be responsible for monitoring the implementation and effectiveness of policy actions taken under the adjustment program. MOF will submit semi-annual progress reports to IDA; the first such report will be submitted no later than mid-November 1989. The reports will monitor the measures taken to decontrol economic activities (paras 63-75) aud their impact, and provide an analysis of developments. The purpose is to provide feedback on the effectiveness of the policy actions in stimulating economic growth and identify obstacles in a timely manner. The reports will include the following areass (a) hides and skins - the impact of decontrol on official export volumes; measures taken to remove remaining impediments such as constraints on sales of hides and skins at Government slaughter facilities and the freedom of all tanneries to buy and sell unprocessed and processed hides and skins; (b) frankincense and myrrh - the impact of decontrol on official export volumes; (c) veterinary drugs and equipment - establishment of necessary regulations to ensure that qualified importers can be registered in a non-discriminatory fashion, the maintenance of safety standards; the impact of decontrol on the availability of veterinary drugs and equipment, and the number of registered private traders; (d) maritime transport - the response of private shipping companies to decontrol; the impact on shipping prices, efficiency in port operations; (e) banking - the introduction of appropriate banking regulations by the Government to provide the necessary conditions for the establishment of private banks. - 41 - (f) insurance - the introduction of appropriate regulations to provide the basis for the establishment of private insurance companies in Somalia. 119. Assurances were received at netotiations that the Government will prepare for IDA semi-annual progress reports on the implementation of the program in a format and on a time schedule acceptable to IDA (para 118). The first report will be due not later than November 15, 1989. E. Agreements Reached 120. The Letter of Development Poli'y (Annex VIII) describes the actions that have been taken by the Government, and the further actions that will be taken during program implementation. These measures are also summarized in the matrix of policy actions attached to the letter. Credit proceeds for the importation of goods and materials in the Program (Part A) will be disbursed in two tranches, $33.0 million (54 percent) for the first tranche and $28 million (46 percent) for the second tranche. The reason for a higher percentage in the first tranche is to ensure that the program is financed during 1989 prior to the availability of funds from the African Development Fund in 1990. The actions required for the first tranche have already been met; the first tranche will be available when the program becomes effective. Second Tranche Release 121. The release of the second tranche will be contingent upon satisfactory progress in the implementation of the overall macroeconomic and sectoral policies, as well as implementation by the Government of the following actions: (a) agreement with IDA on the three-year public investment program covering 1990-1992 (paragraph 43); (b) agreement with IDA on proposals for the public expenditure program to be included in the FY1990 Government budget (paragraph 43); (c) based on a revised tariff structure for main imports agreed with IDA, the establishment and implementation of an import verification system satisfactory to IDA (paragraph 40). (d) agreement with IDA on an action plan for the institutional development of ADC and ENC (paragraph 65); and (e) agreement with IDA on an action plan to improve land tenure policy and administration for irrigated land (paragraph 77). 122. Actions with respect to public expenditures, including the public investment program, draw their importance from the fact that there is an urgent need to improve resource allocation in the public sector. - 42 - Institutional improvements in ADC and ENC are important because of the role of these agencies in food marketing and the management of food aid. Changes in the land tenure policy and administration for irrigated areas is deemed essential to fully exploit the output potential of the agricultural sector. Revision of the tariff -ystem for Somalia's main imports is an important prerequisite to the introduction of an import verification system. The import verification system is in turn essential for the success of the adjustment program. In addition to restoring discipline in the verification and valuation of imports, achieving the budgetary targets of the program depends to a large extent on large increases in import revenue. F. Procurement 123. Procurement procedures have been designed to permit rapid use of the funds while ensuring efficiency and accountability in the process. Imports by the Government, the private sector and public sector enterprises would follow international competitive bidding for amounts of US$400,000 equivalent and above. For Government contracts valued at below US$400,000 procurement would