Mali - Economic policy and international trade

36250 UNDP-WORLD BANK TRADE EXPANSION PROGRAM COUNTRY REPORT 3 MALI Economic Policy and International Trade This country report is a product of the joint UNDPrWorld Bank Trade Expansion Program which provides technical and policy advice to countries intending to reform their trade regimes. The views contained herein are those of the authors and do not necessarily reflect those of the United Nations Development Program or the World Bank.  MALI ECONOKIC POLICY AND INTERNATIOHAL TRADE Country Study prepared for the World BanklUNDP Trade Expansion Program by the Center for Studies and Research on International Development University of Clezmont France May 1989 Trade Policy Division World Bank Washington, D.C.  TABLE OF CONTENTS Page Preface v Glossary of Abbreviations vii s-ry viii Int reduction rv 1. THE GENERAL QUEST FOR COMPETITIVENESS: THE ROLE OF MACROECONOMIC POLICY 1.1 The Need to Ensure Competitiveness 1.2 The Impact of Macroeconomic Policy on Competitiveness 1.3 Conclusion CREDIT POLICY 2.1 Easing of the Overall Constraint 2.2 Use of Selective Policy Instruments Favoring Exports and Import Substitution 2.2.1 Selective credit policy instruments 2.2.2 The conditions for more intensive use of selective credit instruments 2.2.3 Conclusion 3. FISCAL POLICY 3.1 Comparisonof Mali's T a x S y s t e m w i t h O t h e r Tax Systems in Sub-Saharan Africa 3.2 Tax Reforms and Promotion of Foreign Trade 3.2.1 Indirect taxes 3.2.2 Direct taxes 3.2.3 Conclusion 4. CUSTOMS POLICY 4.1 Goals of the Tariff Policy 4.1.1 Features of a 'goodn customs policy 4.1.2 The problem of fraud 4.2 Mali's Tariff Protection System 4.2.1 Taxation of foreign trade 4.2.2 The tax burden on imports and exports 4.2.3 Customs policy reforms undertaken as part of the Economic Reform Program 4.3 Recommendations for Further Customs Policy Reform 4.3.1 Separation of protection and budgetary goals 4.3.2 Simplification of the'tariff system 4.3.3 Increased neutrality of the tariff system 5. REGULATIONS AND PROCEDURES GOVERNING INTERNATIONAL TRADE 5.1 Objectives of Trade Regulations 5.2 Procedures 5.2.1 Import and export licenses 5.2.2 Inventory declarations 5.2.3 Product linking 5.3 Recommendations 5.3.1 Procedural requirements for imports 5.3.2 Procedural requirements for exports 5.3.3 Procedures for payment of importlexport charges 6. PRICE POLICY FOR AGRICULTURAL EXPORTS: COTTON 6.1 Objectives of the Cotton Price Policy 6.2 Assessment of the Current Cotton Pricing System 6.2.1 Brief description of the cotton pricing system 6.2.2 Consequences of the system 6.3 Desirable Emphases for Reform 6.4 Conclusion References ANNEXES Annex 1. Simplified Simulation of the Different Types of Turnover Tax in Mali Annex 2. Simulation of Effective Direct Income Taxes for Different Types of Companies Annex 3. Determinants of the Real Producer Price for Cotton in Mali (by Pascale Phelinas)  This is a report of a study conducted under the Trade Expansion Program of the United Nations Development Program (UNDP) and the World Bank. The study team from the Center for Studies and Research on International Development (CERDI) was led by Patrick Guillaumont, Professor at the University of Clermont I and Director of CERDI. Other team members were Shantayanan Devarajan, Professor at Harvard University; Anne-Marie Geourjon, Assistant Professor at the University of Clermont I; Sylviane Guillaumont. Professor at the University of Clermont I; and Henri-Fransois Henner, Professor at the University of Clemont I. The team also benefited from the assistance of Hans-Peter Lankes (World Bank consultant). Sylvie Millot (CERDI consultant), Pascale Phelinas (Research Officer, ORSTOM), Cheikh Sidibe (Chief, Foreign Trade Division, DNAE), and Wendy Takacs (University of Maryland). vho assisted the team in the compilation of data or wrote supplementary memoranda to the report. Although this study was a team effort, various members were responsible for,specific chapters of the report. Chapters 1, 2 , and 6 were rg written by P. Guillaumont and S. Guillaumont; Chapter 3 by S. Devarajan; Chapter 4 by A.M. Geourjon; and Chapter 5 b H.F. Henner. Annex 3 was written by Pascale Phblinas. The team spent July 10-24, 1988, in Mali, where it benefited from the most helpful and fruitful assistance provided by Mr. Youssouf Thiam, World Bank economist in Bamako, and coordinated by the National Directorate of Economic Affairs, in particular its Director, Mr. Dbmb. It is not possible to list here all the Malian individuals who helped the team in its work. We trust that each of them will accept our expression of appreciation.  GLOSSARY OF ABBREVIATIONS Central Bank of West African States (Banque Centrale des Etats de 1'Afrique de 1'0uest) BDM Development Bank of Mali (Banque de Developpement du Mali) BIC tax on industrial and commercial profit (impbt sur les benefices industriels et commerciaux) CERDI Center for Studies and Research on International Development, Clermont University (Centre d'Etudes et de Recherches sur le Developpement International) CMDT Textile Development Company of Mali (Compagnie Malieme pour le Developpement de Textiles) CPS tax for import (export) services (contribution pour prestations de services rendus A l'importation [l'exportation]) DFI import tax IAS tax on businesses and services (impbt sur les affaires et les services) tax on income on securities (impbt sur le revenue des valeurs mobilieres) ISCP special tax on specific products (impbt special sur certain produits ) OSRP Office of Price Stabilization and Control (1'Office du Stabilisation et de Regulation des Prix) TCR regional cooperation tax (taxe de cooperation regionale) WAEC West African Economic Community WAMU West African Monetary Union  viii To increase its rate of economic growth while preserving external equilibrium Mali needs to encourage exports and some import substitution. I Economic policy can help to achieve these goals. First, Mali must ensure the general competitiveness of the economy while preventing any increase in the real effective exchange rate (that i s , the ratio of Malian prices to international prices, converted at the official exchange rate). Although the available data suggest that the real effective exchange rate has not noticeably appreciated over the past fifteen years, Mali's growth objectives, the.drop in cotton prices, and the increase in the country's debt-service obligations, together with the great length and permeability of Mali's borders, make competitiveness a vital necessity. To enable accurate tracking of the country's competitiveness. a reliable consumer price index is needed. Competitiveness also requires strict control over money creation and aggregate demand. Specifically, this will entail limiting the budget deficit, even if increased external financing is available. In addition to these general measures regarding competitiveness, implementation of a set of specific measures concerning credit, taxation, customs duties, regulation of foreign trade, and the setting of cotton prices will help to expand international trade. Credit policy. Although credit policy is determined within the framework of the rules of the West African Monetary Union (WAMU), national monetary authorities have some discretion in terms of the overall policy adopted and in the use of selective instruments.  4 For credit policy to contribute. effectively to the expansion of exports and to import substitution it must ensure the competitiveness of the economy and therefore limit growth of the money supply. The steps currently being taken to restructure the Development Bank of Mali (BDM) and improve its debt collection and to settle the government's domestic arrears should serve to lessen the constraint imposed by overall monetary policy on the distribution of credit to productive activities. The monetary authorities have available an array of selective instruments for channeling credit toward export-oriented and import- substituting activities. Efforts can be made to expand the number of activities benefiting from seasonal credit (.which is unrestricted and available at low interest), but these activities must not result in an encroachment of public control over sectors that are now the preserve of private enterprise. To establish credit programs for smali and medium-size productive enterprises, it would be desirable to adopt a more flexible interest rate policy (with respect to WAMU rules). Fiscal policy. Mali can also use fiscal policy to promote foreign trade. Nominal tax rates in Mali are close to those in other African countries, but the effective tax burden in Mali is much lighter, which shows the narrowness of Mali's tax base. The proportion of indirect taxes is also higher in Mali, which indicates that the tax system is creating distortions. Since any increase in the budget deficit could cause the real exchange rate to appreciate, all recornendations are based on the assumption that the government's revenues must be protected. The most important indirect tax. the turnover tax on business and services ( U S ) introduces several biases into the tax system. The first bias is that in favor of vertically integrated (and generally large) enterprises; this is due to the fact that deductions allowed in computing the U S cover only some of the inputs used. The second bias works to the disadvantage of exporters in two ways: (1) since the IAS is a deduction- based value added tax (VAT) and not a true rebate system VAT, taxes already paid on inputs are not refunded, and (2) the IAS is higher on imported than on locally produced goods, thereby raising the cost of imported inputs used by exporters. Deductions allowable against the IAS should be increased, which would eliminate, for enterprises producing for the domestic market, the bias against companies that are not vertically integrated. The bias against exporters could be corrected by replacing the IAS with a rebate system VAT and by equalizing taxation of imports and local goods. Changes in two other taxes are recomended. Mali's export taxes, which (apart from the case of cotton) generate only 1 percent of the government's revenues, should be eliminated and the IAS rate increased to makd up the lost revenue. Second, the tax on income from securities should be abolished. Direct taxes in Mali have an impact on the performance of the economy, especially on capital formation. There is a big difference between the effective tax burden on the profits of a corporation and the profits of a partnership because of the securities tax. This distortion can discourage capital formation and its cause should be eliminated. Customs policy. The promotion of foreign trade in Mali can be facilitated by an appropriate customs policy. Improvement of the efficiency of the customs system is particularly important for facilitating a movement from quantitative restrictions to tariffs, which would then become the chief protection instrument within the framework of a rational industrial policy. The recommendations suggested here are consistent with the continuation of the government's Economic Reform Program. Prevention of smuggling and tariff evasion is a prerequisite for any measure designed to improve the tariff system because the greater the amount of smuggling and evasion the more inefficient will be the tariff- based protection policy and the greater the resultant distortions. Simplification of the customs system, which is currently extremely complex, would help to reduce these problems and facilitate the collection of duties and taxes. Three categories of measures are suggested for simplifying the system: elimination of official prices, reduction of exemptions from import duties and taxes, and a return to three separate systems of import taxation, that is, customs duty, import tax (DFI), and VAT. Simplification of the customs system would also facilitate economic analysis of the tariff structure, thereby enabling a separation of protective and revenue generating functions. Sectors needing protection and the period for which protection should be provided would need to be carefully and systematically determined. The protection policy must be separated from the budgetary objectives. To this end the turnover tax (IAS or VAT) would be used solely to generate tax revenues, which would result in elimination of all discrimination between imported and local products, while the DFI would be used purely as a protection instrument. Until a systematic analysis is undertaken of the sectors warranting special protection, greater neutrality of the customs system would appear desirable in order to lessen existing distortions. To this end it would be helpful to increase the uniformity of the DFI rates applicable to products in the same category.  Finally, all customs tariffs create a handicap for the export sector that should be reduced by eliminating taxes and duties on exports (with a few exceptions) and introducing a VAT. A general exemption should be granted from taxes and duties on imported inputs used in the manufacture of exports, including the 5 percent tax for special import services (CPS). Regulatory framework. Certain rules and regulations governing .foreign trade have remained unchanged since the period of state control of the economy and are not appropriate to the government's present economic policy. These rules were established to achieve three objectives: satisfaction of the population's basic needs, collection of statistical data on trade flows for tax and customs purposes, and protection of national production. With the liberalization of trade the first objective is now pursued through market mechanisms and not by regulation. The instruments used to achieve the remaining two objectives are import and export licenses, inventory declarations, and more recently, product-linking requirements (for sugar and tea). Analysis of the functioning of these regulatory procedures and of their economic consequences shows that they perform their function poorly and that they tend to divert trade into unrecorded flows, thereby reducing both customs revenues and protection of domestic production. Two sets of measures are reconnnended to ease the constraints imposed on imports and exports and thereby to lessen the temptation to fraud and the resulting distortions. These measures include elimination of the import license system, except for certain special items, and elimination of export licenses. A second category of measures is intended to strengthen the effectiveness of administrative control to help ensure t h a t customs d u t i e s a r e a c t u a l l y c o l l e c t e d and t h a t r e a l p r o t e c t i o n i s provided where warranted. The e f f i c i e n c y of customs a d m i n i s t r a t i o n can be enhanced by simplifying operations, providing b e t t e r t r a i n i n g and b e t t e r pay f o r s t a f f ( o r incentives f o r ensuring t h a t proper d u t i e s a r e a c t u a l l y p a i d ) , and taking more vigorous a c t i o n t o stamp out corruption. As f o r l i n k i n g imports and domestic production. which has worked w e l l f o r sugar but not f o r t e a , it seems d i f f i c u l t t o develop t h i s policy i n t o a general p r o t e c t i o n system because of i t s i n e f f i c i e n c y when l o c a l products and imports a r e not homogeneous and because of t h e r i s k s of lower p r o d u c t i v i t y i n s e c t o r s protected i n t h i s way. Cotton p r i c i n g policy. The policy concerning producer p r i c e s f o r c o t t o n , t h e country's chief export product, i s a key f o r e i g n t r a d e policy instrument. Cotton p r i c i n g policy t r i e s t o r e c o n c i l e four o b j e c t i v e s : maintaining a l i n k between t h e producer p r i c e and t h e i n t e r n a t i o n a l p r i c e t r e n d ( t o ensure t h e e f f i c i e n t a l l o c a t i o n of n a t i o n a l resources t o cotton production), s t a b i l i z i n g t h e producer p r i c e ( t o encourage innovation i n t h e s e c t o r and prevent excessive f l u c t u a t i o n s in production), ensuring a minimum l e v e l of f i s c a l revenue f o r t h e government, and preventing l a r g e v a r i a t i o n s i n these revenues over time. Several systems a r e conceivable f o r supporting these o b j e c t i v e s . I n t h e case of Mali, t o ensure both t h a t t h e producer p r i c e i s i n l i n e with t h e i n t e r n a t i o n a l p r i c e t r e n d and t h a t i t has some measure of s t a b i l i t y . i t i s recommended t h a t a guaranteed export p r i c e be s e t . based on t h e p a s t i n t e r n a t i o n a l p r i c e trend. This export p r i c e can then be used t o f i x t h e p r i c e paid t o producers while a l s o ensuring a modest c o n t r i b u t i o n t o t h e s t a t e budget.  A stabilization fund should also be established to prevent instability in state revenues. To ensure proper use of the funds, it is recommended that the stabilization fund be autonomous and that it be required to deposit its reserves in an account with the Central Bank of West African States (BCEAO).  N INTRODUCTION Erpansion of trade is a particularly important issue in Mali today. Mali is very dependent on imports to supply many of its needs while its export receipts are derived primarily from two products, cotton and cattle, so they are subject to considerable fluctuation. A policy encouraging export development and diversification is necessary, but Mali also needs an effective import-substitution policy. Mali's trade policy has to be formulated with due regard to the specific characteristics of the Malian economy. Mali is still at a low level of economic development. The country is landlocked, which is a handicap to exports, while the innnense length of its borders (7,000 kilometers) makes smuggling easier and protection of domestic production more difficult. The public sector is large but is currently being reorganized and doemscaled under the liberalization policy. Mali belongs to the West African Monetary Union (WAMU), which guarantees the convertibility of its currency while prohibiting Mali from unilaterally adjusting its nominal exchange rate. Certain of its key products (livestock in particular) face difficult competition because of the protection given to producers in industrial countries. On the more positive side is the dynamism of the country's traders, which can be an asset for the promotion of national products. A trade policy aimed at export promotion and efficient import substitution involves two main aspects. First, the general competitiveness of the economy needs to be ensured through appropriate macroeconomic policies. Second, specific incentive measures are needed in different fields: credit policy, fiscal policy, customs policy, foreign trade policy, and agricultural export pricing policy for cotton. While economic policy measures can have a n impact on foreign trade, and trade expansion policy merges to some extent with the structural adjustment policy, the following analysis concentrates on the measures most likely to directly affect foreign trade.  CHAPTER - 1 THE GENERAL QUEST FOR COMPETITIVENESS: THE ROLE OF HACROECONOHIC POLICY Expansion of trade in an economy undergoing liberalization requires a competitive price structure. The following sections examine what this competitiveness means for Mali and how it can be influenced by macroeconomic policy. 1.1 The Need to Ensure Competitiveness In a small and largely liberalized market economy, with a fixed exchange rate, the price of exportable and importable (tradable) goods is in the long run essentially determined by the prices prevailing in other countries (corrected for the exogenous movement of the nominal effective exchange rate, that is, the mean of the relevant bilateral exchange rates). These prices constitute an absolute constraint for export activities. but they are also determining for import-substitution activities in an economy such as Mali's where such activities are rarely sheltered against competition from unofficial imports. The volume of exports and imports then depends on the level of domestic c e t s (cost of inputs and nontradable goods). which determines the profitability of export and import- substitution activities. These costs depend on elements as varied as wages, domestic transportation, profit margins, and taxes. Measuring changes in competitiveness is always difficult. but is particularly so in the case of the Malian economy because of lack of reliable price statistics for the different sectors. On the basis of statistics currently available, the following observations can be made.  An initial, approximate measure-of changes in competitiveness can be derived by comparing the price indexes for agricultural and industrial products with those for services, both measured u s i n g t h e sector deflators I of the national accounts. Agricultural and industrial goods are assumed to be tradables, which means their prices depend on prices outside Mali and on trade policy, whereas services are generally considered to be nontradables with prices that reflect the cost of domestic inputs. For this rough estimate, 1970 is selected as the base year and the exchange rate is assumed to have been at an equilibrium level as a result of the 50 percent devaluation in 1967, followed by a period of restrictive monetary and budgetary policy. It appears from the national accounts data for Mali published by the World Bank (1987c11 that the index constituted by the ratio of the services deflator to the deflator for agricultural and industry tended to decline between 1970 and 1985, and especially from 1978 onward (column 1, Table 1-1 at the end of this chapter). This could indicate an improvement in competitiveness. This diagnosis is confirmed by another measure of competitiveness, the real effective exchange rate (REER) index, which is the index of the ratio of prices in Mali to those of its main trading partners, corrected for the movement of the nominal effective exchange rate, that is, the index of the average exchange rate with respect to those partner countries. The REER index was calculated using the price index for the partner countries. 