be done through limited international bidding procedures, which have been reviewed and are acceptable, and would seek aminimum of three price quotations. For private and public sector enterprises procurement contracts valued at less than $400,000 quotations from at least three eligible suppliers would be obtained. For procurement contracts valued at less than $200,00C private sector and public sector enterprises would follow established co-.mercial practice for the procurement of such goods. The Procurement Uni , established under this credit, would do a preliminary review of the competitiveness of prices for imports valued at less than US$200,000. Direct contracting (sole source procurement) could be used for proprietary equipment or where compatibility with existing equipment call for standardized equipment and spare parts. In such cases documentary evidence would need to be supplied by the importer. As mentioned earlier in this document (para 40) the Government will be entering into a contract with a qualified company to implement an import verification system which will review and verify the quality, price, and quantity of imports. Consultants to be employed under Parts C and D will be selected in accordance with IDA guidelines of August 1981. G. Disbursements, Accounts and Audit 124. Disbursements from the IDA credit would be made for 100 percent of foreign expenditures for eligible imports (see Annex IX) under Part A of the project, 100 percent of the cost of consultants' services and training under the technical assistance component, and 100 percent of the costs of goods, works and consultant services under approved subprojects directed at mitigating the social costs of adjustment. Disbursements against contracts valued at less than $100,000 equivalent for the import component, and contracts valued at less than $20,000 equivalent for other components would be made against certified statements of expenditure (SOEs); all other disbursements would be made against full documentation. Supporting - 43 - documents for amounts disbursed on the basis of SOQs would be retained in the Procurement Unit, and would be made available for review by auditors and visiting IDA missions. 125. To facilitate disbursements of the IDA credit the Government will open three Special Accounts. Two with a commercial bank and one with the Central Bank of Somalia. These accounts will be operated on terms and conditions acceptable to IDA. The first Account will be used for the import component, and will have an authorized allocation of US$20,000,000 (about six months requirements) and will be managed by the Procurement Unit (PU) in the MOP. A second Account in the Central Bank will be for Part C of US$200,000 (about four months requirements), managed ly the Social Action Committee. The third account, managed by the PU will be used for Part D of the project, and will have an authorized allocation of US$500,000 (about four months requirements). In all cases, the accounts will be replenished on a regular basis on approval of withdrawal applications accompanied by appropriate supporting documents including reconciled bank statements. The African Development Fund will also advance funds to a separate Special Account in connection with its financing of Parts A and B of the program. 126. The program's accounts, including Statements of Expenditure and Special Accounts, will be audited each fiscal year by independent auditors acceptable to the Association. A certified copy of such audited accounts will be submitted to IDA within six months after the end of each fiscal year. 127. Not later than six months after completion of the program, GOS will prepare and furnish to IDA a completion report highlighting its costs and benefits. H. Risks 128. Somalia's experience with the implementation of the previous adjustment programs has been mixed. Programs have frequently been interrupted in the past for different reasons and resumed again. However, there are strong indications that the Government's comiitment to adjustment is stronger than before, and it is relatively well positioned to succeed. Unlike the earlier experience, the Party's Central Committee backs these reforms strongly and the Parliament has already enacted the required legal changes to pave the way for implementation. For example, principles are introduced in new laws assigning an important role to the private sector and the decontrol of markets in the development of the economy. Thus, the overall development strategy and, more specifically, the reforms are explicitly embraced by the political leadership. Also, there has been a lively debate within the country in recent months regarding the need for change in the direction of economic policy. Therefore, the positions reached by the Government reflect a stronger consensus than previously existed. Finally, the Government's commitment to the program is further evidenced by the implementation record during the second half 1988, as well as the strength of the measures taken up front, in January/February 1989. - 44 - There are, nevertheless, a number of risks associated with the program implementation and its success. 129. One of the risks concerns the weakness in the Government's implementation capacity. The capacity to formulate and implement policy has been further eroded by declining real wages in the public sector. Under the program the Government is comuitted to carry out a public expenditure review, with IDA assistance, with an emphasis on civil service employment and remuneration. Based on this review, the Government will streamline the civil service and increase real wages over the medium term, particularly for skilled personnel and for managers. This will help retain some of the key personnel and recruit others. In addition, the proposed credit has a technical assistance component which airis at strengthening the implementation capacity in key ministries. The Bank is planning on a more comprehensive free-standing tecbnical assistance program to broaden efforts in this area. UNDP is providing assistance in similar areas, as is the Swedish Government. Also the IMF is supporting the strengthening efforts of the Central Bank of Somalia through technical assistance. 130. A second risk associated with the credit is the extreme dependence of the program on external assistance. Moreover, as indicated in the section on foreign financing requirements, some of this support has to be in cash form. If actual disbursements from external sources fall significantly short of the anticipated amounts, this could have a profound impact on the program's success. In case the Government is unable to pay its oblig.tions to the Fund because of lack of cash assistance, this would disallow . Fund-supported program with consequences not only in terms of the availability of direct Fund resources but also total external support. Therefore, if the program is not adequately funded, shortfalls in projected imports would constrain output and would result in supply shortages. Moreover, lack of external assistance would cause a serious decline in government revenues. Under such circumstances, it would not be possible to maintain the fiscal balance underlying the macroeconomic program. 131. However, the response of the donor community to recent initiatives taken by the Government has been encouraging. In addition to t'ne cash support already provided by the Italian and the U.S. Governments, a Support Group by the donors is being formed to mobilize the required cash assistance to enable a Fund-supported program. As noted in paragraph 107, Somalia has also become eligible for the SPA initiative. There are also plans to hold a Consultative Group meeting for Somalia in late 1989. These initiatives, coupled with continued good performance on policy reforms, should help assure the needed external support for Somalia. 132. A third risk originates from the continuation of civil unrest which was particularly problematic in the North West region in 1988. The civil unrest resulted in the closure of Berbera port and a major decline in livestock exports in 1988. If problems continue, it would reduce the full benefits of the policy reforms with a major impact on exports. If export revenues do not recover, shortfalls in foreign exchange can have similar effects on the adjustment process as the insufficient external assistance. - 45 - However, with the rehabilitation of Bossasso port, livestock shipments will further shift to the South and East. Trade in hides and skins, where a major improvement is expected in 1989, and frankincense and myrrh can thus avoid the troubled areas in the Northwest. PART VII - RELATIONS WITH THE IMF 133. The IMr Executive Board approved a 20-month stand-by arrangement on June 29, 1987 for SDR 33.15 million. On the same date, Somalia's request for a three-year arrangement under the Structural Adjustment Facility (SAP) and the first annual arrangement thereunder was approved, upon which SDR 8.84 million was made available. Under the stand-by arrangement, only the initial purchase of SDR 5.53 million was made. Due to accumulation of arrears to the Fund, the subsequent purchases were not made. The program became inoperative in September 1987 as a result of the Government's decision to cancti the foreign exchange auction, and failure to clear the Fund arrears. Subsequently, Somalia was declared ineligible to use the general resources of the Fund on May 6, 1988. 134. Following the Article IV consultation discussion in March 1988, a Fund staff team visited Mogadishu in the second half of May 1988 at the request of the authorities to discuss their adjustment measures, and the modalities for the eventual repayment of overdue obligations to the Fund. On the basis of broad understandings reached during this mission and a subsequent mission in July 1988, the authorities adopted a policy package covering the period July-December 1988, which included cuts in real expenditures, new revenue measures, change in the interest rate structui, and adjustment of the official exchange rate. The mission that visited Somalia in November 1988 found that, with the exception of minor deviations, the authorities had implemented the measures contained in the policy package. 