1 These data, from World Tables, are based on the Malian national accounts and systematically made up of estimates of value added by sector at current and constant prices, are not very reliable, especially in regard to the movement of the prices of services. For Mali, which does not have a consumer-price index, the GDP d e f l a t o r and the p r i v a t e consumption d e f l a t o r used by the World Bank were used t o c a l c u l a t e the REER index (columns 2 and 3 of Table 1-1). Data were weighted by the o r i g i n of imports i n 1975. When the GDP d e f l a t o r i s used, the calculations show t h a t the REER index had moved downward t o 79 by 1987; when the p r i v a t e assumption d e f l a t o r i s used, the index had moved down t o 69. These observations match those of Dittus (1987). who uses d i f f e r e n t indexes and weightings. I f , instead, r e t a i l p r i c e data a r e used t o construct a r e t r o - spective consumer p r i c e index (see Lecaillon and Morrison 1986; Poels; and Table 1-2, column 3 ) . t h e pace of i n f l a t i o n i n Mali appears t o be f a s t e r than suggested by n a t i o n a l accounts data, which would i n d i c a t e a s i g n i f i c a n t appreciation (column 4 of Table 1-1) between 1978 and 1981, followed by some depreciation. However, the weighting of t h i s index (which had t o be chosen a r b i t r a r i l y because of the lack of data on the s t r u c t u r e of consumption and the sparse p r i c e data a v a i l a b l e ) does not take services i n t o account ( a t l e a s t not f o r 1968-80) and assigns preponderant significance t o p r i c e s of tradable goods, e s p e c i a l l y c e r e a l s . Its swifter increase than t h a t of the other indexes described r e f l e c t s the marked r i s e i n c e r e a l p r i c e s r a t h e r than any unfavourable movement of r e l a t i v e p r i c e s as f a r a s tradables a r e concerned. These analyses have t o be rounded out by a c a l c u l a t i o n t h a t takes i n t o account the o r i g i n not only of o f f i c i a l t r a d e but a l s o of u n o f f i c i a l flows from neighboring countries. It proved impossible t o take i n t o account t r a d e with Guinea and Mauritania, which i s financed e s s e n t i a l l y i n the p a r a l l e l exchange market f o r which we have no data. For t h e o t h e r UAMU countries (Burkina Faso, Cdte d 9 1 v o i r e , Niger, and Senegal), however, i t was possible to calculate an average REER, with a weighting that approximately reflects the significance of Mali's official and unofficial trade with those countries (Table 1-1, columns 7, 8, and 9). The calculations using the GDP deflator and the private consumption deflator indicate an underlying depreciation of Mali's REER since 1973 with respect to its four WAMU partners. If there had been no improvement in competitiveness over the past ten years. it would be hard to explain how industrial production could have risen as it has since the early 1980s, even in the sectors exposed to international competition (textiles, foodstuffs). It is also revealing that both the minimum wage and the producer price for cotton, which is an indicator of labor rates in rural areas, are lower in Mali than in the other W A N countries (Tables 1-3 and 1-4). Nevertheless, the hypothesis is sometimes put forward that the CFA franc is overvalued in Mali. This hypothesis is apparently based on two considerations. First, if the REER is calculated using as the weight the market share of competing countries for Mali's main exports -- cotton (Dittus 1987) and possibly cattle and groundnuts (Plane 1988) -- the calculations show a marked appreciation up to 1979, followed by a pronounced depreciation to 1984-85 and then a large rise thereafter because of the U.S. share in world cotton exports (Table 1-1, columns 5 and 6). Neither the long-term trend nor the theoretical significance of this movement is clear, in that the fluctuations in the index reflect those of the dollar. The second argument is derived from the marked trade imbalance, which has tended to increase over recent years, in part because of the influence of t h e worsening terms of t r a d e ( s e e Tables 1-5 and 1 - 6 ) . By making some assumptions about t h e e l a s t i c i t i e s of demand f o r imports and supply of exports w i t h r e s p e c t t o t h e exchange r a t e , t h e d i f f e r e n c e can be c a l c u l a t e d between t h e present REER and t h e r a t e which would permit r e s t o r a t i o n of equilibrium in t h e t r a d e balance ( S t r y k e r 1987, 3 9 - 4 0 ) . Great caution i s required i n i n t e r p r e t i n g t h e r e s u l t s because of t h e h y p o t h e t i c a l n a t u r e of t h e e l a s t i c i t i e s used and because t h e very e x i s t e n c e of a t r a d e imbalance implies an overvaluation of t h e currency i n t h i s type of c a l c u l a t i o n . The f a c t i s t h a t i t i s normal f o r a low-income developing country t o b e n e f i t from a p o s i t i v e n e t c a p i t a l t r a n s f e r . The two arguments presented above do n o t t h e r e f o r e support t h e contention t h a t t h e CFA f r a n c i s overvalued i n Mali. Nevertheless, i n l i g h t of t h e d e t e r i o r a t i o n i n the terms of t r a d e , t h e d e s i r a b l e REER might be lower today than i t was i n 1970. Continuing d e t e r i o r a t i o n i n t h e terms of t r a d e over a long period means t h a t a g r e a t e r volume of e x p o r t s i s required t o maintain t h e t r a d e d e f i c i t and t h e l e v e l of imports a t a given level. This can only be achieved by means of a domestic p r i c e s t r u c t u r e t h a t i s more favorable t o e x p o r t s , t h a t i s , by a d e p r e c i a t i o n of t h e REER o r by i n c r e a s e d p r o d u c t i v i t y i n t h e export s e c t o r . I n t h e case of Mali, such assessments a r e d i f f i c u l t t o make because of t h e u n c e r t a i n t y regarding the a c t u a l movement of t h e terms of t r a d e , a s shown by t h e discrepancy between World Bank and UNCTAD d a t a (Table 1-6) which, moreover, r e l a t e only t o o f f i c i a l trade. I n a d d i t i o n , d a t a on p r o d u c t i v i t y i n t h e export s e c t o r s a r e very scanty, although it does seem t h a t some s i g n i f i c a n t p r o d u c t i v i t y gains have been achieved i n t h e c o t t o n s e c t o r .  It remains t r u e , n o n e t h e l e s s , t h a t i f t h e o b j e c t i v e i s t o f a v o r e x p o r t s and import s u b s t i t u t i o n , economic p o l i c y i n Mali w i l l have t o prevent any a p p r e c i a t i o n of t h e r e a l exchange r a t e . This need i s i n t e n s i f i e d because t h e Malian economy i s very open t o t h e o u t s i d e w o r l d , and i t s long borders make t r a d e p r o t e c t i o n d i f f i c u l t . 1.2 The Impact of H a c r o e c o n d c P o l i c y on c o m p e t i t i v e n e s s As a WAMU member, Mali cannot change t h e p a r i t y of i t s currency independently of t h e o t h e r members. However, t h e impact on t h e REER, o t h e r t h i n g s being e q u a l , of a d e v a l u a t i o n of t h e CFA franc with respect t o the French f r a n c could be much l e s s i n Mali than i n t h e o t h e r WAMU c o u n t r i e s . M a l i ' s t r a d e , more than t h a t of any o t h e r WAMU country ( e x c e p t p o s s i b l y Burkina F a s o ) , i s conducted w i t h i n t h e WAMU. I f the objective i s t o d i v e r s i f y Mali's e x p o r t s o r t o s t r e n g t h e n i t s competitiveness w i t h r e s p e c t t o imported p r o d u c t s , t h e measures adopted w i l l t o a l a r g e e x t e n t concern MalY's neighboring c o u n t r i e s , f o u r of which have t h e same currency. Thus o t h e r macroeconomic instruments t h a n exchange r a t e c o n t r o l must be used t o c o n t r o l t h e REER. These i n s t r u m e n t s a r e monetary p o l i c y and budgetary p o l i c y . I n a country such a s Mali, which does n o t have a c a p i t a l market i n which t h e government can borrow t o f i n a n c e i t s d e f i c i t , t h e budget d e f i c i t and money c r e a t i o n a r e c l o s e l y l i n k e d . Whether i t i s f i n a n c e d w i t h C e n t r a l Bank of West A f r i c a n S t a t e s (BCEAO) advances o r e x t e r n a l borrowing, t h e budget d e f i c i t t e n d s t o i n c r e a s e money c r e a t i o n and t h e r e f o r e aggregate demand. Thus t h e f i n a n c i n g of t h e d e f i c i t causes t h e p r i c e s of domestic goods t o r i s e compared w i t h t h o s e of i n t e r n a t i o n a l goods, bringing about an appreciation of.the REER, and eroding competitiveness. Control of money creation has a beneficial, twofold effect on the equilibrium of the trade balance. First. by limiting domestic spending it reduces imports and encourages exports. Second. it prevents an excessive rise in domestic costs (wages, salaries, and profit margins) and so in the prices of domestic goods relative to international prices, thereby improving competitiveness and lowering the REER. Accordingly, in its policy framework document on medium-term economic and financial policy (hereafter called the policy framework document), the Malian government refers to 'maintaining the average annual rate of growth of domestic liquidity at a level below that of GDP, with a view to easing the pressures resulting from excessive demand.' A too restrictive monetary policy could have an unfavorable impact on the balance of payments, however, since it could deprive the productive sectors of the credit needed for expansion. Accordingly, the policy framework document states that 'the aim of credit policy will be to channel resources to the productive sectors of the economy, especially agriculture, stockraising, and light industry.' Limiting the budget deficit is an Although the need to limit the budget deficit derives primarily from the effect of the deficit on money creation and aggregate demand. Mali had previously also been constrained under an International Monetary Fund (IMF) standby agreement setting a ceiling of 20 percent of fiscal revenues for the amount of BCEAO advances to the Treasury. Because of Mali's noncompliance with its agreements with the IMF, the country has not received the second tranche of the standby credit and the Malian Treasury has been deprived of the counterpart funds. Meanwhile the BCEAO has been obliged, on behalf of the Treasury, to service the credits already received from the IMF. e s s e n t i a l p r e r e q u i s i t e f o r r e c o n c i l i n g s t r i c t c o n t r o l of money c r e a t i o n ( e s t i m a t e d a t 5 . 2 p e r c e n t a n n u a l l y over t h e n e x t f i v e y e a r s , a c c o r d i n g t o t h e p o l i c y framework document) w i t h s u f f i c i e n t d i s t r i b u t i o n of c r e d i t t o the productive s e c t o r s . 1.3 Conclusion I n sum. two main recommendations can be drawn concerning competitiveness: 1. Appropriate p r i c e indexes a r e needed t o e n a b l e a c c u r a t e monitoring of competitiveness and of p r o d u c t i v i t y . The e f f o r t s underway t o e s t a b l i s h a r e l i a b l e consumer p r i c e index should be pursued v i g o r o u s l y . 2. To e n s u r e expansion of t r a d e , s t r i c t c o n t r o l of money c r e a t i o n and a g g r e g a t e demand i s n e c e s s a r y t o p r e v e n t a p p r e c i a t i o n of t h e r e a l e f f e c t i v e exchange r a t e . T h i s means t h a t t h e budget d e f i c i t must be k e p t down, even when increased external financing i s available. The microeconomic measures t a k e n t o expand f o r e i g n t r a d e must n o t f r u s t r a t e t h e s e e f f o r t s t o reduce t h e d e f i c i t .  Tabla 1-1. Comp.titivanass Indicators for M a l i , 1988-87 109.6 104.2 100.0 102.7 121.1 138.0 116.3 140.1 132.3 130.0 143.2 161.1 167.4 123.9 104.6 94.3 87.4 84.8 ioa.8 128.8 Table 1-1 Notes (1) Relative d e f l a t o r : r a t i o of d e f l a t o r f o r s e r v i c e s and comparable c a t e g o r i e s t o the d e f l a t o r f o r a g r i c u l t u r a l and i n d u s t r i a l s e c t o r s . ( 2 3 4 Real e f f e c t i v e exchange r a t e s o r geometric means of b i l a t e r a l r e a l exchange r a t e s , c a l c u l a t e d according t o t h e following formula: exchange r a t e index m u l t i p l i e d by p r i c e index f o r Mali and divided by p r i c e index f o r o t h e r c o u n t r i e s . These means a r e weighted by the s t r u c t u r e of o f f i c i a l imports in 1975: Belgium 1.5% Japan 1.7% Cote d s I v o i r e 21.1% Netherlands 2.2% France 44.9% Senegal 11.1% Germany 9.1% United Kingdom 2.5% Italy 2.2% United S t a t e s 3.7%  For p a r t n e r c o u n t r i e s : consumer p r i c e indexes. For Mali: - I n d i c a t o r 2: GD P d e f l a t o r . from World Bank (1987). a d j u s t e d f o r y e a r s 1982-87 by unpublished World Bank d a t a d e r i v e d from l a t e s t Malian n a t i o n a l accounts. - I n d i c a t o r 3: p r i v a t e consumption d e f l a t o r , same source a s G DP deflator. - Indicator4: consumerpriceindex(seenotestoTable1-2). Source: 1968-80. L e c a i l l o n and Morrison 1986. Annex 8 ; 1980-85. UNCTAD index. ( 5 ) . ( 6 ) Real e f f e c t i v e exchange r a t e s o r geometric means of b i l a t e r a l r e a l exchange r a t e s , c a l c u l a t e d according t o t h e same formula a s above u s i n g consumer p r i c e indexes f o r t h e p a r t n e r c o u n t r i e s and t h e GDP d e f l a t o r f o r Mali. These means a r e weighted according t o t h e s i g n i f i c a n c e i n world t r a d e of Mali's competitors f o r c o t t o n e x p o r t s ( y e a r 1975) f o r i n d i c a t o r 5 and f o r c o t t o n . groundnut. and beef e x p o r t s ( y e a r 1975) f o r i n d i c a t o r 6. namely: - Cotton 79.4Z Egypt 12.4%. Mexico 8.2%. P a k i s t a n 8.5%. Turkey 9.5%. United S t a t e s 6i.4X - Groundnuts 10.8% Argentina 19.2%. B r a z i l 10.6%. Hong Kong 16.1Z. Senegal 9.1Z - Beef 9.8% ' Argentina 13.8%. A u s t r a l i a 26.1%. France 18.5%. Germany 23.3%. Netherlands 18.3% 7 . 8 . 9 Real e f f e c t i v e exchange r a t e s (geometric mean) v i s - a - v i s neighbor c o u n t r i e s belonging t o t h e WAHU: Weighting: Cbte d ' I v o i r e 60% Senegal 20% Burkina Faso 1OZ Niger 10% For p a r t n e r WAMU c o u n t r i e s : consumer p r i c e index index. For Mali: i n d i c a t o r 7. G DP d e f l a t o r ; i n d i c a t o r 8. p r i v a t e consumption d e f l a t o r ; and i n d i c a t o r 9. consumer p r i c e index. i n accordance w i t h i n d i c a t o r s 2. 3. and 4.  Table 1-2. Price Indexes f o r Mali. 1968-87 P r i v a t e consumption Consumer p r i c e Year GDP deflator a deflator a indexes a a~ From World Bank ( 1 9 8 7 ~ ) d j u s t e d f o r 1982-87 by unpublished World Bank d a t a derived from Malian n a t i o n a l accounts. For 1968-80, c o s t of l i v i n g index ( L e c a i l l o n and Morrison 1 9 8 6 ) , weighted 213 f o r index of food products on f r e e market (National D i r e c t o r a t e of S t a t i s t i c s d a t a ) and 113 f o r nonfood products index c o n s t r u c t e d by authors ( c l o t h i n g 46Z, kerosene 24Z, l i g h t i n g 92, u t e n s i l s 21Z); f o r 1980-85, consumer p r i c e index (Poels: supplemented f o r 1980-86 by UNCTAD d a t a ) , weighted 52Z f o r food products and 47Z f o r nonfood products ( r e n t 4.9Z. miscellaneous 5.OZ, energy 6.62, t r a n s p o r t a t i o n 9.1Z. hygiene 9.62, c l o t h i n g 13.1Z, and f u r n i t u r e 19.6Z). Table 1-3. Minimum Wage in West African. Monetary Union Countries, 1976-88 (CFA francs per hour as of.January 1 each year) Year C6te d'Ivoire Burkina Faso Senegal Niger Mali Note: The minimum wage is the salaire minimum interprofessionnel garanti (SMIG). Source: BCEAO, Notes d'information et statistiqueg, "Monetary and - financial statistics," by country 1985-88.  Table 1-4. Producer Prices for Seed Cotton in West African Monetary Union'Countries, 1979180 to 1987188 (CFA francs per kilogram) Year C6te d'Ivoire Burkina Faso Senegal Niger Mali Source: BCEAO, Notes d'information et statistiques, 'Economic and monetary statistics,' by country, 1985-88.  Table 1-5. Movement of Balance of Payments Positions as a Percentage of GDP in Mali, 1970-87 Year Trade balance Current balance (goods balance) (including transfers) Source: For balance of payments positions, 1970-81, IMF, International Financial Statistics, various years; 1982-84, IMF (1987, Table 13); 1985-87, IMF, 'Memorandum on Economic and Financial Policy for 1988-1992,' Table 2. For gross domestic product, 1970-81, World Bank (1987~);1982-87, World Bank, adjusted data based on Malian national accounts.  Table 1-6. Movement of Terms of Trade f o r Mali, 1966-86 ( o f f i c i a l trade only) Year U??C TAD World Tables Note : UNCTAD d a t a a r e the r e s u l t of t h e r a t i o of export t o import u n i t v a l u e s , whereas World Bank d a t a a r e based on i n t e r n a t i o n a l p r i c e s f o r commodities and u n i t value indexes f o r manufactures. The marked divergence between t h e two s e r i e s i s discussed i n t h e text. Source: UNCTAD; World Bank ( 1 9 8 7 ~ . 286-87).  CHAPTER 2 CREDIT POLICY A selective credit policy favoring export-oriented or import- substituting activities has to take two constraints into account, one financial, the other institutional. The financial constraint relates to the fact that credit policy has to fit into a relatively restrictive overall monetary policy framework. The second constraint derives from the fact that Mali belongs to the West African Monetary Union (WAMU), which means that monetary policy instruments, including selective instruments. are laid down for the union as a whole. Application of the selective policy is the responsibility of national monetary authorities (National Credit Councils), however, so these authorities have a certain amount of room to maneuver. 2.1 Easing of the Overall Constraint Credit growth, which was negative in 1987, is estimated at 4.2 percent for 1988. If the inflation forecast of 4.3 percent for 1988 measured by the GDP deflator is taken into account, credit for 1988 will probably be found to have remained unchanged or even to have fallen slightly in real terms. If the economic plan for the period 1988-92 is in fact carried out, credit to the economy should grow by about 11 percent in nominal terms and 7-8 percent in real terms in the years ahead. Given the present situation, a difficult transitional period lies ahead for the development of productive activities. To increase credit to certain activities there is currently no alternative to cutting credit to others. In this connection, two steps appear indispensable. One is r e s t r u c t u r i n g of t h e Development Bank o f . M a l i (BDM) which r e c e i v e s 5 0 percent of a l l d e p o s i t s but g r a n t s a l a r g e r p r o p o r t i o n of c r e d i t . The o t h e r i s reduction of t h e government's a r r e a r s . The BDM must continue i t s e f f o r t s t o recover a r r e a r s . Collection of a r r e a r s has t h r e e b e n e f i c i a l e f f e c t s : (1) by improving t h e BDM's cash p o s i t i o n , i t gives g r e a t e r l i q u i d i t y t o d e p o s i t s , a s i g n i f i c a n t p r o p o r t i o n of which i s p r e s e n t l y frozen, and it thereby improves t h e g e n e r a l l i q u i d i t y of t h e economy; ( 2 ) by reducing t h e amount of c r e d i t o u t s t a n d i n g from t h e BDM. i t brings t h e t o t a l c r e d i t t o t h e economy below i t s o f f i c i a l l i m i t , thereby f r e e i n g an a d d i t i o n a l margin of c r e d i t t h a t t h e C e n t r a l Bank of West African S t a t e s (BCEAO) can then make a v a i l a b l e t o o t h e r l o c a l banks; and f i n a l l y , (3) by reducing t h e BDM's l i a b i l i t i e s , t h e c o l l e c t i o n of a r r e a r s a l s o l e s s e n s t h e burden t h a t t h e BDM's l o s s e s r e p r e s e n t f o r M a l i ' s public finances. Settlement of t h e BDM's s i t u a t i o n by means of e x t e r n a l a s s i s t a n c e and conversion of t h e bank from a p u b l i c t o a semipublic c o r p o r a t i o n w i l l n o t produce any a d d i t i o n a l c r e d i t margin f o r t h e economy, but t h i s r e s t r u c t u r i n g i s n e v e r t h e l e s s e s s e n t i a l i n t h e long term f o r t h e smooth f u n c t i o n i n g of t h e banking system. Several p u b l i c and p r i v a t e s e c t o r e n t e r p r i s e s a r e unable t o repay bank c r e d i t because t h e government i s behind i n i t s payments t o them. As a r e s u l t , a p a r t of a l l banks* a s s e t s i s f r o z e n . The n o n l i q u i d i t y of p o s t a l checking accounts a l s o c o n s t i t u t e s a problem f o r t h e cash p o s i t i o n of certain enterprises. The government's domestic a r r e a r s of CFAF 23.7 b i l l i o n i n 1 9 8 7 were e q u a l t o about one-quarter of t h e CFAF 95 b i l l i o n i n c r e d i t t o t h e economy a s a whole i n t h a t y e a r . ~hesea r r e a r s have c r e a t e d a r e a l liquidity crisis. I t s impact on f o r e i g n t r a d e i s s i m i l a r t o , although l e s s severe than, the effects of a lack of foreign exchange, a problem affecting many developing countries, which, unlike Mali, do not have the advantage of guaranteed convertibility. The enterprises owed money by the government ace unable to pay their suppliers and consequently cannot obtain supplies or invest as they would like to. Settling the government's domestic arrears, as envisaged in the government policy framework document, is accordingly an essential prerequisite for expansion of foreign trade. 