135. Based on these positive developments on the policy front, and encouraged by the January 1989 announcement of new reforms, a PFP was prepared by the Government, and discussed with Bank and Fund staff in February-March 1989. This second PFP is expected to lead to a Fund monitored program for Somalia. However, the accumulation of arrears to the Fund, and closing the cash financing gap for 1989, continue to present problems. The cash financing requirement in 1989 is estimated at US$172 million, of which US$76 million is for an escrow account in respect of arrears to the Fund outstanding at end-1988. This leaves a cash financing gap of US$96 million for 1989. A Fund shadow program would be feasible if this latter amount can be secured and the financial obligations to the Fund accruing in 1989 could be met (para. 49). As already mentioned, a Support Group is being formed which would address the issue of Somalia's arrears on its nonreschedulable debt. 136. The Bank and Fund staffs working on Somalia have maintained a very close working relationship. They have exchanged data and information on developments, and conducted joint reviews of policies. Bank staff has - 46 - participated in all recent Fund missions to Somalia and have contributed to the dialogue carried out by the Fund staff on macroeconomic policies. PART VIII - RECOHMENDATION 137. I am satisfied that the proposed IDA Credit would comply with the Articles of Agreement of the Association. I recommend that the Executive Directors approve the proposed IDA Credit. Barber B. Conable President Attachments Washington, DC May 2, 1989 - 47 - LIST OF ANNEXES Annex I Somalia Country Data Table Is Economic Indicators Table 2: Balance of Payments Table 3: External Financing Annex II Status of Banc Group Operations in Somalia Annex III Supplementary Data Sheet Annex IV Matrix of Policy Issues, Strategies and Actions in ASAP I Annex V Trends in Production, Area Harvested and Yield for Sorghum and Maize Annex VI Social Action Program - Examples of Possible Projects Annex VII Import Verification System - Draft Terms of Reference Annex VIII Letter of Development Policy and Matrix of Policy Issues, Strategies and Actions Annex IX List of Eligible Items under Parts A and B of the Program - 48- Annex I Page 1 of 3 Table 1. Smilea: 1y Indicators, 19o 19n 15 19im 1987 1968 1m9 1 1931 Est Prg Pro Proo (Growth rates) Reel P at far caost 85. 9.23 4.13 11.3 -2.7X 2.71 4.81 4.18 Real MP at wket prices 3.38 9.51 -2.11 9A. 43.A 4.5X 5.51 5.8 Rlt GP mrket prlm per cap. 0.4X 6..3 4.9 6.51 -6.3 1.X 2.5 2.51 Real dstho caoptlon. per coM -18.51 -6A.3 -7.1X 12.GS -12.23 5.41 1.2 1.OX Real private ouAptIon. per cap. -17.8X -5.18 4.5 11.51 -8.39 5.9S 0.4S 0.OX Mgpdih OPI (perlod avg.) 92.2 37.82 35.81 28.11 81.71 02.81 23.71. 15.71 VW[" CPI (end period) 82.0S 30.4P 30.71 42.11 107.1S 38.9S 19.6S 12.71 Debt service (US$, ml II los) 107.7 118.7 152.6 172.4 188.8 175.7 148.8 147.2 Debt servioe ratio 93.71 84.11 130.4S 161.11 237.5S 168.1S 129.11 114.5S Debt aervloe,w 13.23 12.8A 16.8X 17.1S 18.8S 18.1S 12.3S 11.1l Gross dua. Instm tAtMP 35.5 29.51 33.GS 34.71 29.8 29.81 29.11 28.0S Mubila Irlnstunt,UP 28.11 20.8% 25.51 24.51 20.71 17.51 16.4 15.38 Privat InwstomtmiP 7.6P 8.17 7.5S 10.2 8.8S 12.3S 12.71 12.81 Private flued investmnt/011 8.11 5.81 8.51 5.5 2.18 8.1S 9.2 9.41 PMbil10/tOtal fuied lnvamstint 82.11 78.11 79.5 81.18 91.01 86.81 84.2 61.81 Dmotlo savil,s/P -7.18 -1.3 3.4S 0.3S 5.18 2.51 4.28 5.6X FMbila dbstIc t evi lP -5.01 -4.5 -2.11 -5.1X -1.71 0.5 1.28 2.11 Private do etic aavirtg1UP -2.0X 2.11 5.5S 5.4S 6.71 1.9S 3.01 3.4S Natlonal savi,oWe,P 17.8S 17.5S 2232X 28.9P 20.5X 19.11 21.51 22.3X MOile vutioMI sNvir%UP 10.A8 13.31 12.81 20.18 11.51 14.4S 15.38 15.6S Private national saviyP 6.1 4.1X 9.81 8. 8 9. 4.11 8.31 7.2 Sovuriumit remie/UP 6.4 6.32 8.4 6.23 5.32 7.1X 8.SX 10.23 ReM. aid grtse/UP 9.6$ 13.9 17.11 21.23 15.51 2.3L 24.51 25.18 EioandltireUL P 18.1S 2D.71 24.71 30.71 23.51 24.9X 2A.A 24.5X 01ai deflcit (Incl. grnta)GDP 4.5X -8.5 -7.X -9.5S -7.1 -1.7X -0.4S 0.42 OvralI deflclt (owl. grat)/UP -11.71 -14.51 -18.3 -24.5S -18.23 -17.OX -10.4S -14.4S Rmuordirary unditLn M 48.91 58.18 60.3 42.71 49.23 68.18 77.1 88.3X Exort groth (Jods only) 38.01 50.0X 1.8 -0.7X -7.V8 41.4X 11.5X 12.7X EbwortWD 7.8X 10.1 10.3S 9.3 5.8X 7.5X 7.5X 7.8 Inwt growt (goods only) -9.8X -8.11 -4.X 2.3 -32.23 25.91 4.18 3.6X lqwortsP 49. 