2.2 Use of Selective Policy Instruments Favoring Exports and Import Substitution The BCEAO does not have a selective monetary policy instrument designed exclusively for export promotion, such as the granting of export credits free of restrictions or at preferential discount rates. Selective policy instruments are available, however, for priority sectors, that is, for productive agricultural or industrial activities that are generally directed either to exports or import substitution. These instruments can therefore be used to favor exports without necessarily introducing a bias against import substitution. These instruments are consistent with the basic objective of limiting credit to commercial activities, particularly when they involve imports, in order that productive activities might benefit. A brief description of the selective monetary policy instruments as formulated for the WAMU and applied in Mali is presented in the following paragraphs before moving on to a consideration of the problems posed by more intensive utilization of these instruments. 2.2.1 Selective Credit Policy Instruments Selective credit instruments are of two kinds: those that affect credit availability and those that affect its cost. Selective action on the availability of credit forms a part of a mechanism for overall quantitative control of credit to the economy. The latter takes two forms, one indirect, through limitation of refinancing through the BCEAO, and the other direct, by means of "credit containment." The total amount of BCEAO refinancing for each member country of the WAMU is set yearly by the BCEAO board, upon recommendation by the respective National Credit Council. The Credit Council has to decide on the proportions that will be allocated to the Treasury and to the banks. To be discountable, bank loans must have been granted to well-managed enterprises; the total discount facility granted to each bank may not exceed 35 percent of its lending. In Mali the only bank that'benefits from BCEAO discounting (apart from discounting of seasonal credit) is the BDM, which has not in fact observed the obligation regarding the quality of the claims discounted, thus obliging the BCEAO to consolidate a part of the BDM's overdraft. The selective aspect of this refinancing policy derives from the fact that the refinancing ceiling set for seasonal credit (bank credit "granted for the marketing of local agricultural products, including credit for financing exports of these products") is only advisory whereas it is mandatory for other types of credit. Credit containment takes the form of ceilings set for the growth of credit provided by banks. As in the case of refinancing, seasonal credit is not included in this limitation. The selective aspect of containment is also apparent in the fact that the BCEAO sets different growth ceilings for different banks. Thus the BDM is not able to increase its lending; in fact, it has to seek to reduce it (including loans to its creditworthy borrowers), and the margins for credit growth are reserved for the other banks. In setting ceilings, the BCFAO states that it favors banks on the basis of newness in business, quality of management, ability to attract deposits, and extent of lending to the priority sectors, namely agriculture, livestock, and industry. In addition. two specific instruments serve to further the selectiveness of credit allocation: requirement for prior authorization or approval and sector credit ratios. For all loans over CFAF 30 million banks have to request prior authorization from the BCEAO, which can give preference to local production of goods for export or import substitution. It should be noted, however, that the CFAF 30 million threshold is relatively high in relation to the private sector's credit needs and that the obligation to seek prior authorization appears to constrain the banks unequally. depending on the nature of their clientele. For nonseasonal credit the National Credit Council also sets minimum ratios for the priority sectors and a ceiling ratio for the commercial sector. The extent to which these requirements for prior authorization and sector credit ratios are observed depends on how strictly the relevant penalities (noninterest-bearing reserves with the BCFAO) are applied. The penalities have in fact been imposed with increasing strictness in recent months. Loans granted against signature or securities alone are not covered by the overall quantitative restrictions on credit or prior authorization requirements, but they can be kept within bounds by means of a provision requirement. In 1986 there was a considerable increase in signature loans because of tighter quantitative restrictions. As a result of numerous defaults. these securities were converted into ordinary loans and became a major f a c t o r i n overrunning-the growth l i m i t s s e t f o r such credit. Accordingly, t h e National Credit Council imposed a 75 percent provision requirement i n 1987 f o r a l l bank lending a g a i n s t s e c u r i t i e s . .This requirement has e l i c i t e d considerable c r i t i c i s m . The measure appears, however, t o be a needed and unavoidable response t o some obvious abuses, p a r t i c u l a r l y a t the l e v e l of t h e BDM, which were beginning t o spread t o other banks. The measure i s favorable t o balance of payments equilibrium s i n c e it a f f e c t s primarily import t r a n s a c t i o n s , which commonly involve purchase on c r e d i t . Most of t h e d i f f i c u l t i e s with t h e measure a r e t h e r e s u l t of applying i t t o o s t r i c t l y across t h e board. The National C r e d i t Council has t h e r e f o r e decided t o introduce some f l e x i b i l i t y i n t o t h e r u l e by allowing t h e provision t o be reduced t o 50 percent i f t h e loan a p p l i c a n t i s a n a t i o n a l production e n t e r p r i s e . Ultimately, once the s i g n a t u r e loan s i t u a t i o n has been c l e a r e d up, i t would be l o g i c a l f o r t h e provision t o be modulated in accordance with t h e borrowers* presumed c r e d i t w o r t h i n e s s , in t h e context of a procedure s i m i l a r t o t h a t used f o r p r i o r authorization. F i n a l l y , it i s a l s o p o s s i b l e t o o b t a i n medium-term c r e d i t from the BCEAO. The conditions f o r such c r e d i t a r e p a r t i c u l a r l y favorable f o r small and medium-size e n t e r p r i s e s . This c r e d i t c u r r e n t l y r e p r e s e n t s only about 1 4 percent of a l l c r e d i t . t o t h e economy, however. S e l e c t i v i t y i n regard t o amount of c r e d i t i s accompanied by s e l e c t i v i t y in terms of i n t e r e s t r a t e s . The BCEAO c u r r e n t l y a p p l i e s two discount r a t e s , a p r e f e r e n t i a l o r reduced r a t e of 6 percent and a normal r a t e of 8.5 percent. Lending r a t e s , which a r e i d e n t i c a l throughout t h e WAMU, a r e s e t a t a c e r t a i n range above t h e BCEAO's discount r a t e : 1 to 2 o r 1 t o 3 p o i n t s above t h e discount r a t e f o r p r e f e r r e d borrowers and 0 t o 5 points for ordinary loans. Preferred credit is seasonal credit (loans for marketing local agricultural products, discounting bills relating to exports or such products, and financing their storage) and loans to small and medium-size enterprises (with outstanding credit of under CFAF 30 million). Given their preferred status, interest rates for seasonal loans, which affect the balance of payments, and loans to small and medium-size enterprises are lower than rates for ordinary loans: 8 percent and 9 percent (maximum), respectively, versus 13.5 percent for ordinary loans. Loans for small and medium-size enterprises are not limited to those engaged in exporting or import substitution, but it should be noted that the majority of private Malian export-oriented enterprises fall into the small and medium-size category. Cattle and gold exports are increasingly benefiting from this type of credit. The interest rate is positive in real terms but relatively modest (about 4.5 percent with inflation at 3.5 percent). To sum up, Malian monetary authorities have various means available to them for influencing the distribution of credit in favor of productive activities at the expense of conunercial activities: prior authorizations, sector credit ratios, and regulation of lending on signature. The procedure used for seasonal credit (which does not come under the quantitative restrictions and benefits from a preferential rate) makes it possible to favor the marketing of certain national agricultural products. Finally. small and medium-size enterprises are able to obtain credit at considerably lower interest rates than the rest of the economy. The issue to be determined is whether the use of these selective instruments can be strengthened. 2.2.2 The Conditions for More 1ntensive.Use of Selective Credit Instruments The system of prior approvals and sector credit ratios that makes the channeling of credit to.particular sectors possible is limited by the structure of credit demand. Demand is much greater in the c o m e r c i a l sector than in agriculture or industry. Thus the effectiveness of the selective credit policy depends on the other aspects of.economic policy, particularly tax and customs policy, which are capable of creating incentives for productive activities (see Chapters 3 and 4). Two selective credit policy instruments, those involving seasonal credit and preferential treatment of small and medium-size enterprises, warrant special examination. Currently, the products benefiting from seasonal credit in Mali are cotton (through exports of the Textile Development Company of Mali and the Haute Valee Operation), mangoes (through Fruitema), and rice (through the financial restructuring of the Office du Niger). The BCEAO National Director can also make seasonal credit available to other activities, but eligibility is limited to local products that can be marketed within one year (so that the financing transaction can also be completed within one 3 "For application of this scale, seasonal credit shall be understood to be bank financing provided exclusively and specifically for the marketing of local agricultural products, including loans for financing the exportation of these products: -- when this marketing is effected through or under the supervision of agencies directly or indirectly under government control, -- s normally completed within and when these financing t r a n s a ~ ~ i o nare 12 months of the start of the season." (BCEAO, "Taux des operations de la Banque Centrale des Etats de 1'Afrique de l'ouest." Note d'Information No. 354, November 1986). year). Private traders wishing to obtain such financing must belong to an organization, must accept a certain degree of state control, and must be covered by a guarantee fund that protects the banking system against any risk. Seasonal credit seems to be an effective instrument for promoting agricultural activities. One example is Sicamali9s experiment with exporting shea butter: exports rose from next to nothing to CFAF 2 billion after the introduction of seasonal credit in 1982-83. Currently, exports seem to be limited not because of a lack of credit but because Sicamali, which in principle holds the monopoly for purchasing shea nuts, offers such a low price that shea nut gathering is discouraged and clandestine exports are encouraged. The liberalization of cereal marketing (millet, sorghum, and maize) has raised the problem of how to provide seasonal credit for cereals, which had been available during the time of the OPAM monopoly. The Cereal Market Restructuring Program has established various lines of credit which enable banks to finance the purchase and storage of cereals; thus farmer's associations can receive ordinary loans from the National Bank for Agricultural Development and other banks % welL. The recovery rate for these loans is relatively high. Some experiments are also underway to enable private traders to benefit from seasonal credit or bank guarantees through guarantee funds made available by the Cereal Market Restructuring Program or through mutual economic interest groups ("groupements d'interet economique'). If guaranteed by a state agency (OPAM for example) these loans to the private sector could acquire the status of seasonal credit. Making cereal marketing and storage credit available for farmers associations and private traders is particularly desirable from a trade balance perspective, since favoring the sale of local cereals helps reduce demand for imports. (Merchants are sometimes tempted to buy outside Mali when their suppliers will give them credit.) This development could also favor exports or cereals should surpluses arise. It has been suggested that seasonal credit should be made more widely available, for the marketing of vegetables, for example, or hides and skins. The difficulty in these cases is that a large number of scattered and very small-scale producers are involved. In general, the issue to be considered is whether expansion of the seasonal credit system is desirable since it would extend government supervision over potential beneficiary activities at a time when liberalization of the economy and promotion of the private sector are the desired objectives. Two factors make expansion of seasonal credit less important than it might otherwise be. The fact that seasonal credit is not subject to the same quantitative restrictions as regular credit will n o longer be a consideration if, as envisaged in the medium-term program, regular credit reattains a growth rate of 7-9 percent in real terms. As to the advantage represented by a reduced interest rate, reduced rates c&ld be-allowed for most of the activities referred to through the preferential credit program for small and medium-size enterprises. However, even the application of preferential interest rates is not without certain problems. The margin of 1 to 2 points over the discount rate for seasonal credit seems reasonable for operations that do not (under present circumstances) entail risks for the banks and that involve only low management costs. However, when the banks do not benefit from BCEAO discounting but lend their surplus funds in the money market (which is generally the case with Malian- banks other than the BDM). the money market rate needs to remain lower than the rate charged to preferred borrowers, which is not always the case. The regulation of lending rates for small and medium-size enterprises is more questionable. Banks indebted to BCEAO see their margin reduced from 5 percentage points for ordinary loans to 3 percentage points, while banks without access to refinancing facilities are obliged to limit the rates they charge to small and medium-size enterprises to 9 percent compared with 13.5 percent on ordinary loans. Requiring lower interest rates can be counterproductive if it discourages banks from granting such loans, which are often more costly (in terms of management) and more risky than ordinary loans. It is true that the general credit conditions are fixed administratively and uniformly for the entire WAMU, but the introduction of some flexibility into the conditions applicable to small and medium-size enterprises would nevertheless be desirable. 2.2.3 Conclusion The main recommendations presented in this chapter can be summarized as follows. For the credit policy to contribute effectively to expansion of exports and effective import substitution, it must ensure the competitiveness of the economy. The use of selective credit instruments is therefore constrained by the overall limit on the increase of credit. Efforts currently underway to restructure the BDM and clear the government's domestic arrears, which will help ease this overall constraint, thus assume considerable importance.  The monetary a u t h o r i t i e s have an adequate a r r a y of s e l e c t i v e instruments a v a i l a b l e t o them. E f f o r t s can be made t o expand t h e number of a c t i v i t i e s b e n e f i t i n g from seasonal c r e d i t ( u n r e s t r i c t e d and low i n t e r e s t ) , but t h e r i s k i s t h a t t h i s expansion may be achieved by i n c r e a s i n g government c o n t r o l over s e c t o r s t h a t a r e c u r r e n t l y t h e preserve of p r i v a t e enterprise. F i n a l l y , with a view t o i n c r e a s i n g c r e d i t f o r n a t i o n a l productive small and medium-size e n t e r p r i s e s it would probably be d e s i r a b l e t o adopt a more f l e x i b l e p o l i c y ( a s regards WAMU r u l e s ) on t h e i n t e r e s t r a t e s a p p l i c a b l e t o them.  CHAPTER. 3 F I S W POLICY The following f a c t s suggest t h e s i g n i f i c a n c e of t h e budgetary i m p l i c a t i o n s of a t r a d e expansion program i n Mali: 1. O f f i c i a l development a s s i s t a n c e t o Mali accounted f o r 35 p e r c e n t of GNP i n 1985, which was t h e h i g h e s t percentage f o r any country i n t h e world. While t h i s f i g u r e f e l l t o 23 p e r c e n t i n 1986, Mali s t i l l ranked f o u r t h h i g h e s t among a l l c o u n t r i e s r e c e i v i n g a s s i s t a n c e (World Bank 1987b). 2. Budget d e f i c i t s i n Mali r e g u l a r l y exceed 1 0 p e r c e n t of GDP. They r e p r e s e n t e d 15.2 p e r c e n t of GDP i n 1985 and 12.2 p e r c e n t i n 1986 (World Bank 1988a). 3. The tax-GDP r a t i o of about 12 p e r c e n t i s lower t h a n t h e average f o r Sub-Saharan A f r i c a (World Bank 1988b). 4. Not only i s t h e tax-GPD r a t i o low, b u t i t i s a l s o based p r i m a r i l y on i n d i r e c t r a t h e r t h a n d i r e c t t a x e s . I n 1985 t h e p r o p o r t i o n of i n d i r e c t t a x e s i n t o t a l t a x a t i o n was 72 percent. The average f o r Sub-Saharan A f r i c a was 62 p e r c e n t . 5. More t h a n 40 p e r c e n t of t h e proceeds from i n d i r e c t t a x e s come from t a x e s on f o r e i g n t r a d e (customs d u t i e s on imports and t a x e s on e x p o r t s ) . Several aspects stand out i n t h i s p i c t u r e . Mali i s a r e s o u r c e - poor economy w i t h a demand f o r r e s o u r c e s t h a t s t i l l exceeds n a t i o n a l income. Resource t r a n s f e r s between t h e p u b l i c and p r i v a t e s e c t o r s a r e costly. The nominal tax rate is high, but the tax yield is actually low. The proportion of indirect taxes is high, clearly because they are the easiest to collect. And taxation of foreign trade, which impedes its expansion, represents a significant proportion of the public revenue base. This chapter examines the fiscal aspects of programs designed to expand foreign trade in Mali. Section 3.1 analyzes the country's fiscal performance from a comparative standpoint, relating-Mali's instruments and results to those of the other Sub-Saharan countries. It also examines how the country's chronic budget deficits can affect incentives intended to promote foreign trade. Section 3.2 describes Mali's various fiscal instruments, showing how these instruments create distortions in market signals, and presents reconnnendations for improving the system without losing fiscal revenue. 3.1 Canparison of Mali's Tax System with Other Systems in Sub-Saharan Africa Tax-GDP ratios in Mali have regularly been lower by a standard deviation than the average for Sub-Saharan Africa (see Table 3-1). In a study covering the 15-year period 1966-81, Shalizi and Squire (1986) calculated a tax-GDP ratio for Mali of about 11 percent compared with an average of 15 percent for Africa as a whole .4 Two factors could explain these low figures: a low tax rate or a narrow tax base. Statutory tax rates are not particularly low in Mali; in 4 The 11 percent figure does not include Special Facility funds for the supplementary budget. If they are included, Mali's tax-GDP ratio is about 14 percent, which is still lower than the average for Sub-Saharan Africa. fact, the rates could be categorized as rather high. ( ~ l t h o u g hit is not easy to collect data on average nominal tax rates in the countries considered, Table 3-2 provides an indication of the rates in Mali and in a ~ sample of African ~ o u n t r i e s . )Since the cause of the problem is not low tax rates, the low tax-GDP ratio probably results from the narrow tax base. This, in turn, results from the large number of exemptions granted to taxpayers and the weakness of tax administration. These two aspects of the Malian system will be examined later, after the use made of various fiscal instruments is examined for Mali and neighboring countries. An important distinction is that between direct and indirect taxes. As a general rule, indirect taxes are easier to collect but they create more distortions in production and consumption decision-making and therefore entail efficiency losses, which are detrimental to the economy. Although countries with relatively undeveloped administrative structures tend to depend more on indirect than direct taxes, the ratio of indirect to direct taxes is particularly high in Mali, even by African standards. This has not always been the case, however (see Table 3-3). The proportion of indirect taxes has grown over the years in Mali while remaining more or less stable in Africa as a whole. There are also indications that internal taxes make up a higher proportion of indirect taxes in Mali than in neighboring countries, suggesting the difficulties in trying to tax international trade, given Mali's 7,000 kilometer border. 5 The countries included have a system of indirect taxes similar to that of Mali. Their fiscal systems do not include a value added tax (VAT) or turnover tax. but they have a VAT-type system of indirect taxation, which is applied to both imports and locally produced goods.  On the b a s i s of t h i s comparative a n a l y s i s , what conclusions can be drawn concerning the f i s c a l policy t o be adopted i n the context of an i n t e r n a t i o n a l trade expansion program7 F i r s t , the l o w tax-GDP r a t i o compared with the average f o r African countries shows t h a t t h e r e i s scope f o r mobilizing more domestic resources t o lessen t h e budget d e f i c i t . This i s s u e t i e s i n with foreign trade because a budget d e f i c i t i s generally financed e i t h e r by expanding domestic c r e d i t or by borrowing from abroad. The outcome i n both cases i s a r i s e i n domestic p r i c e s r e l a t i v e t o the p r i c e s of foreign products. The a d d i t i o n a l d r a i n on n a t i o n a l revenue and a possible increase in the domestic money supply would bring about an increase i n the general p r i c e l e v e l : the p r i c e s of goods t h a t a r e not t r a d a b l e i n t e r n a t i o n a l l y w i l l r i s e i n r e l a t i o n t o tradable goods. Regardless of the solution s e l e c t e d , the budget d e f i c i t r e s u l t s i n an appreciation in the r e a l exchange r a t e because the nominal exchange r a t e i n Mali i s fixed i n r e l a t i o n t o t h e French franc. Thus appreciation i n the r e a l exchange r a t e a f f e c t s the production of t r a d a b l e goods (import s u b s t i t u t e s and e x p o r t s ) . It i s therefore c l e a r t h a t i f the budget d e f i c i t can be reduced by increasing the tax-GDP r a t i o t h i s w i l l have the e f f e c t of lowering t h e r e a l exchange r a t e and thus of stimulating foreign t r a d e . It i s well known, however, t h a t t a x increases can have a detrimental impact on the economy by causing d i s t o r t i o n s i n the s i g n a l s given t o producers and consumers and reducing t h e e f f i c i e n c y of resource allocation. S p e c i f i c a l l y , taxes could erode the competitiveness of Malian exports. Thus care must be taken t h a t the instruments s e l e c t e d t o increase the tax-GDP r a t i o do not r e s u l t i n the l o s s of the b e n e f i t s the country would stand t o gain from reduction of i t s budget d e f i c i t .  As has been noted, indirect taxes generally bring about more distortions in production than do direct taxes because indirect taxes affect production as well as consumption, while direct taxes affect only consumption (and savings). Thus since the proportion of indirect taxes to total tax revenue is much higher in Mali than the average for African countries (72 percent compared to 63 percent) and seems to be rising, one objective of any tax system reform designed to promote foreign trade should be to correct this trend. A move to a rebate-based value added tax (VAT) would help to accomplish this goal. Although a VAT is an indirect tax, i t s impact is closer to that of a direct tax because it is a tax on final consumption. Section 3.2 examines several measures that would make it possible to modify the structure of direct and indirect taxation in Mali. Among indirect taxes, customs duties on imports and taxes on exports hamper international trade more than internal taxes because they affect trade directly. Thus it could be considered fortunate that taxes on ' foreign trade constitute a smaller proportion of overall tax revenue in Mali than in any other African country, although this is a result more of collection problems than of a liberal trade regime. Mali's internal taxes, however, have a direct impact on international trade, particularly on exports. 3.2 Tax Reforms and Promotion of Foreign Trade This section takes a closer look at the tax instruments used in Mali and recommends certain changes that will help maintain government revenue while minimizing any detrimental effects on trade. 3.2.1 Indirect taxes The chief indirect tax in Mali is the tax on businesses and services ( U S ) , a turnover tax, which in 1987 accounted for about 34 percent,of government revenue. The U S could be described as a pseudo value-added tax. Like a VAT, it is levied on both imports and domestic transactions. Agriculture and the cannnercial sector, however, are exempt from this tax. The industrial and service sectors (excluding trade) and imported consumer goods thus constitute the base of the IAS. While the IAS aims in certain respects to tax the value added by allowing enterprises to deduct the cost of certain inputs, the deduction is not systematic. The U S does not completely avoid the problem of being a multistage tax on turnover. Enterprises calculate the IAS as follows. Firms authorized to pay on a flat-rate basis add a government-established profit rate to their labor and input costs, which determines their turnover. Before calculating the U S due, they deduct from their turnover the cost of inputs subject to U S at an earlier stage in the production process. It should be noted that no deduction is allowed for services included in the production process (although their cost incorporates the IAS paid on the direct and indirect inputs needed for the production of these services and they are subject to an U S tax at special rates) .6 Thus besides being computed on a deduction-based rather than a rebate-based system, the U S does not have a comprehensive deduction system (see Annex 1 for a simplified presentation of the differential impacts of turnover taxes in Mali) . 6 The only exception is for electric power service, which is deductible. But water, for example, is not.  Use of the deduction-based IAS -rather than the rebate-based VAT method results in the loss of two advantages of a VAT-type tax. First, with a rebate-system VAT exporters can get back all taxes paid on inputs. Not only are they not required to pay any taxes on their production, but they can also deduct the VAT paid on their domestic sales and receive reimbursement for all taxes paid on inputs. With the deduction-based method these rebates and deductions are not possible because it is not a tax rebate mechanism but a mechanism for reducing the tax base. Nor do tax authorities take into account customs duties paid on inputs, making matters even worse for exporters.7 As a result, taxes are added to Malian exporters' production cost, which is generally not the case for their competitors. Second, the rebate-based VAT method does not encourage enterprises to pad their cost figures, because they are not required t o pay again the taxes already paid at an earlier stage in the production process. If they overstate their costs, this can be proved from the tax receipts of the firm that sold them the inputs. With the deduction-based method, this is not possible because calculation of the tax payable is based on the enterprise's own returns. The incompleteness of the deductions permitted under the IAS creates a bias against small enterprises, which obtain needed production services from other enterprises and therefore pay more tax than enterprises with better vertical integration (see Annex 1). Expanding the scope of deductions from the tax base would remove this bias for enterprises selling 7 The exceptions are enterprises covered by the investment code. which are exempt for five years. on the domestic market but not for exporters. Thedrelative advantage of small export enterprises over small enterprises selling on the domestic market would also be reduced with this reform. Introduction of a VAT would eliminate the remaining bias. One final problem with the U S derives from the fact that imports are treated differently from products manufactured in Mali. Although since 1986 the tax rates have been identical, the U S on imports is calculated on a base that includes the U S . For example, if an item costs CFAF 100 at the Malian border, the 20 percent rate is applied to CFAF 120 (i.e.. CFAF 100 times 20 percent), making the actual rate 24 percent. This additional tax on imports has the same effect as a customs duty, offering national producers modest protection. But as with other customs duties, this system has the same effect as an export duty, again penalizing Malian products on the international market. The foregoing analysis clearly shows the need for reform of the US. Malian authorities have started a program aimed at introducing a true VAT before 1990, a decision that is bound to benefit the economy. Nonetheless, instituting a real VAT is not without problems. If the VAT is introduced too quickly, the political support essential for the success of a reform of this kind might be lacking. The risk of price hikes is always a concern, as is the possibility of a loss of revenue to the state. Accordingly, a transitional phase would be desirable. The question then becomes what measures would be compatible with reaching the long-term goal of instituting a VAT while in the short run reducing the inefficiencies of the U S and its adverse effects on exports? Several recomendations are suggested.  1. For computing t h e U S , allow deductions of a l l i n p u t s t o t h e production process including s e r v i c e s ( p a r t i c u l a r l y f i n a n c i a l services). Before t a k i n g t h i s s t e p , t h e p r i v a t e s e c t o r should be consulted (through t h e chamber of commerce) and t h e p o t e n t i a l l o s s e s of f i s c a l revenue should be c a l c u l a t e d . If f i s c a l l o s s e s w i l l be s i g n i f i c a n t , they could be p a r t l y o f f s e t by a modest i n c r e a s e ( s a y , 1 p e r c e n t ) i n t h e I A S r a t e . This reform would make t h e t a x f a i r e r r e g a r d l e s s of t h e s t r u c t u r e of e n t e r p r i s e s s e l l i n g on t h e domestic market, but i t would n o t do anything t o change t h e i n d i r e c t t a x burden on exports. I t s primary purpose would be t o pave t h e way f o r t h e subsequent i n t r o d u c t i o n of a VAT. 2. Equalize t h e e f f e c t i v e U S r a t e s on both imports and products produced i n M a l i s o t h a t e x p o r t s a r e n o t penalized. This change might a l s o r e s u l t in a drop in revenue and t h e r e f o r e might r e q u i r e a modest i n c r e a s e i n t h e U S . 3. Broaden t h e base of t h e U S t o i n c l a e , i n - p a r t i c u l a r , the l a r g e commercial s e c t o r , but f i r s t undertake a meticulous examination of t h e e n t e r p r i s e s t h a t would be s u b j e c t t o t h e tax.8 Many small r e t a i l e r s w i l l f i r s t r e q u i r e t r a i n i n g i n t h e 8 This change could c r e a t e a d i s t o r t i o n between t h e modern and t h e informal s e c t o r s , d r i v i n g some f i r m s i n t o t h e informal s e c t o r . Establishment of a f l a t - r a t e system f o r small t r a d e r s might l e s s e n t h i s e f f e c t . Moreover, a s t h e change i s made t o t h e rebate-based VAT method, i n c e n t i v e s t o move t o t h e informal s e c t o r w i l l be reduced.  accounting procedures for transactions involving the tax. This recommendation should be implemented once traders have been adequately informed about this new form of taxation. The revenue raised through this measure may offset the losses caused by the first two reconnnendations. making it unnecessary to raise the U S to any appreciable extent. 4. Finally, the VAT can be introduced. Switching from the deduction-based U S to the rebate-based VAT will entail some major changes in the way taxes are administered, at both the government and the individual ,enterprise levels . Consequently. the VAT must not be implemented until the administrative apparatus needed to handle the heavy increase in paperwork has been set in place. It will also be necessary to consult the enterprises and give them the opportunity to familiarize themselves with the changes they will need to make in their accounting procedures. It will be advisable to draw on the experience of other countries, such as Niger. for example. t&etermine how to manage this phase. 5. Once the VAT has been introduced. it should become the government's chief source of indirect tax revenue. Customs duties and import taxes will no longer be necessary as revenue sources. Because the base for the VAT is broader than that of import duties and taxes. a small increase in the VAT rate can bring in as much revenue as a large increase in the customs duty rate. Export taxes will no longer be needed  t o boost government revenue. I t w i l l a l s o be a d v i s a b l e t o make t h e VAT i d e n t i c a l on imports and on domestic p r o d u c t i o n . Otherwise, even though e x p o r t e r s a r e reimbursed f o r t h e VAT on i m p o r t s , t h e s l i g h t p r o t e c t i o n a f f o r d e d t o domestic production by a h i g h e r r a t e on imports would handicap e x p o r t s by r a i s i n g t h e c o s t of i n p u t s , p a r t i c u l a r l y l a b o r . Of t h e o t h e r i n d i r e c t t a x e s i n Mali, customs d u t i e s on imports and t a x e s on e x p o r t s a r e t h e most important. Customs d u t i e s and t a x e s on imports account f o r about 17 p e r c e n t of government revenue, a c c o r d i n g t o 1987 budget f i g u r e s . O v e r a l l t h e s t r u c t u r e - o f customs d u t i e s i n Mali i s c o n s i s t e n t w i t h economic e f f i c i e n c y c r i t e r i a : r a t e s a r e generally higher on consumer goods t h a n on producer goods. But, a s shown i n Chapter 4 , which examines import d u t i e s i n d e t a i l , t h e r e a r e s i g n i f i c a n t d e v i a t i o n s i n each c a t e g o r y f o r which t h e r e i s no a p p a r e n t reason. Customs d u t i e s a r e a l s o h i g h e r on imports t h a t compete w i t h domestic p r o d u c t i o n , which means t h a t customs d u t i e s a r e used a s a p r o t e c t i o n i n s t r u m e n t . I n a d d i t i o n t o t h e t a x on e x p o r t s i m p l i c i t i n t h e s t r u c t u r e of import d u t i e s , Mali h a s two c a t e g o r i e s of e x p l i c i t e x p o r t t a x e s : the tax f o r import s e r v i c e s (CPS) and t a x e s a p p l i c a b l e t o s p e c i f i c p r o d u c t s . According t o 1987 budget d a t a . proceeds from e x p o r t t a x e s amounted t o CFAF 1.2 b i l l i o n , o r a l i t t l e more t h a n 1 p e r c e n t of t o t a l revenue. (The t o t a l i s CFAF 2.2 b i l l i o n i f t h e CMDT i s i n c l u d e d . ) The proceeds from e x p o r t t a x e s i n Mali a r e t h u s e q u i v a l e n t t o a 0.5 p e r c e n t i n c r e a s e i n t h e IAS rate. 9 9 I n 1987 t h e U S , a t a n average r a t e of 10 p e r c e n t , brought i n about CFAF 20 b i l l i o n . R a i s i n g t h e r a t e t o 10.5 p e r c e n t would g e n e r a t e an a d d i t i o n a l CFAF 1 b i l l i o n .  Given that exports already bear- additional taxation because o f the imperfections of the U S deductions mechanism and the absence of any system for refunding import duties. The government should eliminate all explicit export taxes. This move would show exporters that the government is committed to promoting trade, and it would free up administrative resources that could be employed on improving the collection of other taxes. 3.2.2 Direct taxes Direct taxes affect trade since they affect the overall efficiency of the economy. If these taxes cause distortions in production decision- making, they will have the effect of lowering the efficiency of Malian industry and hence the competitiveness of Malian products on the world market. The direct tax system in Mali tends to create certain distortions. One major distortion is that created by the multistage structure of taxes on the profits of corporations. Dividends distributed by corporations are. in turn, subject to the tax on income from securities (IRVM) and the tax on industrial and conxnercial profits (BIC), which cannot be deducted from taxable income for IRVM purposes (see Annex 2 ) . In some instances the incremental rate of the tax on profits is close to 70 percent for corporations, compared with approximately 60 percent for other companies. lo This bias against corporations could discourage capital formation. Since corporations have more opportunities to establish themselves on the export market, this bias might affect the performance of Malian exports. Such 10 BIC rates are different for the two types of companies: 45 percent for limited liability companies and 25 percent for the others. See Annex 2 for an explanation of how these tax rates are calculated.  high incremental tax rates also discourage the establishment of new enterprises. This is an important consideration if the expansion of Malian exports is to be based on nontraditional manufactured products because new enterprises will need to be set up to produce them. To eliminate this bias ' and lessen the tax burden, it would be advisable to eliminate the IRVM, particularly since its yield is negligible (less than CFAF 300 million). Its elimination will also demonstrate the government's support for the creation of a dynamic private sector, which is clearly a vital component of an international trade expansion program. 3.2.3 Conclusion This chapter examined the fiscal aspects of an expansion of Malian foreign trade. Given that the national economy has relatively limited resources and that the government lacks the capacity to mobilize domestic resources, trade policy reform will have significant consequences for the government budget. Furthermore, as is the case i n other developing countries, Mali derives the bulk of its revenue from indirect taxes, which are detrimental to foreign trade. The changes in the tax system proposed here are guided by two concerns: leaving the government's revenue base intact and improving the efficiency of the economy (or, at least, reducing discrimination against exportable goods). These concerns have guided Mali's economic policy over the last two years and continue to guide reforms planned for the years to come. It is with these considerations in mind that w e make the following recommendations:  1. Gradually convert the IAS to a VAT by authorizing deduction of all inputs including services, applying the same IAS rates to imports and to domestically produced goods, broadening the U S base to include the commercial sector, and switching from the deduction-based method to the rebate-based method. 2. Maintain higher customs duties on consumer goods than on producer goods but try to standardize the rates in each category (or at least reduce the degree of variation). 3. Once the VAT has been introduced, make it the main source of government revenue from indirect taxes, and u s e customs duties only as a protection instrument. 4. Eliminate export taxes and offset any resultant loss in revenue by a slight increase in the U S rate. 5. Eliminate the IRVH so that corporations are not subject to double taxation, and if necessary, offset the loss in revenue by a slight increase in the U S rate. Adoption of these recommendations will help to encourage the development of Ualian foreign trade while ensuring due consideration for Mali's precarious budgetary situation. These recommendations are particularly important as a complement to reconmendations made elsewhere in this report. If fiscal issues are neglected, this could seriously compromise the trade expansion program in Mali. Moreover, the trade expansion program provides a n opportunity to rationalize Mali's tax system. The benefits of this reform of the fiscal system are therefore not limited to the international trade sector but extend to the entire economy.  Table 3-1. Comparison of TaxlGDP Ratios in Mali and Sub-Saharan Africa as a Whole, 1975-85 Sub-Saharan Africa Year Mali Average Standard Deviation Source: World Bank (1988b).  Table 3-2. Statutory Tax Rates in Twelve Sub-Saharan African Countries Income tax Indirect tax Indirect rate for rate on tax individuals Corporate domestic rate on (maximum bus iness Country production imports incremental rate) tax 'Benin Burkina Faso Ethiopia Lesotho Malawi Mali Mauritania Niger Seychelles Swaziland Togo Zaire Source : Majd (1987).  Table 3-3. A Comparison of Indirect Taxes as Proportion of Total Revenue in Mali and Sub-Saharan Africa as a Whole, 1975-85 (percentages) Average for Year Sub-Saharan Africa Source: World Bank (1988b).  CHAPTER 4 CUSTOMS POLICY Customs tariffs have a direct impact on a country's foreign trade. But before suggesting any changes that might foster the development of foreign trade, it is important to define the objectives of tariff protection and to describe the characteristics of the Malian system. Some reforms are already underway as part of the government's Economic Reform Program. 4.1 Goals of the Tariff Policy Traditionally, one of the primary goals of customs tariff policy in developing countries is to generate revenue. Foreign trade is regarded as a sector that is easy to tax, even though collection of these taxes is not so easy in a landlocked country such as Mali. In 1987 indirect taxes on international trade, including the U S on imports, accounted for about 43 percent of government revenue (World Bank 1987a, 50). Another primary goal of tariff policy is to protect domestic production. Establishment of a customs duty introduces a bias in favor of domestic production. Although protection of domestic production may be justified in a developing country such as Mali, it can create internal distortions that are prejudicial to the economy in that they generate costs for consumers and exporters and lead to inefficient domestic resource allocation. 