40.21 38.9X 42.A3 29.0S 33.5 31.A8 30.0X Inrrt comht (13*) -145.1 -111.0 -99.2 48.9 -90.7 -117.1 -92.2 -70.3 Orn rt noo./lP -17.81 -12.08 -10.81 -5.8 -9.01 -10.71 -7.6X -5.3X CA owl. off. groabs ( US$) -319.1 -315.0 -294.9 -3M8.5 -285.5 -396.8 -324.7 -304.6 CA mui. off. gra1wbUP -39.1X 44.18 -32.11X -48. -28.51 -40.1 -28A -23.01 REER (depreclatlon -) 59.18 -44.81 -34.1X -15.5S 23.81 ... Sbces: Smalil aIuhritles at UF trd World BEank stff estilates and projectloiw. Note: Table reflefts maoreoonblio fruewca k paw#nstd In the FRP -49 - Annex I Page 2 of 3 Table 8. SOALIA - Smi la - Exterl FInanclog RWuirmt (1I I IOnS of US dollars) 1989 1963 1991 Trade Balance -283.9 -292.4 -294.5 Not mvios. eMi. Intet -13.3 -8.7 4.0 Interest Paynts -9.4 -6.7 -6.1 of bShd: IDA -3.1 -3.1 -3.0 lw -12.9 -7.2 -3.0 Private Rmlttans 30.0 40.0 50.0 Cwrrmt accomt balac -33.S -324.8 -4.6 (before offlcial trafers) Mart izat ion -108.3 -85.1 -91 .0 of Uhich: IDA -1.39 -1.64 -1.84 IMF -4.3 -28.7 -9.5 Arrears -134.8 -71.1 -59.0 of hihd: IW -78.0 0.0 0.0 Ong.3 In grass reserves (Incl. Comr. Buk) -24.5 -20.0 -20.0 Total Financing ReqPirammt -602.2 -501.0 -474.8 Dliurs.rnts: existing onltments 258.5 133.0 95.0 OffIcial Loom 39.0 23.0 20.0 ProJeot 30.0 23.0 20.0 of Vhicth: IDA 20.0 15.0 13.0 Progra 9.0 0.0 0.0 of Whleh: IDA 8.0 0.0 0.0 Official Grtsn 219.5 110.0 75.0 Project 140.0 98.0 75.0 Prtrnam 79.5 14.0 0.0 Dlatxrummnts: e2oxtad comitmants 38.0 182.0 219.4 Offlclal loaon 38.0 59.0 60.0 ProJect 0.0 7.0 10.0 *f Wilch: IDA 0.0 5.0 7.0 Progr 38.0 52.0 50.0 *f ebloh: IDA 30.0 35.0 35.0 AfB 8.0 17.0 0.0 Official Grants: 0.0 123.0 159.4 ProJeot 0.0 49.0 70.0 grVm 0.0 74.0 89.4 TotAl Identifled FInancIna 29.5 315.0 814.4 RhIning Gap -305.7 -188.0 -160.3 of dcldh: Debt Relief 133.2 78.0 86.3 Caih 6ap -172.5 -108.0 -74.0 Sare: IMF and World M* staff estlmates based an data from the Souali authoritles. - 50 - Annex I Page 3 of 3 Table 2. Somaliat Balance of Payment, 1985-91 -----------------------_--------_--_--_---------------------__---------------__------------------. 1985 1986 1987 1988 1989 1990 1991 Eat Prog Pros Prog Trade balance -280.00 -262.30 -335.42 -232.76 -283.87 -292.36 -294.45 Exports 93.00 94.70 94.00 58.40 82.60 92.20 103.90 Imports 373.00 357.00 429.42 291.16 366.47 384.56 398.35 Services, not -55.00 -69.57 -65.03 -75.78 -82.69 -72.37 -60.18 Non-factor services, net -6.00 -9.25 -13.05 -13.43 -13.26 -8.67 -4.04 Credits 48.10 22.30 13.04 20.87 21.93 23.04 24.21 Debits 54.10 31.55 26.09 34.30 35.19 31.71 28.25 Net factor payments -49.00 -60.32 -51.98 -62.35 -69.43 -63.70 -56.14 Intterest -49.00 -60.32 -51.98 -62.35 -69.43 -63.70 -56.14 Credit 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Debit 49.00 60.32 51.98 62.35 69.43 63.70 56.14 Private transfers 20.00 37.00 35.00 23.00 30.00 40.00 50.00 Current account, xel. off. grants -315.00 -294.87 -365.45 -285.54 -336.56 -324.73 -304.63 Official transfers 204.00 195.70 306.60 194.80 219.50 232.56 234.35 CIPs Cash 46.00 55.10 16.70 9.00 0.00 0.00 0.00 In kind 34.90 47.70 45.30 7.10 72.50 77.56 79.35 Food 10.10 22.00 32.40 16.70 7.00 10.00 10.00 PIP 113.00 70.90 204.20 162.00 140.00 145.00 145.00 Other ... ... 8.00 0.00 0.00 Current account, inluding grants -111.00 -99.17 -58.85 -90.74 -117.06 -92.17 -70.28 Capital account, net 59.10 -4.76 -44.40 -8.00 14.20 22.00 -1.60 Official (net) 73.00 64.20 19.50 -13.80 14.20 22.00 -1.60 Disbursements 122.00 124.30 82.22 45.40 77.00 82.00 80.00 CIP cash 6.00 16.00 22.70 0.00 0.00 0.00 0.00 CIP in kina 37.00 24.30 6.60 17.40 47.00 52.00 50.00 CIP food 20.00 20.00 3.70 0.00 0.00 0.00 0.00 PIP 59.00 64.00 21.52 28.00 30.00 30.00 30.00 Other ... ... 27.70 ... Amortization -49.00 -60.07 -62.71 -59.15 -62.81 -59.98 -81.59 Private -13.90 -68.96 -63.90 5.80 0.00 0.00 0.00 Overall balance -51.90 -103.93 -103.25 -98.74 -102.86 -70.17 -71.88 Financing 51.90 103.93 103.25 98.70 -69.50 -5.83 71.88 Banking system (net) -2.10 23.90 13.60 -76.50 -67.90 -45.10 -29.40 Central bank (net) 29.90 31.90 -2.40 -87.70 -62.90 -45.10 -29.40 Reserves (-,increase) -2.00 18.50 4.00 -0.90 -10.00 -20.00 -20.00 IMF (net) 33.90 7.40 8.80 -50.80 -43.40 -25.10 -9.40 Other (net) -2.00 6.00 -15.20 -36.00 -9.50 ... ... Comnercial bank (net) -32.00 -8.00 16.00 11.20 -5.00 0.00 0.00 Arrears -98.00 80.00 -18.50 116.90 -58.80 -147.10 -59.00 Debt relief 152.00 0.00 108.20 58.30 133.20 78.00 86.30 Escrow Account for IN? arrears -76.00 76.0 Residual Cash Gap 0.00 0.03 -0.05 0.04 172.36 108.37 73.98 - 51- Annex II Pa-ge 1 of 2 ScedH"ule 0 STATUS OF BANK CROUP OPERATIONS IN SOMLIA STATEMENT OF SANK LOANS AND IDA CREDITS (As of MIrCh 31. 1989) --(S1 Illl I ton) Amount (L Canel lntions) Loan or Credit Undi- Numer Year Borrowr Purpose Bank IDA bursed / Twenty-one credits fully disbursed 148.88 Cr. 972-SO 1979 Somali: ay Region Agriculture 12.00 1.00 Cr. 110S-SO 1981 Smlit Fourth Education 10.20 0.19 Cr. 1824-SO 1988 Somalia Fourth Highway 28.00 0.42 Cr. 1484-SO 1984 SbMlta AAfgoy Gas DOlInImtion 18.00 6.65 Cr. 14865-S0 1964 homlt Fisheries Explo. Prom. 18.50 .60 Cr. 1588-SO 1t85 SomalIa NW Region Agrtc. Dev. 10.60 7.76 Cr. 1812-SO 1986 Somaia Agricultural Inputs Program I 10.00 .8S cr. 1n1-so 10 Somil Agricultural Sector Adjustment Program 80.00 2.48 Cr. A020-SO / 1987 Smalit Agriocultural Sector Adjustment Program 82.60 5.18 Cr. 147-S0 1080 Somall Lvestock Health Service 4.80 4.21 Cr. 1728-SO 1088 Somalia Ports Modrnizatlon 22.60 19.82 Cr. 1774-SO 0 1987 Somalis SI-Mechanized Rainfed Agric. 18.40 11.82 Cr. 174-0 1987 Somala 2nd Agricultural Extenion 12.70 10.18 Cr. 1850-SO 1088 Somalia Powr Rehab. 12.50 7.58 Cr. 1658-SO 1908 Somall Banrdhere Tech. Aset. 6.50 2.69 Cr. 1957-S0 1989 Somali Central Rangelands It 19 00 1S." Total . ......... ... 