4.1.1 F e a t u r e s of a 'good' customs p o l i t y Three f e a t u r e s seem t o be e s s e n t i a l t o a good customs p o l i c y : s e p a r a t i o n of t h e p r o t e c t i o n and revenue-generation o b j e c t i v e s , n e u t r a l i t y , and s i m p l i c i t y . The g o a l s of p r o t e c t i n g domestic production and g e n e r a t i n g budget revenue must be s e p a r a t e d in o r d e r t o c o n t r o l t h e m o t i v a t i o n a l e f f e c t s of customs t a r i f f s . I f import t a r i f f s a r e r a i s e d f o r budgetary r e a s o n s t h e r e i s a r i s k of simultaneously i n c r e a s i n g t h e p r o t e c t i o n of t h e economy, which may n o t be d e s i r a b l e . T a r i f f s should t h e r e f o r e be used p r i m a r i l y a s an instrument of p r o t e c t i o n p o l i c y r a t h e r than t o a c h i e v e budgetary g o a l s . It i s e a s i e r t o g e n e r a t e revenue by means of a t a x on t h e consumption of products ( b o t h domestic and imported). Because t h e base f o r a consumption t a x i s much broader t h a n t h a t of import t a r i f f s , a lower r a t e can a c h i e v e an e q u i v a l e n t amount of revenue ( s e e Chapter 3 ) w h i l e p r e s e n t i n g l e s s of an i n c e n t i v e t o evade payment. A p p l i c a t i o n of a customs t a r i f f e n t a i l s d i s c r i m i n a t i o n between domestic and f o r e i g n p r o d u c t s and a l s o among v a r i o u s s e c t o r s of t h e domestic economy a s c e r t a i n s e c t o r s r e c e i v e r e l a t i v e l y more p r o t e c t i o n and a r e t h e r e f o r e more p r i v i l e g e d t h a n o t h e r s . A nonuniform t a r i f f c r e a t e s d i s p a r i t i e s among p r o d u c t s ( f a v o r i n g t h o s e f o r which t h e t a r i f f r a t e , and t h e r e f o r e nominal protection,11 i s h i g h e r ) and among s e c t o r s . Domestic producers a r e a f f e c t e d by t h e t a r i f f r a t e b o t h on imports of competing goods and on i n p u t s t h e y need f o r t h e i r p r o d u c t i o n . T a r i f f s on competing goods f a v o r domestic producers of t h o s e goods w h i l e t a r i f f s on i n p u t s p e n a l i z e t h e producers t h a t use them. Thus t h e e f f e c t s of d i f f e r e n t i a l 11 Nominal p r o t e c t i o n measures t h e e f f e c t of p r o t e c t i o n i n s t r u m e n t s on t h e p r i c e s of p r o d u c t s .  customs tariffs vary depending on the production activities concerned; the effective rates of protection for these activities can also be very . different l2 Customs tariffs are by their nature biased in favor of import ' substitution activities and against export activities. The levying of taxes on imported products benefits import substitution sectors to the disadvantage of others, particularly export industries. The taxing of imports penalizes exports by raising the cost of imported intermediate products, which in developing countries often constitute a large part of export production. Tariffs also cause increases in domestic consumer prices, which can in turn lead to an increase in the cost of domestic labor, a development that is also unfavorable for export promotion. The lower the average customs tariff level the less adverse the impact on the export sector. To neutralize the bias against exports, tariff protection needs to be accompanied by special measures to promote exports. In a country such as Mali that has budgetary difficulties, it is easier to lower protection against imports than to promote exports directly by means of a subsidy system, as is done in Senegal and C6te d'Ivoire, for example. Thus the average level of protective tatkffs on imports must be low enough to eliminate the handicap imposed on the export sector. To enhance the neutrality of the incentive system, the average spread of tariffs should also be small. The more homogenous the tariff 12 The effective rate of protection is equal to the percentage increase in ' the value added of a production activity attributable to all protection measures in effect. structure, the easier it is to apply and- the fewer the distortions it will cause among different sectors. Tariff neutrality can of course be deliberately abandoned in order to foster expansion of priority sectors, but such differentiation would conflict with the goal of simplification. Protection will be easier to manage if the customs tariff structure is simple and if customs duty and import tax exemptions are limited. Neutrality and simplicity of the customs tariff should also help to limit fraud, which distorts the results of customs policy. 4.1.2 The problem of fraud13 Fraud in the foreign trade sector is very widespread in Mali. The massive extent of the problem creates a major handicap for the economy, with particularly harmful consequences for the production sector, which is put at a great disadvantage relative to the commercial sector, and for government revenue, which is lost as a result of the fraud. There are two types of fraud: (1) clearing goods through customs on the basis of false declarations of quality, quantity, or origin and (2) smuggling. Smuggling is encouraged both If$ internal factors, such as an inadequate fiscal system, insufficient resources for control and prevention, and tolerance on the part of government officials, and by external factors, such as the parallel market between GuineanlMauritanian. francs and the CFA franc and reexportation from Guinea. Also, smuggling 13 See C.O. Sidib6: Le p h t n o m h e de la fraude au Mali: origines et cons6quences, a report prepared for this study. for a more extensive examination of the issue of fraud in the foreign trade sector. is increasingly being done by individuals who carry only small quantities at a time, which makes control and prevention even harder. On the export side, livestock, hides and skins, and gold are most frequently the target of smugglers, but misrepresentation and outright contrabanding are far more common with imports. l4 Items smuggled into Mali fall primarily into two categories. The first group is staples and consumer goods for which the state has a monopoly on trade. This category formerly included certain products marketed by SOMIEX (milk. sugar, tea) and still includes cigarettes and pharmaceutical products. It also includes common consumer goods produced outside Mali that compete with domestic production and that enjoy nontariff protection (such as tissue paper, flour, and plastic items). This group of products accounted for more than 90 percent of the value of goods seized; of these, 70 percent involved products normally marketed by a state monopoly. The second category includes products subject to heavy import duties (60 percent or higher). These goods are primarily luxury consumer items such as alcohol, certain textiles not produced locally (cotton damask), and perfumes. Smuggling represents a considerable loss of revenue for the Treasury. of course, but it also creates internal distortions that can frustrate or even counteract the protection policy. The more ertensive smuggling is, the less effective the protection system will be. Smuggled products that compete with products of protected industries reach the 14 See "Mali: la fraude contre le developpement," Africa International no. 207 (July 1988). domestic market without any limit on quantities or payment of internal taxes or customs duties, which amounts to negative protection for the domestic industry in question. Control and prevention of smuggling are therefore a prerequisite for implementation of an efficient export promotion system. Several customs policy measures designed to lessen smuggling are presented in Section 4.3 of this chapter. As a general rule the protection system should try to limit the incentives for smuggling by avoiding quantitative restrictions and unduly high tariffs. 4.2 Mali's Tariff Protection System This section examines the impact of Mali's customs tariffs by describing the various duties and taxes levied on foreign trade and by comparing the real tax burden on imports and exports. The changes made in official prices and import taxes (DPI) since 1986 as part of the Economic Reform Program are also discussed. 4.2.1 Taxation of foreign trade Duties and taxes on imports. The system of customs duties and taxes payable on imports is more cumbersome and complex than the system for exports. In 1968 imports were taxed according to a three-column system: customs duty, revenue duty, and a turnover tax (the tax on businesses and services, U S ) levied on both imports and domestically produced products. Since then various taxes have been added, making the present system considerably more complicated.  All products. except fuel and fuel products, for which the taxation system is even more complex,15 are subject to six categories of external and internal duties and taxes. There are three categories of external taxes. The customs duty is applied at a uniform rate of 5 percent, calculated on the basis of the c.i.f. value of the product or its posted (official) value. The - DFI varies from 0 to 100 percent depending on the product and is also calculated on the c.i.f. value or the posted value. The DFI is the only external tax that varies by product. The Office of Price Stabilization and Control tax (OSRP) is a special uniform tax of CFAF 5 per net kilogram. There are also three categories of internal taxes. The - IAS is now calculated at the same rates for imported and domestically produced goods: a reduced rate of 1 0 percent, a normal rate of 20 percent, and a surcharge rate of 40 percent. The tax base is different, however, which serves to maintain a difference between the two categories. For domestic production the base is tax free while for imports it is tax inclusive (the c.i.f. or posted price plus customs duty, DFI, and U S ) . When applied in this manner, the IAS is not a neutral tax but provides additional protection for domestic production against competing imports. The deduction-based rather than rebate-based format of the IAS also creates a handicap for Malian exports. Exporters are exempt from payment of the IAS at the production 15 In addition to the other taxes. fuel and fuel products are subject to a specific internal tax on fuels, the Mining Fund special tax, the tax on petroleum stocks, and the difference in price structure tax (DSP) levied by the Office of Price stabilization' and Control. The latter tax is a mechanism for adjustment between the consumer price and the c.i.f. value plus taxes and marketing costs.  C stage but they must pay t h i s t a x on t h e i - r d i r e c t and i n d i r e c t i n p u t s , w h i c h reduces the competitiveness of t h e i r products (see Chapter 3 on f i s c a l policy). A second i n t e r n a l t a x , t h e t a x f o r s p e c i a l import s e r v i c e s (CPS) ' i s paid t o the Public Debt Amortization Fund t o s e r v i c e t h e n a t i o n a l debt r a t h e r than t o t h e Treasury. There a r e no exemptions t o t h i s t a x , which i s 5 percent on a l l products except petroleum products, f o r which t h e r a t e i s 3 percent. It i s c a l c u l a t e d on t h e c . i . f . value of products, n o t t h e i r posted value. The t h i r d i n t e r n a l t a x , t h e s p e c i a l t a x on c e r t a i n products (ISCP), a l s o known a s t h e ' l o c a l t a x , ' i s a . v a r i a b l e - r a t e t a x payable on seven products: s a l t , sugar, t e a , milk, tobacco, c a r t r i d g e s , and alcohol. Products o r i g i n a t i n g from t h i r d c o u n t r i e s , t h a t i s , c o u n t r i e s o u t s i d e t h e West African Economic Connnunity (WAEC), a r e s u b j e c t t o a l l t h e d u t i e s and t a x e s on imports l i s t e d above, while products from WAEC c o u n t r i e s a r e l e s s h e a v i l y taxed. WAEC products a r e covered by a p r e f e r e n t i a l system f o r e x t e r n a l d u t i e s and taxes: no d i s t i n c t i o n a p p l i e s f o r i n t e r n a l t a x e s , however. Unprocessed products from WAEC c o u n t r i e s a r e exempt from customs d u t i e s , DFI, and t h e OSRP tax. Some manufactured products q u a l i f y f o r t h e regional cooperation t a x (TCR). For t h e s e products, which a r e covered by a f i v e - y e a r a u t h o r i z a t i o n from WAEC a u t h o r i t i e s , t h e TCR r e p l a c e s customs d u t i e s , DFI, and t h e OSRP t a x with a s i n g l e t a x a t a r a t e t h a t i s lower than t h a t of t h e o t h e r t h r e e combined. Manufactured products t h a t a r e n o t approved f o r t h e TCR a r e exempt only from customs d u t i e s .  Duties and taxes on exports. Three categories of taxes are levied on exports. (A fourth tax, the OSRP tax, is now levied only on groundnut oil.) The export tax, which was originally introduced to ensure adequate supplies for the domestic market, is a variable-rate (from 5 to 10 percent) special or ad valorem tax based on the border or posted value of the product.16 The - CPS is levied on all exports at a uniform rate of 3 percent. The anticyclical tax is levied on export profits when world prices are high. It is levied on the export value added of certain products (groundnuts, groundnut oil, groundnut cakes, cottonseed, cottonseed oil, leather, skins, and gum arabic) and is not applied when prices are low. 4.2.2 The tax burden on imports and erports It was impossible to study the system of incentives resulting from tariff protection because of the complexity of the tariff and tax structures. The customs tariff comprises more than 4,200 headings, with rates that vary according to product origin. There are also nineteen different taxes levied on imports at the border. The tariff system is further complicated by numerous exemptions and the use of posted values which, by modifying the taxable base of products, make it possible to increase or reduce the protection provided. Thus, although tariff analysis is essential for the formulation of a rational customs policy, the complexity of the Malian system makes this approach impractical. For the 16 The official or posted export values are lower than the real value of the products. They are intended to ease the export taxation of certain products . same reason, Stryker's study (1987) on protection in Mali in 1986 could not be updated following implementation of the Economic Reform Program. Given this constraint, the ratio of total taxes levied at customs to the value of products was calculated for 1987 as a simple method for broadly comparing the tariff protection enjoyed by various categories of products. Although simple and convenient, this method has significant deficiencies in that it does not distinguish imports by origin and it takes into account all taxes levied at customs, even the IAS and ISCP. which are also levied on domestically produced goods. It is impossible to eliminate the impact of these taxes, however, because there are three different rates of U S and the rate of the ISCP varies by product. The outcomes'presented here, therefore, are approximates rather than precise assessments of the level of tariff protection for various products. These ratios were calculated (Table 4-1) for the main products grouped in five categories: primary consumer gooda, noncompeting consumer goods, competing consumer goods, noncompeting inputs, and competing inputs. A comparison of the average tariff protection for each category shows that the overall structure of the tariff system is satisfactory: consumer products are more heavily taxed than intermediate goods. Mali's comparative advantage does not lie in the production of intermediate goods. As most of Mali's industries produce consumer goods, the difference in taxation between consumer goods and inputs probably allows domestic activities to benefit from an effective protection level that is higher than the nominal protection of their finished products. Customs tariffs also do a good job of protecting domestic activities. Imported products that compete with domestic products are taxed more heavily than noncompeting imports in both the consumer product and intermediate goods categories (Table 4-1). A more detailed look at the findings, however, shows some sizable discrepancies in the taxation levels of various products within each category. From this it can be assumed that certain production activities are penalized to the extent that some of their inputs--most likely those .that compete with domestic production--are subject to a greater tax burden than that applied to their final product. The calculations are for 1987, however, and do not take full account of the effects of the May 1987 changes in the DFI rates aimed at correcting such situations (see Section 4.2.3). A decree of May 1988 extended this reform, so these anomalies probably n o longer exist. There is often n o economic justification for the marked differences in taxation of the products in the five categories. While in some cases these differences may be legitimate (a higher rate may be used to combat dumping or to provide special protection for a specified period), in most cases they are hard to explain. For example, articles of clothing that compete with domestic production are subject to very different tax burdens, such as 24.7 percent for clothing of textile fabric, 42 percent for knitted goods, and 68.9 percent for footwear. Such differences increase internal distortions, complicate customs collection, and encourage smuggling. The extent of the internal distortions caused by the tariff structure was demonstrated for 1986 by Striker (1987). His study provides an evaluation of nominal and effective protection in Mali for a sample of products and industries and shows the range of the differences that exists between various goods and the different production activities.  The tax burden on exports was evaluated i n the same way as t h a t f o r imports (Table 4 - 2 ) . The r a t i o of the t o t a l amount of taxes on exports t o the value of transactions i s equal t o 2.9 percent on average, but c e r t a i n products a r e highly taxed ( a t r a t e s of more than 5 p e r c e n t ) . ' Export taxes, which account f o r only a very small p a r t of government revenue, f u r t h e r penalize export a c t i v i t i e s , which a r e already r e l a t i v e l y disadvantaged by the t a r i f f system compared with production f o r the domestic market. 4.2.3 Custams policy reforms undertaken as part of t h e Economic Reform Program The Economic Reform Program. which t h e Malian government has been implementing since 1986 i n an e f f o r t t o reduce the r o l e of the public s e c t o r and t o increase t h a t of the p r i v a t e s e c t o r , has a l s o encompassed reform of the t a r i f f policy. The goals of t a r i f f reform a r e gradual elimination of t h e system of posted values and adjustment of t h e s t r u c t u r e of the DFI. O f f i c i a l o r posted values form t h e b a s i s of import taxes f o r c e r t a i n products. This system enables t h e a u t h o r i t i e s t o vary taxes on the products concerned by modifying the base r a t h e r than changing the r a t e . This i s a more f l e x i b l e 'means of intervention r e q u i t i n g only an order ( a r r e t e ) , whereas a change i n r a t e s has t o be made by decree ( d e c r e t ) . This system a l s o has t h e advantage of simplifying t h e assessment of t h e customs value of goods. In addition, i t has been used t o discourage the consurpption of luxury products, t o p r o t e c t n a t i o n a l i n d u s t r i a l u n i t s , and t o favor the consumption of c e r t a i n s t a p l e s .  The problem w i t h t h e use of posted p r i c e s r a t h e r than r e a l v a l u e s i s t h a t t h i s c o n c e a l s t h e e f f e c t s c r e a t e d by customs t a r i f f s and t h e r e b y c o n s i d e r a b l y complicates t h e i r r a t i o n a l u s e a s a t o o l of economic p o l i c y . For t h i s reason p o s t e d v a l u e s a r e g r a d u a l l y b e i n g e l i m i n a t e d . Order No. 69811MFC-CAB of August 1 , 1986, e s t a b l i s h e d f o u r c a t e g o r i e s of p r o d u c t s f o r which p o s t e d v a l u e s would apply: s t a p l e s ( m i l k , sugar. tomato c o n c e n t r a t e , c o f f e e e x t r a c t ) , s t r a t e g i c products (cement. f u e l , and f u e l p r o d u c t s ) , p r o d u c t s v u l n e r a b l e t o smuggling ( t e x t i l e s , k n i t t e d g o o d s ) , and p r o d u c t s i n t e n d e d f o r s p e c i f i c i n d u s t r i a l e n t e r p r i s e s (manufacturers of s h e e t m e t a l and of s p a r e p a r t s f o r b i c y c l e s ) . The p o s t e d v a l u e s f o r almost a l l t h e s e p r o d u c t s were s e t lower than t h e i r r e a l v a l u e . w i t h t h e e x c e p t i o n of s u g a r , home h e a t i n g o i l , c e r t a i n s p e c i a l f a b r i c s , and c o t t o n bedspreads. Order No. 3155lMFC-CAB of J u l y 16, 1988, a g a i n s e t t h e p o s t e d v a l u e s f o r most of t h e p r o d u c t s , a l t h o u g h w i t h t h e e x c e p t i o n of m i l k , s u g a r , cement, f u e l , and f u e l p r o d u c t s , t h e new v a l u e s a r e f a i r l y c l o s e t o t h e r e a l v a l u e s . Adjustment of t h e DFI r a t e was t h e second g o a l of t a r i f f reform under t h e Economic Reform Program. This reform was i n t e n d e d t o e l i m i n a t e c e r t a i n anomalies i n t h e t a r i f f s t r u c t u r e t h a t r e s u l t e d i n lower t a r i f f r a t e s f o r s e v e r a l f i n i s h e d products t h a n t h e r a t e s on i n p u t s used i n t h e i r production. I t b e c a m e i n c r e a s i n g l y u r g e n t t o lower t h e r a t e s on i n p u t s a s t h e e n t e r p r i s e s involved reached t h e end of t h e p e r i o d f o r which they q u a l i f i e d f o r exemptions under t h e investment code. A t t h e same time, an i n c r e a s e i n t h e DFI was planned f o r c e r t a i n f i n i s h e d p r o d u c t s . The changes i n t h e DFI r a t e s were made g r a d u a l l y t h r o u g h . t h e law of March 21, 1986, a d e c r e e d a t e d May 1 2 , 1987, and Decrees No. 137 and No. 138 of May 2 0 , 1988. However, t h e purpose of Decree 138 was n o t t o reshape t h e s t r u c t u r e of t h e DFI b u t t o compensate, i n t h e c a s e of p r o d u c t s s u b j e c t t o posted v a l u e s , f o r t h e l o s s of earnings r e s u l t i n g from t h e reduction of t h e d i f f e r e n c e between t h e i r posted and t h e i r r e a l v a l u e s . 4.3 Recrnmendations f o r Further Customs Policy Reform The gradual movement of t h e posted values of products i n l i n e with t h e i r r e a l values and adjustments of DFI r a t e s have improved t h e transparency of t h e customs system and eliminated some major i n t e r n a l distortions. The question now i s how t o take t h i s p o l i c y f u r t h e r t o promote foreign t r a d e , t h a t i s , t o s t i m u l a t e exports and t o ensure t h e development of p r o f i t a b l e import s u b s t i t u t i o n a c t i v i t i e s . Section 4.1 showed t h a t a customs system could be improved by s e p a r a t i n g t h e p r o t e c t i o n policy from revenue generation and by simplifying t h e t a r i f f system and increasing i t s n e u t r a l i t y . The following proposals a r e keyed t o t h e s e t h r e e p o i n t s ; c e r t a i n measures could be implemented quickly while o t h e r s w i l l r e q u i r e p r i o r s t u d i e s . . 4.3.1 S e p a r a t i o a o f p r o t e c t i o n and b u d g e t a q goals Even before a VAT system can be f u l l y implemented s t e p s should be taken t o a d j u s t t h e IAS t a x so t h a t it does n o t a f f e c t p r o t e c t i o n l e v e l s , t h a t i s , by applying t h e same r a t e s t o imports and l o c a l products. Once a VAT has been introduced, i t should be regarded a s t h e primary source of revenue, and t a r i f f s must then be used a s a p r o t e c t i o n instrument r a t h e r than a means of enhancing revenue. I t i s a l s o p r e f e r a b l e t o discourage consumption of luxury goods through an a p p r o p r i a t e VAT r a t e r a t h e r than through very high t a r i f f s t h a t simply encourage smuggling. The h i g h e r t h e t a r i f f on a product, t h e more smugglers stand t o gain i n r e l a t i o n t o t h e r i s k s they t a k e .  As has already begun under the Economic Recovery Program, the DFI rate must become the only instrument to use for tariff protection. 4.3.2 Simplification of the tariff system Simplification of the tariff system will make it easier to use and will facilitate the type of economic analysis needed to mold tariff policy into an efficient economic tool. In addition, simplification, by facilitating computerization of customs service, can cut administrative costs and might even lessen evasion and smuggling. The complexity of the existing system greatly complicates collection efforts and encourages the practice of false declarations. Dropping posted values completely would make the system more transparent. but there are some arguments in favor of retaining them in specific cases. The use of posted values provides a flexible and swift means of intervention. which has advantages when applied to strategic products and staples. The system offers a means of containing the consumer prices for these products. which might justify retention of the system on a temporary basis in a very low-income country. rC Although elimination of posted values is not advisable in the near term for milk, sugar, cement, and fuel products,17 it should be possible in 17 The posted values for these products are quite different from their real values. They are lower in the case of milk, cement, and fuel products and higher in the case of sugar. Their elimination would bring about inmediate price increases for milk and cement and a drop in protection for sugar. I n the case of fuel and fuel products, which are sold under an administered price system, an increase in posted values would change the distribution of customs and OSRP revenue. the medium term for milk and sugar; the case of the two strategic products will be more difficult, however. It should also be possible in the near term to begin to tax the other products on the list on the basis of their real value. The large number of exemptions allowed complicates the system and accounts for a major loss in revenue. In 1987 exemptions were equivalent to 65 percent of the total amount of duties and taxes actually collected at customs (Table 4-3). It would be advisable to review the numerous pieces of legislation, including the investment code, that grant exemptions, with a view toward rationalizing and upgrading them. The review should also encompass exemptions that are granted on an exceptional basis without being specifically provided for in legislation, which account for 3.5 percent of all exemptions. A reduction in the number of exemptions is desirable if the aim is to simplify the tariff system so that it can be used more effectively. The large number of duties and taxes on imports also complicates the tariff system. It would therefore be desirable to return to a three- column system of taxation by consolidating the various taxes. Three taxes would be kept: customs duty. the impor? tax (-DFI) , and a value added tax (VAT). This system would be consistent with the aim of equalizing taxes on imports within the framework of the WAEC. Elimination of the OSRP tax on imported fuel products and the DSP tax on imported cement and fuel products, which are both payable to the Office of Price Stabilization and Control, and the CPS, which goes to the Public Debt Amortization Fund, will, of course, result in a loss in revenue for the affected agencies. Elimination of the OSRP taxes should be easier to carry out given government commitment to price liberalization as part of the Economic Reform Program. With elimination of the CPS, the debt will have to be regarded as a budgetary problem instead of as a problem to be resolved through tariffs. 4.3.9 Increased neutrality of the tariff system The study of the tax burden on imports has highlighted the considerable differences in the tax levels for various products within a single category (competing and noncompeting consumer goods, competing and noncompeting intermediate goods, primary consumer goods and staples). Reducing the differences in DFI rates for products within a single category would reduce distortions. It would be advisable, however. to retain a difference in DFI rates between consumer goods and intermediate products, with intermediate products being less highly taxed in order to favor export industries that do not quality for exemptions. The tax on consumer goods could be around 35 percent or 40 percent while that on inputs and staples could be 15 percent or 20 percent, levels that are slightly lower than the current average for each category. Taxes on noncompeting inputs for domestic production could even be targeted for eventual elimination, which would give domestic industries a competitive edge. The cost of this reform could be offset by very slight increases in the IAS (or VAT) rates, which have a broader base than tariffs, and by reducing smuggling. The harmonization of rates will probably make a positive contribution toward curbing evasion and smuggling, particularly for products such as tea which are too heavily taxed. The main distortion engendered by a customs tariff is a bias against exports. Measures must therefore be devised to offset. or at least minimize, this handicap. The slight lowering of the overall tariff level that is proposed would relieve the tax burden on imports that currently affects the export sector. Provided the U S is changed from a deduction- based system to a rebate-based system (see Chapter 3 ) , exporters will be able to increase their competitiveness. The taxes that are now levied on exports accentuate the bias against exports. In some cases, these taxes are relatively high. In view of their negative effect and their negligible contribution to government revenue, it would be better to eliminate all duties and taxes on exports. As an exception, export taxes could be retained for agricultural products, such as cotton, for example, because farm income is not subject to direct taxation. In the future, if the gold mining sector expands, imposition of an export tax on gold might be justified as a promising source of revenue for the government. However, at present, the mining sector is not sufficiently developed and the risk of smuggling is too great for a special export tax to be considered. Another means of reducing the bias against exports would be to expand the duty and tax exemption system for imported inputs used in the manufacture of exports. While an overall reduction in the number of tax exemptions is desirable, the exemptions offered to exporting industries should be granted to all such industries. This could be done by trying to solve the technical difficulties that limit development of the system of industrial warehouses ('entrep6ts industriels') which was instituted in 1977 and implemented in 1986. Only two enterprises are currently benefiting from this system. While a free zone is virtually ruled out because of the high cost it would involve, the possibility could be  4 investigated of offering tax credits to exporters equivalent to the amount of duties and taxes paid on imported inputs; these credits could be deducted from their domestic taxes. The reform of the investment code might also provide an opportunity for offering special benefits to firms that export. Finally, steps should be taken to see that export enterprises that benefit from exemptions also qualify for exemption from the 5 percent CPS that is levied on their imported inputs, which is not the case at present. While implementation of these suggestions would reduce the antiexport bias resulting from the tariff system, it is impossible to tell whether these measures would be sufficient to offset all the negative effects of the tariff system. The foregoing proposals are intended to improve the efficiency of the customs system. This reform is all the more important given the recent tendency to eliminate quantitative restrictions, which makes the protective role of tariffs more significant. Customs tariffs can be used as an instrument for temporarily protecting certain carefully selected activities. (Stryker (1987), for example, found that Mali had a comparative advantage in the production of agricultural equipment, plastic bags, and cottonseed oil). Proper identification of the sectors to promote is a delicate matter, however, and be done only within the framework of a meticulously formulated industrial policy.  Table 4-1. Duties Collected on Imports i n Mali i n 1987, by Product Category Duties Value o f Duties A.verage tax r a t e c.1.f. value and taxes imports as c o l l e c t e d as (duties c o l l e c t e d as Product Number of imports on Imports % of t o t a l % of t o t a l % o f c.1.f. value) Primary consumor products/staples Salt Sugar Pharmaceutical products Milk Carer Is Flour, m a l t Books Tea Tota 1 m n d f u e l products 27 Compet Inp consuaor poods Cotton 66 Tobacco 24 Frult Other f r b r l c s P r o c e s s d f r u i ts/vegetablos Soap, W X. Furnl t u r o Footwear Ceramlc products Fish Bakery products Dlscontlnuous synthetic k r t i l e s Beer Vegetables Jewe 1 r y Carpots, embroidery Knl ttd goods NonalcohoIic bovoragas Clothlng, f a b r i c Leather a r t l c l e s Meat Headgea r Other vegetable t e r t l l e s Food industry waah Continuous synthetic k r t l l e s Feathers, down Wool Si Ik V i negar Flax  Table 4-1. D u t i e s C o l l e c t e d on Imports i n M a l i i n 1987, by Product Category (continued) Duties Value o f Duties Aueraae tax r a t e c. 1 .f. va l u o and taxes importr as c o l l e c t e d as (duties-col l e c t e d as Product Number of imports on imports % of t o t a l % of t o t a l . X o f c. 1 .f value) Noncompeting consumer goods Passenaer motor v e h i c l e s ~nstanE coffee, soup Processed meat Glass Perfumery, t o 1 l e t p r e p a r a t i o n Yiscollaneous A l c o h o l i c beverages Coffee Photographic goods Games, s p o r t s equiprmnt Yusical instruments Cocoa Sp i. .c Arms, anunun it ion Clocks and watches Umbrol l a s Compoting i n t e r m o d l a t e products Colors, p a l n t s 32 667 176 0.687 0.683 Old c l o t h i n g 63 442 242 0.396 0.803 Oi I sods 12 28 9 0.026 0.029 L i restock 1 17 2 0.016 0.006 Brushes 98 10 2 0.009 0.006 Rawhides, s k i n s and l e a t h e r 41 3 0 0.003 0.001 Plants 6 - 0 - 0 o.001 Tota 1 1167 431 1.034 1.429 Noncomptlng Intormodtat. products ~ o c h a n l c a lappliances 84 Iron b steel 73 ~ e r tl lir e r s 31 6846 144 Commercial v o h l c l e s 87-A 6069 1294 E l e c t r i c a l appliances 86 6036 626 Uisc. chunical products 38 2334 248 Rubber 40 2260 loo0 Synthetic n a t e r i a l s 39 2260 263 Paper, paporboard 48 1307 329 Fats, o i l s 16 1237 lee Railway equipment 86 1227 6 Inorganic chemicals 28 1203 148 Vehicles spare p a r t s 87-C 1187 186 Photographic, medical instruments 90 1127 161 Zinc 79 1019 61 Organic chemicals 29 820 111 Wood, charcoal 44 738 146  Table 4-1. D u t i e s C o l l e c t e d on I m p o r t d i n M a l l i n 1987, by Product Catagory (continued) butias Valua o f Out ie m Avarage t a x r a t e C. i .f. v a l u a and taxas Imports as c o l l e c t e d as (dutes c o l l e c t e d as Product Number o f lmporta on Importa 3 of t o t a l 3 of t o t a l 3 o f c.1.f. value) tticlrat 76 416 64 0.871 0.211 16.4 Toola 82 887 74 0.846 0.247 19.3 Yiacallanaou. motal product. 83 686 176 0.846 0.681 46.4 Wadding, Indu.trlal taxtilea 69 369 119 0.880 0.894 32.2 A r t l c t a r o f atona, c m n t 68 117 19 0.106 0.061 16.8 Oluos 36 69 29 0.062 0.097 42.4 Pyrotechni c products 36 64 1 0.067 0.006 2.3 Carving n a k r i a l s 96 60 1 0.063 0.002 0.9 A i r c r a f t and part. 88 41 0 0.037 0.000 0.0 C0pf-r 74 26 6 0.023 0.019 22.1 Rea 1no 13 26 11 0.021 0.036 46.4 Straw and e s p a r t o product. 46 9 4 0.008 0.014 47.7 Other vagetable products 14 6 1 0.004 0.003 20.6 Y agnaa iurn 77 2 1 0.002 0.002 84.6 Load 78 1 0 0.001 0.001 29.0 Cork 46 0 0 0.000 0.001 80.6 Shipa, boat# 89 0 0 0.000 0.000 0.0 Tln 80 0 0 0.000 0.000 67.6 Total m td89 Xm - 26.478 16.4 Orand T o t a l 111,949 80, 181 100 100 27 .O Source: prepared by Hans P e t a r Lankas on t h e baala o f SYDONIA c u a t m a a t a t i a t i c a .  Table 4-2. Duties C o l l e c t e d on Exports i n Mali i n 1987, by Product Category Value o f 7. x Average tax r a t e Customs Taxes exporta as c o l l e c t e d as (taxes c o l l e c t e d Product Number va lue on export. % of total % of t o t a l ma % o f e x p o r t value) L l vertock 1 3747 274 9.387 23.406 7.3 Meat 2 2 0 0.004 0.007 6 .O F i ah 3 77 16 0.192 1.368 20.8 Milk 4 2 0 0.006 0.012 8.0 Other animal product. 6 0 0 0.001 0.003 8.0 Vegetables 7 68 6 0.170 0.408 7 .O Fruit 8 131 4 0.328 0.326 2.9 Coffee, tea 9 3 0 0.008 0.008 3.2 Cerea la 10 143 9 0.368 0.808 6.6 Flour, m a l t 11 10 0 0.026 0.028 3.3 O i l , needs 12 882 22 0.968 1.863 ' 6.7 Vegetable e x t r a c t s 13 286 13 0.713 1.073 4.4 Other vegetabla products 14 763 0 1.886 0.038 0.1 F a t s and o i l s 16 10 0 0.026 0.027 3.1 E d i b l e preparatlona 21 3 0 0.007 0.007 3 .O A l c o h o l i c beverages, vlnegar 22 66 2 0.163 0.167 3.0 Food induatry w a a k 23 48 1 0.120 0.122 3 .O S a l t , sulphur, cement 26 22 1 0.064 0.066 3.0 Inorganic chemlcala 28 2 0 O.m 0.006 3 .O Photographic gooda 87 1 0 0.003 0.000 0.0 Miacellaneoua chemical product* 38 18 0 0.033 0.033 3.0 Reaina and p l a s t i c m a t o r l a l a 39 3 0 0.007 0.004 1 .6 Rubber 40 8 1 0.019 0.062 8.0 Rawhider, aklna and I e a t h a r a 41 811 16 0.778 1.268 4.8 Wood, charcoal 44 3 0 0.007 0.009 3.9 Straw and esparto products 46 8 0 0.020 0.020 3.0 Cotton 66 30966 719 77.661 61.306 2.3 Other vegetable k x t l l e a 67 17 1 0.048 0.044 3.0 Clothing, f a b r i c 61 0 0 0.001 0.000 0. 0 Old c l o t h l n g 63 3 0 O.m 0.000 0. 0 Footwear 64 4 0 0.010 0.010 3.0 Umbrellar, ate. 66 0 0 0.000 0.000 0. 0 Feather., human ha ir 67 1 0 0.003 0.003 3.0 Precloua w t a l a , j e w e l r y 71 2638 84 6.608 7.161 3.2 Iron, ateel 73 41 1 0.102 0.104 3.0 Lead 78 0 0 0.000 0.000 0.0 Zinc 79 20 1 0.060 0.062 3.0 Tool a 82 2 0 0.004 0.006 3.0 Miacellaneoua metal a r t l c l e a 83 6 0 0.012 0.012 3.0 Mechanical appllancea 84 84 2 0.211 0.210 2.9 E l e c t r i c a l appliances 86 17 0 0.042 0.001 0.1 Vehiclea 87 3 0 0.008 0.006 1.9 O p t i c a l and p r e c i a l o n lnatrumenta 90 19 0 0.048 0.000 0. 0 Arms, a m u n i t i o n 93 1 0 0.001 0.001 3.0 Furniture 94 0 0 0.000 0.000 0.0 39,91(1 - - - Tota l 1172 100 100 2.9  Table 4-3. Comparison o f Eremptionr by Budget Type Debt Highway Amorti zatlon Mining Petroleum Title Fund Treasury Fund Fund Stocks N o t i c e No. 8 )/ 26,388,789 64,161,487 8,162,082 1,742,684 887,167 S t a t e enterpr i r e 103,361,146 8,607,919,089 807,022,221 4,040,186 14,800,240 Author 1r e d e n t e r p r i r e 2,618,898 1,844,678,278 24,611,688 674,004 17,189,661 P r o j a c t agrumontr 186,606,114 6,091,484,681 798,048,626 18,640,940 12,239 Order 700 b J 4,199,642,688 401,818,798 Order 684 4/ 8,008,228 177,908,486 9,699,277 886,416 76,037 Others $1 181,640,022 189,606,296 48,860,199 8,009,294 1,623,236 D u t i e r p a i d (collected) 2,842,806,711 26,666,726,266 6,888,676,218 122,247,134 112,863,898 Note*: a Notice No. 8: i e g i r la t i o n governing l o s r e r a t t r i butable t o t r a n s p o r t o f petroleum products. b Order No. 709: eremptions granted f o r Items f o r t h e h a d o f State, t h e army, g i f t s , assistance f o r r e t u r n o f coop4rants and c e r t a i n pharmaceutical products. c Order No. 664: exemption f o r f u e l f o r Malian a i r c r a f t ( A i r Mali). d Other: temporary o r permanent exemption@ I n r p e c l a l cases n o t provided f o r I n l e g i s l a t i o n b u t necessary. Source: Republic of Mali; M i n i s t r y of Finance and C o m r c e , National D i r e c t o r a t e o f Customs, S t a t i s t i c s and Economic Studier Division.  Table 4-3. Comparison of Exemptions by Budget Type (continued) Debt Highway Amortization Mining Title Fund Treasury Fund Fund N o t i c e No. 8 r/ 66,780,909 60,618,~70 8,662,321 1,380,916 1,204,231 Stat. enterprise 216,366,041 a,066,776,766 644,201,114 6,236,314 12,974,916 A u t h o r i zod e n t e r p r i s e 2,966,067 2,816,662,220 28,687,789 489,304 12,368,493 P r o j e c t agreomonts 647,607,774 4,849,192,600 738,998,107 16,437,998 11,087,191 D i p l o m a t i c exwrptions Order 709 b/ Ordor 684 e/ Others d/ 362,878,840 23a,117,072 48,492,081 8,282,116 677,333 Tota l 1,328,240,266 16,0a4,24,787 2,848,617,698 33,603,164 38,202,163 Outieo p a i d (collected) 6,301,148,646 28,464,496,487 6,077,906,869 113,996,960 124,206,611 Notes: a N o t i c e No. 8: l e g i s l a t i o n governing losses a t t r i b u t a b l e t o t r a n s p o r t o f potroleurn products. b Order No. 709: eramptiono granted f o r itums f o r t h e Head of State, t h e army, g i f t s , . asmistance f o r r e t u r n o f coofirants and c e r t a i n pharmaceuti ca l products. c Order No. 664: examption f o r f u e l f o r Malian a i r c r a f t ( A i r M a l i ) . d Other: temporary o r permanent exomptlons I n s p a c i a l casee n o t providod f o r i n I e g i s l a t i o n b u t necessary . Source: Republic o f M a l i ; M i n i s t r y o f Finance and Commerce, N a t i o n a l Directorate of Cumtoma, Statistics and Economic Studies D i v i e i o n .  V Sta -• a*) CY) • U n e a  REGUTIONS AND PROCEDURES GOVERNING INTERNATIONAL TRADE Many of the regulations governing Mali's international trade originated in an earlier period when the government assumed numerous economic functions mainly to compensate for capacity that was lacking in the private sector. The situation has changed over time, and simplified procedures have been introduced in recent years (1968-88). 5.1 Objectives of Trade Regulations Tracking product volumes. The concern with tracking product volumes is to ensure that the essential needs of the Malian population can be met, especially demand for basic products such as tea, sugar, flour, and milk. A parallel goal is to improve the balance of import and export flows in order to reduce balance of payments problems and borrowing from the operations account. Planners are often more inclined to reduce imports by limiting the size of import flows than by imposing customs duties, believing that this allows tighter control of the volume of goods entering the country. cO Generating statisticslprojections. In a managed economy, accurate data are needed on trade flows in and out of the country and within its borders, if only to allow customs and revenue to be determined. Such projections in Mali are the responsibility of the External and Internal Trade Departments of the National Directorate of Customs, which try to ascertain what stocks of key products are available in each region. Besides providing a window on potential demand or surplus figures, this exercise gives an initial idea of the customs revenue that can be expected from the anticipated trade flows. In aadition to the implicit fiscal objective here, a general objective is to gain a more accurate picture of the flows of goods entering and leaving the country. Encouraging or protecting domestic production. Regulations in this area attempt to create circumstances favoring domestic products over competing imports, even though domestic production is generally at a disadvantage in terms of price or quality. Protection policies are designed to offset the handicaps of the Malian economy in order to expand the share of the market commanded by local enterprises. Two primary protection procedures have been employed: (1) temporary suspension of import licenses and (2) product-linking requirements which are intended to reinforce tariff barriers that did not have the desired effect. The question that needs to be answered is whether or to what extent these objectives are still consistent with the needs of the Malian economy as defined by agreements the government has entered into with international agencies. These three goals were far more consonant with an economy managed and regulated by the government than with the present move toward deregulation, which gives more play to price mechanisms. Because the transition from a managed to a m a r a t economy is being effected gradually, however, these familiar procedures have not yet been phased out. The fundamental problem is still h w to achieve these objectives without allowing newly adopted procedures to create still greater distortions in the rest of the economy. The concern with tracking product volumes is n o longer valid since the price mechanism ensures that the market as a whole is supplied as needed. The concern with statistics and projections, which is mainly a response to the need for information as a basis for introducing and setting rates for taxes and customs charges, should cease to be important if the tariff system advocated in the preceding chapter proves effective in reducing fraud. Accordingly, the concern with protection of domestic production is the only goal which remains pertinent. 