8 .28 of which has been repaid 11.88 Total now held by IDA 8an.98 Total Undlebursed 908.0 NOTE: 1. Special African Facility. 2. Current estimted dollar equivalent of undisbursed SDR credit balance. -52- Annex II Page 2 of 2 Schdule D STAT T O !FC INVESTIMETS (AS of Morch 81a 1989) U11 MilIIon Fl... I Type of Aimount Year Obilastor !u.inea Loan Ecuit Total 1981 Somli Moloas Co. Ltd. Food Proc. 0.37 - 0.7 190i Polypropylene lag Co. Polypropylon, lags 0.98 - 0.98 Total Gross ComItments 1.35 - 1.85 Les Repaymnts 0.84 - 0.84 Total now hold by IFC 1.01 - 1.01 Total undlsbursed 0.0 - 0.0 - 53 - Annex III SOAIA AGRICULTURAL SECTOR ADJUSTHENT PROGRAM 1I SUPPLDMENTARY DATA SHEET Section I - Timetable of Key Events (a) Time teken to prepare project 9 months (24 months elapsed time) (b) Project prepared by IDA staff in collaboration with AfDF (c) Identification mission June 1987 (d) Appraisal mission September 1987; post appraisals in July 1988 and February 1989 (e) Negotiations April 1989 (f) Planned date of Effectiveness July 17, 1989 Section II - Special IDA Implementation Action: None Section III - Special Conditions Conditions of Effectiveness (a) Establishment of the project account in the Central Bank (para 116). (b) Appointment of the head of the Social Action Unit satisfactory to IDA (para 91). (c) Establishment of the social action fund (para 94). Conditions of Second Tranche Release (para. 121) (a) Agreement with IDA on the three year public investment program covering 1990- 1992. (b) Agreement with IDA on propos'als for the public expenditure program to be included in the FY1990 Government budget. (c) Based on a revised tariff structure agreed with to IDA, the establishment and implementation of an import verification system satisfactory to IDA. (d) Agreement with IDA on an action plan for the institutional development of ADC and ENC. (e) Agreement with IDA on an action plan to improve land tenure policy and administration for irrigated land. - 54 - Annex IV Page 1 of 3 SOMALIA MATUX OF POLICY ISSE STRATSGIESI AID ACTIONS IN ASAP I Actlons Token and Issues Wd Strategy Actlen Required undsr ASIP SecInd Trenche Conditions Objectives Implemeeted Under ASAP I Macreconomic1 PelTeto. Uacroecenomic and Aericultural Potics Ref_orm (A) To continue macroeconomic To eupport macroecoomic reform; increase DOurin the fir t 16 oneths of the policy reform and g_nral role of privet sector In the e ony credit the Government continued its deontrol of the ecoa my, end including improved supply of agricultural reform prgram. A ltter of intent to further strogkhea end Input; and strengthen lnetitutions on agricultural policy in which the deepen agricultural policy responsible for tereor In agriculture. 00 mae com_itmetn to further adjustnt. refors was relved as a condition of the second tr&nche. Howver in _Fp~ember 167 tile foreign exchange aution snd many other aspects of conmic policy were abandoned. Dlebu_rsmnt for Imports of goods was suspended. Following an Intensive series of discussions the Covernm_nt Introduced major improvements In policy In July 198. torern teans *llocction syste A intrducd to replaee the auction in November 168. Price Policy and Larkitina (A) To reduce or *linte the Pricing for diesel fuel sold by nS in the Continuation of 005 diesl fuel sales regulatIon of pries In d le market t lmport perity asins at border prices. In recent months, product and ttor mrket market schang rate. becuse of the rapid devaluation, (fuel, hids and skins, sod price have logged behind ctf levels, topical vetrinary drug). Private sector to obtain liens, to Liensn can be obtained by traders import *nd dlitrlbut dill fuel and with aeess to adequate atorage Ilubeicnt,. facilities and sa*fty sasures. Study of the domsIC end euport mrketing The tdy recowmided liberal tation of hides ad skimts, aWd follow-up on of the mrket for raw and hides, and action agreed betwn the tO and IDA as skins dometieally; for processed part of second trench. Conditions. hide and skines, al markets. In the event, at negotiations on the seond tranche, IDA and OS agreed to dcentol etof the domestic market for raw hides and skins. The COS sold take m ures to ensure The trade In topical veterinary drugs that toplal (non Injectible) veterianry was decontrolled. drus M*y be Imported d trded by qualified persona. - 55 - Aiex IV Page 2 of 3 SOMALIA MATRIX OF POLICY ISSlUES. STUTEGIES AND ACTIONS IT ASAP I Aetlonn Tekon and - I_aus a" Straty Actln Reulred under SAP I Second Tr'ndch Conditions Objectle aplented Under AP I Pt. c Sctor lnvestmnt and n nt (a) Toeimpre the The ON Shold inu,e a set f poratlng Continewd d of Improved operating operational officloncy priaciple, aimd at Improving grain principle. for grain mrkoting *nd of pubilc sector mrketing and food oid mnagemnt. fooid mngent lned by 0O as enterpries involved tn condtin f effetivness. A rport processing ad maketing Tecnical assistance for 4C and ENC almd from the technical sistance twa of agricultural at s rgthening it n nt, inprovtng ll soon be val table. product. it. ain mretng actvtie. nd etaiblishbingoperatinlbI guideline. on floor price. ,eling