5.2 Procedures To accomplish the three objectives detailed above, three regulatory instruments are used: import and export licenses, inventory declarations, and product linking. 5.2.1 Import and export licenses Imports. All importers are required to hold import licenses registered with the National Directorate of Customs. Import licenses are valid for six months, but can be extended for an additional three months. Although license applications can be obtained at minimal cost through the Chamber of Conmterce, they require very detailed infonuation and must be countersigned by various public or private agencies (13 copies). Many private sector importers believe that the administration delays processing and checking the forms as an indirect means of curbing or preventing trade. Consequently, they apply for licenses for products they are not currently interested in importing or for import volumes well in excess of what they will actually import. In fact, private sector importers treat licenses like financial assets: they consider it sound policy to hold a portfolio of them at all times, since this enables them to switch operations whenever imports of particular classes of goods are prohibited. For essential products like sugar, a license can be obtained only after a "Prior Approval to Importn document has also been obtained through the Customs Directorate. More restrictive than the license itself, this document requires the applicant to submit an invoice from his foreign supplier -- in other words, the applicant must already have almost completed the usual steps required to import a product (selecting and setting up the method of payment, taking out insurance, arranging transportation, and so on). The authorities justify this cumbersome procedure by claiming that it trains private operators in the skills required in a difficult international market. The upshot is that a number of potential imports are discouraged by the time it takes to obtain an import license and so are effectively prevented from operating through the official channels. According to the External Trade Department, import licenses are granted routinely, except when imports have been suspended, which officials say is becoming increasingly rare. In any case, import volumes as reflected in license applications exceed recorded and estimated imports volumes by a very wide margin. This finding appears to corroborate the hypothesis that private operators manage their import licenses like a portfolio of assets. The obvious conclusion, then, is that import licenses no longer reflect the real needs of the Malian population or the imports that actually enter the country. The import licensing procedure no longer provides a means of estimating import volumes, and there is no justification for a licensing system in an economy that is relying increasingly on market regulatory mechanisms rather than governmental controls. Any protective effect of licensing on Malian industries appears to be illusory, since licenses are not granted within a quota system and importers would quickly switch to nonrecorded imports if quantity  4 restrictions were introduced. Nor does licensing help in the collection of statistics and the projection of trade flows. Studies by the Customs Directorate itself show no evidence of any connection between the volume of authorized imports (total licenses granted) and the volume recorded by the Customs Administration or estimated by the Central Bank of West African States (BCEAO) -- or even, at times, the stocks existing on the Malian market. The disadvantages of the system are mainly the delays imposed on importers and the considerable effort they must make whenever they attempt to speed up their license application. At the same time, opportunities for profit (economic rent) are created for importers that are able to obtain licenses more easily than others. I n addition, if licenses are used as a means of restricting imports, importers will almost automatically move away from official import operations to nonrecorded ones, with an accompanying loss of customs revenue. Other import-related procedures have been introduced which appear to be of no advantage to the authorities. The requirement that importers use the services of an authorized customs broker or forwarding agent is unnecessary since clearance procedures take place at the final destinationlpoint of sale and not at the border crossing points. The use of authorized forwarding agents is supposed to guarantee that the government actually receives the duties and other charges payable on imported goods. Unfortunately, however, the use of such agents has simply created an additional cost for private sector importers, who are forced to use the services of a group which takes advantage of its monopoly position. In the end, it is consumers or the government that bear the burden--the former have to pay a surcharge on the imported product (when the customs  6 clearance procedures a r e c a r r i e d out c o r r e c t l y ) and the l a t t e r runs the r i s k of revenue l o s s through fraud. Imports a r e usually cleared through customs close t o the f i n a l place of s a l e . I n p r a c t i c e , t h i s usually means i n Bamako. This concentration of imports in Bamako c r e a t e s a d d i t i o n a l handling c o s t s f o r importers because of the r e s u l t i n g congestion a t t h e Bamako Customs Clearance Center, with waiting times t h a t may exceed two weeks. Further c o s t s a r e associated with the f o r m a l i t i e s required i n t h e course of transporting goods from the border t o one of the o t h e r clearance p o i n t s , not the l e a s t of which i s the disappearance of goods between the border and the clearance points (which a r e f a r from the border). These i n e f f i c i e n c i e s e n t a i l c o s t s t o t h e nation a s a whole and losses t o t h e government t h a t could e a s i l y be avoided i f clearance procedures were simplified and i f f i v e o r six customs centers were s t r a t e g i c a l l y located on major access roads. Exports. Exporters have t o go through procedures s i m i l a r t o those required of importers. One of Mali's problems i s how t o f o s t e r the production and s a l e of exportable goods (and import s u b s t i t u t e s ) d e s p i t e cost and haulage problems. Any obstacle t o export a c t i v i t y ( o r domestic output of consumer o r production goods) should be eliminated a s f a r a s possible. This a p p l i e s t o export l i c e n s e s , a legacy of the period of s t a t e c o n t r o l of the economy when producers had t o be r e s t r a i n e d from supplying the more remunerative foreign market t o the detriment of Malian consumers. Export l i c e n s e s a r e granted f o r only t h r e e months. Applicants have t o give s p e c i f i c information (such a s countries of d e s t i n a t i o n , p r i c e s , q u a n t i t i e s ) a t a stage when they have not y e t signed t h e i r c o n t r a c t s and so can give only projected f i g u r e s . I f t h e i r projections prove wrong ( f o r example, q u a n t i t i e s of goods a r e g r e a t e r than announced), exporters are fined. Export licensing procedures are directed mainly toward Mali's few organized producers, particularly exporters of processed agricultural products. But a large part of the country's agricultural exports (livestock) passes through parallel channels, so the flows are extremely difficult to monitor. Export licensing has not had the intended result, which was to ensure that domestic demand received priority. Nor has export licensing meant that exporters transferred their foreign exchange earnings to their bank accounts in Mali immediately. Nor has payment of the standard export tax (the CPS) helped in monitoring the flow of goods leaving Mali. 5.2.2 Inventory declarations - T h e Internal Trade Department tries to monitor the supply situation in Mali by obtaining declarations regarding the stocks of the major food products held by manufacturers and wholesalers. These declarations are sent monthly to the National Directorate of Customs (Bamako headquarters and the regional offices) and provide the basis for a very approximate estimate of supply status region by region and product by product. These data are used to forecast possible interruptions in the flow of supplies, particularly of basic consumer products. The same procedure makes it possible to anticipate a surplus, and therefore to suspend imports of certain products temporarily so as to give market priority to Mali's domestic output. Although this procedure may have helped the authorities to spot developing supply crises, remedial decisions have not been taken quickly enough. For instance, that not all regions have had adequate supplies of food g r a i n s i s not a f a i l u r e f o r which t h e f o r e c a s t i n g and p r o j e c t i o n mechanisms can be blamed e n t i r e l y . 5.2.3 Product l i n k i n g I n February 1988 t h e Customs D i r e c t o r a t e began t o experiment with a l e s s conventional l i n k i n g procedure f o r two e s s e n t i a l products, sugar and tea. Each prospective importer of sugar ( t e a ) i s required t o o b t a i n a " P r i o r Authorization t o Import" and submit proof of purchase of a q u a n t i t y of l o c a l l y produced sugar ( t e a ) i n o r d e r t o o b t a i n an import l i c e n s e . The l i n k i n g r a t i o s of domestic production t o imports a r e 1:l f o r granulated s u g a r , 1 . 3 : l f o r lump sugar, and 0 . 2 : l f o r t e a . The goal h e r e i s t o move l o c a l l y produced sugar ( t e a ) , f o r which production c o s t s i n Mali a r e higher than world p r i c e s even a f t e r allowing f o r f r e i g h t and customs charges on imports. Importers t h e r e f o r e have t o s t r i k e a balance between t h e higher p r i c e they pay f o r t h e domestic product and t h e i r f u l l c o s t on t h e imported product and t h e n s e l l a t an average p r i c e t h a t covers t h e i r t o t a l c o s t . Contrary t o experience i n neighboring c o u n t r i e s t h a t have a l s o introduced l i n k i n g requirements, t h e experiment i n Mali seems t o have met t h e a u t h o r i t i e s ' e x p e c t a t i o n s i n t h e case of s u g 8 . I n the case of t e a , however, importers were n o t persuaded t o buy t h e l o c a l product, mainly because t h e q u a l i t y d i f f e r e n c e between t h e l o c a l and imported products meant they were n o t t r u e s u b s t i t u t e s , w h i l e t h e l a r g e number of importers helped t o guarantee t h e i r anonymity i n nonrecorded import t r a f f i c . I n 1987 f o r an e s t i m a t e d consumption of 1,300 t o n s of t e a ( e s s e n t i a l l y imported), t h e Customs D i r e c t o r a t e i s s u e d import l i c e n s e s f o r 125 t o n s , while t h e Customs Administration recorded e n t r y of 199 tons and BCEAO e s t i m a t e d imports a t a t o t a l 1,380 t o n s .  What initial conclusions can be-drawn regarding the economic effects of product linking and the conditions needed to ensure that it will be effective7 Product linking can be effective in ensuring that domestic output is sold first, provided that the transactions involved are fairly tightly controlled and that the domestic and imported products are equivalents, so that local importers' calculations about what offsetting measures they need to take remain relatively simple. Only if these conditions apply (as they do in the case of sugar) can importers calculate their return accurately. allowing for losses on the resale of the domestic product and profits on the sale of the imported product (elasticity of demand remaining the same, by definition, regardless of product origin). If the products concerned are not equivalents (meaning that the price elasticities of demand are different), then it becomes much more difficult for importers to calculate their return. Linking is a single-operation measure that replaces the usual pair consisting of a customs duty plus subsidization of domestic output. It has the further advantage of avoiding the need for cumbersome bureaucratic procedures or the actual disbursement of subsidies. As has been demonstrated elsewhere (Takacs 1988). linking can be an acceptable (second- best) protection measure when its aim is to move domestic output and stabilize prices and when financial constraints rule out the payment of subsidies to local producers. Linking is further justified in the case of sugar on the grounds that the international market prices are surplus prices. In some ways, linking can be regarded as an indirect means of recreating acceptable conditions of competitiveness for domestic producers. Linking is a more effective means of doing so in the Malian economic context than would be customs duties, which would be circumvented through smuggling. Nevertheless, it is clear that private sector importers accept linking requirements only if they are less costly overall than a switch to the contraband economy. This switching point consequently determines the limit beyond which this system will not work. Like all protection measures, however, linking involves additional cost for the consumer when the benchmark price used is the international market price. Moreover, linking leads to market concentration, since only businesses that cover the entire national territory are in a position to sustain the cost of a national supply operation--something not true of the small traders in Kayes, for instance. It would be extremely risky to try to apply this system to other products, especially if the criterion of product equivalency cannot be met. The kind of failure experienced with tea would be inevitable. Similarly, this is not the time to tighten the linking requirements on sugar (as a result of setting up a new sugar mill in Mali), since increased losses on local sugar could prompt importers to move out of the official market. 5.3 Recomnendatians The various ministries concerned have undertaken numerous research projects to improve their knowledge of market questions and trade flows and to promote domestic production. These studies have led to the introduction of some of the procedures'outlined above. Although they appear to have met some of the expectations held for them, they have caused new economic distortions which should be eliminated. This is the focus of the reconmendations set out here. 5.3.1 Procedural requirements f o r imports From t h e s t a n d p o i n t of t h e government's i n i t i a l o b j e c t i v e , t h e import l i c e n s i n g system has shown i t s e l f t o be i n e f f e c t i v e , p a r t i c u l a r l y s i n c e t h e a u t h o r i t i e s began t o r e l y more on market mechanisms t o ensure t h a t M a l i ' s consumers and producers a r e adequately s u p p l i e d . ~icenses should be granted a u t o m a t i c a l l y f o r most products, o r b e t t e r s t i l l , eliminated. I f t h e a u t h o r i t i e s wish t o keep t r a c k of i m p o r t e r s ' i n t e n t i o n s . importers can be required t o d e c l a r e t h e i r p l a n s t o t h e National Customs D i r e c t o r a t e , but without having t o f i l l o u t lengthy fonns and r e c e i v e m u l t i p l e s i g n a t u r e s from t h e v a r i o u s government departments concerned w i t h external transactions. Importers could f i l l o u t d e c l a r a t i o n s of t h e i r import i n t e n t i o n s i n t h e same way t h a t wholesalers today submit d e c l a r a t i o n s of i n v e n t o r y t o t h e I n t e r n a l Trade Department. These d a t a could then be c e n t r a l i z e d and processed by t h e Customs D i r e c t o r a t e . The D i r e c t o r a t e could use t h i s information, t o g e t h e r w i t h information on consumption p a t t e r n s and warehousing p r a c t i c e s , t o draw up market supply p r o j e c t i o n s which could t h e n be broken down by region w i t h a s s i s t a n c e from t h e agency's branch o f f i c e s . This i s n o t t o say t h a t t h e b e s t i n d i c a t o r of t h e s t a t e of t h e market i s n o t s t i l l p r i c e ( i f f r e e l y determined by t h e f o r c e s of supply and demand) r a t h e r t h a n t h e volume of t h e product h e l d i n stock. And it i s a l s o t r u e t h a t t h e e f f e c t of freedom t o t r a d e w i l l be t o encourage importers and e x p o r t e r s t o know t h e i r market and i t s r e a l needs b e t t e r , so t h a t they no longer need t o be t o l d what products a r e i n demand and where t h a t demand e x i s t s . However, such a p o l i c y e n t a i l s abandonment of t h e long-standing p r i n c i p l e t h a t Malian consumers should be a b l e t o o b t a i n a given product a t t h e same p r i c e i n any p a r t of t h e c o u n t r y .  E f f e c t i v e protection f o r domestic industry has not been obtained through the import licensing system because the l i c e n s e s do not r e a l l y limit import t r a f f i c . The country's borders and customs network a r e too e a s i l y breached f o r o f f i c i a l r e s t r i c t i o n s on import volumes t o have much impact. Protection can be assured only i f customs d u t i e s a r e a c t u a l l y enforceable and enforced and a r e s e t a t r a t e s t h a t do not spur importers t o leave the o f f i c i a l market and operate through nonrecorded trade channels. 5.3.2 Procedural requirements f o r exports It i s hard t o see any j u s t i f i c a t i o n today f o r Mali's cumbersome e r p o r t procedures. A l l evidence points t o the f a c t t h a t the more complex they become the l e s s they a r e observed. A simple d e c l a r a t i o n ( a s i n g l e form, i n one copy only) submitted p e r i o d i c a l l y t o the National Customs Directorate and indicating t h e approximate quantity o r value of goods exported should provide s u f f i c i e n t data f o r economic s t a t i s t i c a l purposes. As it i s only on signature of an a c t u a l export c o n t r a c t t h a t accurate d e t a i l s become a v a i l a b l e ( d e s t i n a t i o n , quantity, q u a l i t y , p r i c e ) , the value of export t r a f f i c can only be ascertained on an ex post b a s i s . This i s done through BCEAO assessments and, more o f t e n than n o t , i n d i r e c t l y through road checks (which should be reduced). Here, once again, experience shows t h a t multiplying the number of procedures--and there i s a temptation t o do so i n the i n t e r e s t s of improving the monitoring of economic flows--almost always d i v e r t s movements of goods away from o f f i c i a l channels. Simplification, on t h e o t h e r hand, p a r t i c u l a r l y of procedures whose primary purpose i s s t a t i s t i c a l , w i l l reduce the c o s t of o f f i c i a l requirements and thereby l e s s e n t h e incentives f o r fraud o r the use of p a r a l l e l export channels. I n t h a t regard, elimination of export licenses would appear to be the right course. The repatriation of exchange earned abroad will then depend less on public sector regulatory requirements and more on the qualities of the banking system and the monetary policy followed by the BCAEO. 