price., se 1-of foed aid and the distribution of co_eslonal grain Imports to gove rnnt Institution w_- areed. (b) To Impree the contribution A PIP was prpered by 0. Technical An approved PIP was prepared by the of the pubtle investment *lotane to lmprove the statistical O nd mat a conditeon of th secod program to agricultural bals for planning io the agricultural trench. growth. sector. (e) To imprevo cost recovery and Technical asoIetane to a*eos ONAT coee GHAT regularly Incr mosd rental provide mere ef iietntly for and to Implement machinery rehabilIt tion rates. It achloved full cost recurrent co Ot, In progra and tratning Of workshop taf In reovery for tractor rentl at the rlcublar charge made by the MOA. tim of the - c tranch It nom ^T (the tractor hire ohowe on "permtine proelt agsny) were reulred to re ch full cost recovry lo"ele. _habilitation of 00 agricultural machinery. (d) To lmproer donor coordinatlen The 00$ and IDA wil exchango vimn on th Dlacsalone were hold regularly wIth to, inter all, lncre_ the poje ct nd provide IDA with infoterdtion, my denore toexplore availability sapely of fund. at foreign of additional fund. for foreign exchange auctins exchango auction under the Program. USAID and the Italian governmnt contributed to the foreign *xchange auctiona. The COS provided all Information requested. -56- Annex TV Page 3 of 3 MAT1IX OF POLICY ISSUES. STRATEGIES AND ACTIONS IN ASAP I Actions Taksn s Isues and Strategy Atons eqired under AP I Scd Tranch. Co"ditloae Objectives Iplemented Under ASAP I Rural Fln . (a) To Improve the oval lability SO an CMS to move towrds Teitltv Rel Interest rote were moving of agricultural credit oW lterest rates for borre twards poeitlv rats during 1087, stimuloe rural savings. arIsulture. ther. was a r.v.rsl durla the hypriatf lotion of 19 , lnterest (b) To Improve Institutional rWte to aricultural borrer were *reangsonts for agricultural positive In rest xterm on th bale credit end savins, I.e. to ofnmedium-term Inflotien projection Improve financil at th time of the snd trnch. intermdiation. (c) To bring In rest rates on laoe to agriculture IOt ltne wlth morket rates. IOWAt Supply (a) To ensure the avel labilIty Of A foreign exchaneo uction will be Foreign exchang auction w* foreign exchange to purchase, established to l prove the vai labilIty of established. inter *lls, aricultural fIinncial reource for the Import of Ta-PuWa-ioupport the goods for the So"aiI economy. The program adeption of better technology will alse further encourage the stimulated by the Improved porticipatlon of smiler traders by price lncentives In *lloving bids at auction as law as 15,051 subsectora such as grains, equivalent. fruit production, fisheries and livestock (b) To schlevo a greeter and more - There mIntensive porticipttlon by far-reaching involvement of the private sector In the foreign the privatt sectr in the exchange auction (aubtequently the morketing nd distrlbution of foreign exchnge allocation system). purchased Inputs. - 57 - Annex V SOMALIA AGRICULiRL SECTOR ADJUSTMENT PROGRAM nI Trends in Production. Area Harvested and Yield for Sorghum and Maize Production Area Barvested Yield Year Sorghum Maize Sorghum Maize Sorghum Maize --('000 tons)-- ---('000 ha)--- --(tons per ha)-- 1970 158 122 290 133 0.55 0.92 1971 128 99 280 102 0.46 0.97 1972 149 115 390 117 0.38 0.98 1973 128 99 345 101 0.37 0.98 1974 125 97 330 99 0.38 0.98 1975 134 104 400 106 0.34 0.98 1976 140 108 490 119 0.29 0.90 1977 145 111 458 151 0.32 0.74 1978 141 108 420 148 0.34 0.72 1979 140 108 461 148 0.30 0.73 1980 140 110 457 109 0.31 1.01 1981 222 142 517 197 0.43 0.72 1982 235 150 540 209 0.43 0.72 1983 121 236 335 219 0.36 1.08 1984 221 270 548 220 0.41 1.23 1985 222 280 447 234 0.50 1.20 1.86 237 336 385 245 0.62 1.37 1987 244 286 516 260 1.10 1.10 1988 234 353 570 281 1.26 1.26 Growth Rates (Percent per annum) 1970-78 3.6 7.6 2.6 6.0 1.0 1.5 R2 .55 .76 .47 .81 .57 .65 1978-88 5.9 14.7 1.1 7.8 5.0 6.5 R2 .47 .91 .05 .76 .08 .17 1980-88 5.1 15.3 0.8 8.7 17.1 6.09 R2 .28 .87 .02 .69 .79 .48 Source: Ministry of Agriculture and Natural Resources, Food Early Warning System. - 58 - Annex VI Page 1 of 6 SOMALIA AGUCULTURAL SECTOR ADJUSTMENS PROGRAM It Social Action Program - Examples of Possible SubProiects A. Mother and Child Health (MCH) Centres 1. There are 16 MCH centres located in the 13 districts of Mogadishu. These deliver an essential health care service to pregnant and lactating mothers, and children under 5 years. The services include: ante-natal and post-natal care of mothers, immunization for mothers and children, growth monitoring for children under 5 years, health education, basic drugs (antibiotics, antihelmetics, oral rehydration salts, etc.) and World Food Programme food aid to families with malnourished children. A network of trained and untrained traditional birth attendants (TBA's) is attached to each MCH. In the cases of the trained TBSs drugs supplies and equipment are regularly supplied to them through their local MCH. 3f all the health service the MCH centres have the closest contact with the largest number of poor households in the city. 2. Although the national office of the MCH programme has an established supply line for drugs, as well as technical assistance to assist with staff training, many of the MCH's are in urgent need of the most basic repairs. In addition basic amenities such as functioning latrines, electricity and water supply are absent from a number of the MCH's. A survey carried out by local private consultants in late 1987 showed that repairs to the value of $142,000 were needed. 3. In 28 of the 79 districts outside Mogadishu, where there is no Primary Health Care Program in operation, the MCR centres are the most important, and often only health services available for women and young children. As in Mogadishu there are major needs for renovation, and in many cases, for the installation of latrines and water supply. While drug supplies and staff are available for these MCH's many of the newly trained staff are reluctant to work in such areas because of their isolation. In order to mitigate the difficulties (including costs) of living in such areas it is proposed that a housing annex be built onto the existing MCH centres, for the use of the District Midwife. A survey is needed to assess materials needs and construction costs for both the repair and construction work involved. This would require the involvement of both Ministry of Health staff and private consultant engineer for a period of at least 4 weeks. -59 Anex VI Page 2 of 6 B. Women'as Skills Training Centre 4. Since early 1988 the Urban Basic Services Project of the Municipality of Mogadishu has operated a centre providing skills training, literacy training and health education to approximately 100 women from poor families in Wadajir district. A pre-school, koranic school and small scale feeding programs have also been provided for their children between 3 and 6 years. The aims of the centre were to give the women improved income earning opportunities and to develop pro-school attitudes amongst the women which might lead to increased primary school attendance by their children. Centre staff have been provided by Municipality of Mogadishu and the Family Life Programme of the Ministry of Education. Technical assistance and funding of some non-staff operating costs have been provided by Concern (Ireland) and more recently by UNICEP. The women currently using the centre were originally selected from the nearby community, including two squatter areas, on the basis of referral by local officials and detailed interviews by project staff. Recently the selection of a second group of women has begun, but this time using referral by the nearby Mother and Child Health Care centre as a main source of applicants (based on nutrition status of their children). It is planned that the first group of women who have now completed their training should be given the opportunity to take loans from the project in order to facilitate their entry into small business activities, using the skills they have acquired. 5. The centre currently operates from two rented houses costing $1,600 a year to rent. The Municipality has allocated land near to the present centre and the local MCH for the construction of a permanent Women's Training centre; however funds have not been available to go ahead with construction. There is a risk that if the land is not used the Municipality will be pressured to re-allocate the land for other uses. The Urban Basic Services Project estimates that it needs US20,000 to construct suitable buildings. Including costs of a loan fund for ex-trainees, additional furniture and equipment for a newly built centre the total amount of funds needed is estimated to be US$29,000. C. Income Generation Assistance for Families with Malnourished Children 6. With the exception of the above project, until now the only form of assistance given to families with malnourished children in urban areas has been World Food Programme food aid distributed through the MCH centres on a once a month basis. Recent research into the income sources of such families who have attended a MCH centre in Mogadishu has shown that at least 802 of the families are very poor. A number of the mothers interviewed reported that their families did not eat every day, because of lack of income. It is clear from the research that a range of strategies would be needed to assist these types of families. In some cases skills training opportunities, access to specific health services, health education, as well as mediation and advocacy on behalf of the family will be more appropriate. 7. The UBS project would now like to start up a service which would reach this type of household in Raaraan District of Mogadishu. Kaaraan is the second largest District (90,000 people) in the city and contains a large - 60 - Annex VI Page 3 of 6 number of low income households including those in the squatter resettlement area knonn as Gubadley. At least two core sta
Группа Всемирного банка · President's Report
Somalia - Second Agricultural Sector Adjustment Program Project
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