5.3.3 Procedures for payment of importlexport charges Customs duties, other entry charges, and export taxes should be collectible directly on entry or outshipment, without any need for additional controls between border and point of destination or sale. Concentrating available manpower resources at six entry points (Bamako airport, Bamako rail terminus, Gao, Kayes, Motpi, and Sikasso), and reinforcing them with mobile control units, would ease congestion and expedite procedures while widening the field for their application. These changes, when combined with a reduction in the level of charges in the interests of reducing incentives to fraud, could result in a substantial increase in government revenue. Such refo m s should be introduced gradually in consultation with impbrters and exporters, so that creation of new distortions can be avoided. I n particular, actual monitoring/control procedures should be kept to a minimum and should not create transportation bottlenecks, as would, for instance, the requirement that goods be unloaded for inspection. A private corporation has recommended a system of "reinforced control" to achieve higher revenues from customs. Knowledgeable and honest customs officers would verify that quality, quantity. and price of imports matched those on the invoice presented to the Customs Administration or those on the import license. While the proposal would lead to increased revenue, it might also lead to a significant rise in consumer prices unless it were accompanied by a reduction in tariff rates. Instituting a system of reinforced control will be impractical, however, unless it is done progressively and accompanied by a damward adjustment in the level of customs duties. This proposal would deal only with the problems created by underinvoicing or by misstatement of quantities/volumes, however, which are simply one part of the problem of nonrecording (and therefore nontaxation) of trade flows. In a more general sense, successful collection of customs revenue depends on upgrading the efficiency of the Customs Administration as a whole. Nothing can be achieved unless the Customs Administration is both competent and scrupulously honest. What is needed to improve motivation and surveillance skills is better staff training in accurate identification of categories of importedWgoods, simplification of the tariff structure to facilitate the job of verification, and possibly some form of customs staff sharing in the total revenue collected.18 The outcome should be improved recording of import operations as a result of reduced fraud, more effective protection for domestic industry, and an increase in government budgetary 18 A provision for sharing in revenue collected would give customs officials greater incentive to guard against fraud (underinvoicing, underestimation of quantities and qualities, false declarations, and contraband). It might also make the Customs Administration reluctant to accept subsequent tariff reductions, however, and give rise to claims for similar participation arrangements from other sectors of the civil service (the Tax Administration, in particular). revenue as a result of proper application of the tariff and more realistic valuation of goods. The mission therefore makes the following recommendations to the Malian authorities: -- elimination of import licenses -- elimination of expo.rt licenses -- decentralization by conducting customs clearance operations at the six main entry points -- reinforcement of the effectiveness of the Customs Administration through simplification of operating procedures, better training and better remuneration for customs staff, and greater emphasis on the prevention of corruption.  CHAPTER-6 PRICE POLICY FOR AGRICULTURAL EXPORTS: COTTON This chapter examines the government's price policy for cotton, which is the sole agricultural product subject to price control as well as Mali's major foreign exchange earner. Between 1982 and 1986, cotton accounted for 39 percent of export receipts, making it the leading export (followed by cattle at 33 percent). The future of the cotton subsector in Mali was recently studied in considerable depth. A major seminar was held on the subject in May 1988 in StSlingub, chaired by the Minister of Agriculture and attended by representatives of the leading foreign donors active in the subsector. Various recommendations were made on its structure, the role of the Textile Development Company of Mali (CMDT), and the producer price policy. (The producer price policy was discussed only in terms of the principles involved and needs to be studied in detail.) In view of the focus of the seminar, and without anticipating the study's findings, this chapter examines the issue of the price of cotton in the general context of foreign trade policy. The price of cotton is a key element in the incentive system that will shape the expansion of trade. 6.1 Objectives of the Cotton Price Policy For cotton in Mali, as for any major export crop, a producer price policy has four main objectives, which must be prioritized because they cannot be achieved simultaneously (for more detail, see P. Guillaumont and S. Guillaumont 1988).  One objective is that the producer prices be linked with the international price over the long run. The trend in the producer price, which influences production over the long run, cannot deviate for any length of time from the international price trend. If the producer price tends to fall below the international price, the country runs the risk of discouraging higher production. If the price tends to rise above the international price, the crop may tie up too many production factors. That is, it may grow disproportionately in relation to other crops. Moreover, such growth can generate a loss over the long run, and the crop may ultimately have to be subsidized by the rest of the economy. In both cases, the greater the elasticity of supply in relation to price, the greater the risk. I n the case of cotton, for which international prices fell sharply in 1985-86, followed by a partial recovery, all observers believe that the second risk prompted the SBlinguB seminar to affirm the need to maintain a linkage with the international price while also offering an attractive price to the grower. Should there be a lasting reversal in the trend on the international market, the price may not be attractive enough to foreign buyers. A- second objective is revenue generation for the government. Cotton, as the main export, should help finance the government budget, although care should be taken that the tax is not excessive. A third objective, also recognized by the SBlinguB seminar, is stabilization of producer prices. In general, because of the risk it poses, price instability is considered to lower average production. Even if this were not so, volatile producer prices would have an adverse impact on the cotton subsector. First, the instability of producer prices causes i n s t a b i l i t y of production (because of the s e n s i t i v i t y of supply t o p r i c e ) . In an a g r o i n d u s t r i a l subsector such a s cotton t h a t involves fixed p l a n t , t h i s i n s t a b i l i t y i s a f a c t o r i n the c y c l i c a l u n d e r u t i l i z a t i o n of p l a n t and equipment and hence in higher average c o s t s . Next, i f a l l "peaksn i n the world market p r i c e a r e passed on t o the grower, t h i s would lead t o a rapid expansion in a r e a s planted t o cotton. Such a l a r g e expansion can involve thorny ecological r i s k s , including degradation of the s o i l , as l e s s land i s l e f t fallow and the use of crop r o t a t i o n decreases. F i n a l l y , when changes i n the i n t e r n a t i o n a l p r i c e f o r cotton a r e passed on t o producers, the exact p r i c e change cannot be known before planting, so p r i c e changes can influence production only i n t h e following year, when the i n t e r n a t i o n a l economic outlook f o r cotton may be e n t i r e l y d i f f e r e n t . This can be a f a c t o r in wide swings i n export r e c e i p t s . The producer p r i c e t h a t i s t o be s t a b i l i z e d i s defined a s the p r i c e t o which supply i s most s e n s i t i v e . This can be t h e r e a l p r i c e ( t h e nominal p r i c e d e f l a t e d by a p r i c e index f o r t h e goods purchased by t h e grower) o r the r a t i o of cotton p r i c e s t o t h e p r i c e s of competing crops, essentially cereals. Viewed from t h i s angle, t h e problem of s t a b i l i z i n g cotton p r i c e s has become much more d e l i c a t e since the c e r e a l s market has been deregulated. Nevertheless, the i n s t a b i l i t y of c e r e a l p r i c e s i s considered normal by fanners, whose choices a r e influenced more by the trend i n r e l a t i v e c o t t o n l c e r e a l p r i c e s than by f l u c t u a t i o n s in c e r e a l prices. Since t h e consumer p r i c e index now includes a s i g n i f i c a n t c e r e a l component, t h e p r i c e t o be s t a b i l i z e d i s t h e r e a l p r i c e . A f o u r t h objective, which i s o f t e n overlooked, i s t o ensure t h a t the p r i c e policy does not lead t o highly unstable t a x ( o r p a r a f i s c a l ) receipts. In stabilizing producer prices, the state compensates for the instability of international prices. If taxes on an export product like cotton account for a substantial portion of the budget, public receipts become very unstable. This instability, as the experience of many countries shows, is associated with poor public management. The risk is not only that an entire category of receipts will dry up, which happened when cotton prices collapsed, but that sudden surpluses, which are tricky to manage, will have to be dealt with. Public sector decisions made during boom periods (increases in operating expenditures, in particular increased hiring in the civil service, poorly prepared investments, and so on) were often at the root of the difficulties that led to the need for the current adjustment policies. Mali has not been immune to this type of reaction, as shown by the steep climb in public spending in 1972-73 and 1975-77 after cotton prices rose, although the problem seems to have been less marked than in other countries. In any event. it would seem prudent to reduce this risk to a minimum in the future. Efforts should therefore be made to find a mechanism for stabilizing producer prices that does not transfer the burden of unstable international prices to the national budget. This would suggest that stabilization management should be handled by an agency not funded by the state. 6.2 Assessment of the Current Cotton Pricing System 6.2.1 Brief description of the cotton pricing system The cotton subsector is under tight government control through CMDT, a mixed public-private corporation that oversees all matters related to production and provides related services. CMDT collects, transports, processes. and markets cotton, in addition to providing inputs and extension services and conducting research. It also works closely with village associations in their activities related to cotton growing and outreach. CMDT sets an official producer price for cotton each crop year, along with CWT's budget, which covers all its costs and earnings. Taxation of the cotton subsector, which includes direct and indirect taxes, is complex. For many years tax revenues from this subsector have financed a large share of the national budget. For example, in 1983-84 cotton provided CFAF 9.1 billion ( H a r t m a n 1988) or 14 percent of total government revenue of CFAF 61.9 billion in 1984 (IMF 1987, 20). Following the fall in cotton prices, however, receipts dwindled to almost zero, because of shrinkage of the tax base and government exemptions granted to lessen the subsector's deficit. In addition, there is a producer price stabilization system, which has gone through two phases. Prior to 1983, the system was under the umbrella of the Price Stabilization and Regularization Office (OSRP), which handled various agricultural products (food and export crops). OSRP taxed the cotton subsector but never helped finance it. Under the Mali Sud I1 Adjustment Program a cotton Guarantee Fund was established and managed fl OSRP, specifically to guarantee equilibrium in the subsector, but its financing was limited and funds soon ran out during the 1985-86 price collapse. 6.2.2 Consequences of the .system Before the consequences of the system on prices and public revenues can be examined, the problem of expressing changes in producer prices in real terms has to be dealt with. Since there is no satisfactory p r i c e index t h a t can be used f o r d e f l a t i n g nominal p r i c e s , t h e long-term trend i n r e a l producer p r i c e s i s u n c e r t a i n . The t r e n d i d e n t i f i e d depends l a r g e l y on t h e s t a r t i n g p o i n t of the p r i c e index used f o r converting nominal p r i c e s t o r e a l p r i c e s . Nominal p r i c e s remained constant from 1961-62 t o 1969-70, but because of i n f l a t i o n , which was i n a c c u r a t e l y measured but nevertheless a f a c t i n M a l i during the period, t h e r e a l p r i c e f e l l sharply. The trend i s t h e r e f o r e very d i f f e r e n t depending on whether it i s measured from the e a r l y 1960s o r the e a r l y 1970s. However, t h e e a r l y 1960s a r e not a v a l i d reference p o i n t f o r judging the degree t o which p r i c e changes served a s i n c e n t i v e s since y i e l d s were low. Only a f t e r 1967-68, once a g r i c u l t u r a l extension operations had t r i g g e r e d a marked i n c r e a s e i n y i e l d s , can p r i c e s received by farmers be used a s reference. Another problem i s t h e choice of index. When 1967-68 i s taken a s t h e p o i n t of departure and t h e GDP d e f l a t o r i s used, t h e l i n e a r trend of t h e r e a l p r i c e seems t o slope s l i g h t l y upward ( s e e Table 6-1, column 2 ) . When t h e c o s t - o f - l i v i n g index i s used (combined Lecaillon-Morrison and Poels index, see Section 1.1 i n Chapter 1). it curves somewhat downward (column 3 ) . Even i n the case of t h e s t a b l e o r r i s i n g r e a l p r i c e t r e n d a s c a l c u l a t e d using t h e GDP d e f l a t o r , t h r e e elements must a l s o be taken i n t o account i n a s s e s s i n g t h e r e l a t i v e i n c e n t i v e represented by producer p r i c e s over t h e long run: 1. Nominal c o t t o n p r i c e s i n M a l i a r e lower than i n a l l o t h e r c o u n t r i e s i n t h e f r a n c zone. 2. The r a t i o of c o t t o n p r i c e s t o c e r e a l p r i c e s plunged during t h e 1960s. g e n e r a l l y s t a b i l i z e d during t h e 1970s. and  declined again i n t h e e a r l y 1980s. I t s recovery i s too r e c e n t t o imply a r e v e r s a l of t h e t r e n d . 3. Subsidies f o r i n p u t s have been c u t i n r e c e n t y e a r s , which has lessened t h e i n c e n t i v e s a s s o c i a t e d w i t h c o t t o n p r i c e s . Overall. then. t h e evidence suggests t h a t t h e r e a l producer p r i c e f o r c o t t o n i s r e l a t i v e l y low. As such. any damward t r e n d i n t h e f u t u r e may depress production. a s happened a f t e r t h e short-term f a l l i n p r i c e i n 1982-83. To compare t h e t r e n d i n producer p r i c e s i n Mali w i t h t h a t i n i n t e r n a t i o n a l c o t t o n p r i c e s , t h e r e l a t i o n s h i p between t h e producer p r i c e and u n i t export value expressed i n CFA f r a n c s was c a l c u l a t e d (Table 6-1. column 9 ) . That r a t i o , unstable over t h e s h o r t - r u n , does n o t show a t r e n d s i g n i f i c a n t l y d i f f e r e n t from zero. which should r u l e o u t t h e hypothesis t h a t t h e r e i s no connection between t h e t r e n d s in producer and international prices. A more in-depth a n a l y s i s ( s e e annex 3 ) makes it p o s s i b l e t o l i n k t h e r e a l producer p r i c e and i n t e r n a t i o n a l terms of t r a d e f o r c o t t o n ( o r t h e r e a l i n t e r n a t i o n a l p r i c e ) .I9 The r e a l i n t e r n a t i o n a l p r i c e tended t o r i s e between 1968 and 1977, a f t e r which t h e r e was a downward t r e n d -- i n t e r r u p t e d by a s t e e p climb i n 1984 -- which i n t e n s i f i e d i n 1985 and 1986. For t h e p e r i o d a s a whole, t h e t r e n d was downward, u n l i k e t h a t f o r r e a l producer p r i c e s . The e f f e c t of t h i s downward t r e n d on r e a l producer p r i c e s 19 This p r i c e i s expressed i n a mix of c u r r e n c i e s ( t h e c u r r e n c i e s of Mali's main t r a d i n g p a r t n e r s ) and d e f l a t e d by t h e average consumer p r i c e index f o r t h o s e c o u n t r i e s . seems t o have been r e i n f o r c e d u n t i l 1984-by h e a v i e r t a x e s on t h e u n i t export value. The upward t r e n d i n t h e r e a l producer p r i g e i s t h e r e f o r e due t o t h e d e p r e c i a t i o n of t h e r e a l ' e x c h a n g e r a t e f o r M a l i ' s currency from 1 9 7 6 onward (Mali f r a n c , t h e n CFA f r a n c ) and s i n c e 1985 t o a d e c r e a s e i n t a x e s and lower p r o c e s s i n g and marketing c o s t s . Changes i n t h e r e a l p r i c e should a l s o be examined i n r e l a t i o n t o t h e o b j e c t i v e of s t a b i l i z a t i o n . I n t h e c a s e of c o t t o n i n Mali, a s i n most c o u n t r i e s w i t h a s i m i l a r system, t h e use of a t i e r system f o r nominal p r i c e s went hand i n hand w i t h j n s t a b i l i t y of r e a l p r i c e s , which a l t h o u g h l e s s v o l a t i l e t h a n i n t h e case of i n t e r n a t i o n a l p r i c e s , was n o t n e g l i g i b l e . Thus i f t h e GDP p r i c e index i s used a s a d e f l a t o r , t h e a b s o l u t e mean d e v i a t i o n from t h e 1968-87 l i n e a r t r e n d i s 5.6 p e r c e n t f o r t h e r e a l producer p r i c e and 1 4 p e r c e n t f o r t h e r e a l u n i t e x p o r t v a l u e ( s e e l a s t l i n e of Table 6-1). S t a b i l i z a t i o n was t h e r e f o r e r e a l , b u t only p a r t i a l , w i t h i r r e g u l a r and sometimes inopportune adjustments i n r e l a t i o n t o changes i n the international price; for instance, the highest real price i n the e n t i r e p e r i o d measured w i t h t h e GDP d e f l a t o r was a t t a i n e d i n 1985-86. The system h a s s e v e r a l i m p l i c a t i o n s f o r p u b l i c f i n a n c e . Inasmuch a s p r o c e s s i n g and marketing c o s t s changed p r o p o r t i o n a l l y , t h e l a c k of any c l e a r - c u t t r e n d i n t h e r e l a t i o n s h i p between producer and e x p o r t p r i c e s s u g g e s t s long-term s t a b i l i t y i n t h e t a x a t i o n of t h e c o t t o n s u b s e c t o r . The average t a x r a t e seems t o have been r e l a t i v e l y h i g h , a s shown by v a r i o u s s t u d i e s on t h e nominal p r o t e c t i o n of c o t t o n i n Mali ( L e c a i l l o n and Morrison 1986, 66-67; Hartman 1988, 19-21; P h e l i n a s , Annex 3 of t h i s r e p o r t ) . Was it i n f a c t excessive? I n a l l l i k e l i h o o d , p r o d u c t i o n would have i n c r e a s e d more r a p i d l y had t a x e s been lower and p r i c e s h i g h e r . However, heavy t a x e s d i d n o t d e p r e s s p r o d u c t i o n o r cause i t t o s t a g n a t e . I n any e v e n t , calculation of the optimal average taxation of cotton would require both microeconomic and macroeconomic analysis, which is beyond the scope of this study . A clear drawback of the system as it has operated in the past is that it has resulted in pronounced variability in tax receipts. This happened because there was never a true stabilization fund for cotton that had sufficient resources and was independently managed. Thus the system could not efficiently stabilize producer prices and public revenue simultaneously. 6.3 Desirable Emphases for Reform Given the objectives of cotton pricing policy and the lessons drawn from experience. several principles for reforming cotton pricing can be identified. These principles are consistent with the general focus of the Selingua seminar. although they m y lead to approaches that differ somewhat from those originally envisaged. To meet the objectives of a price policy as detailed in section 6.1, a policy should be established for setting a producer price that reflects changes in the international price but does not fluctuate too widely. Stabilization would be provided by an agency that is not dependent on the national budget. in order to ensure that its activities are not affected by instability of public revenue and that guarantee funds are available. Under a system consistent with these principles. a guaranteed export price would be determined each year on the basis of the trend in the international price for cotton during the previous years. For example. the average international price expressed in constant values for the previous s i x o r seven y e a r s could be used.20 The s t a b i l i z a t i o n fund, which should have a q e r t a i n amount of c a p i t a l a t t h e o u t s e t , would r e c e i v e t h e d i f f e r e n c e between t h e guaranteed o r t r e n d p r i c e and t h e a c t u a l e x p o r t p r i c e ; when t h a t d i f f e r e n c e i s n e g a t i v e , i t would s u b s i d i z e t h e s u b s e c t o r even more. The proposed system i s d i f f e r e n t from a system t h a t g u a r a n t e e s t h e producer only a f l o o r p r i c e . I n a f l o o r - p r i c e system f l u c t u a t i o n s i n t h e i n t e r n a t i o n a l p r i c e above t h a t l e v e l a r e passed on t o t h e producer. The f l o o r - p r i c e approach i s n o t a t r u e s t a b i l i z a t i o n system a s t h e a c t u a l p r i c e can f l u c t u a t e widely. The system may a l s o l o s e a l l p r a c t i c a l v a l u e i f t h e f l o o r p r i c e i s n o t indexed t o consumer p r i c e s o r t o t h e t r e n d i n t h e nominal i n t e r n a t i o n a l p r i c e . I n t h e system proposed h e r e t h e r e a l p r i c e i s t r u l y s t a b i l i z e d , a s it i s linked t o t h e trend i n i n t e r n a t i o n a l p r i c e s . This system a v o i d s t h e impact of a b r u p t changes e i t h e r up o r down i n producer p r i c e s and can t h e r e f o r e h e l p t o r e g u l a t e productioh. I n p a r t i c u l a r , i t makes i t p o s s i b l e t o s e t and announce t h e d e f i n i t i v e producer p r i c e p r i o r t o t h e p l a n t i n g season. T h i s a v o i d s r e a c t i o n s i n supply t h a t run c o u n t e r t o changes i n i n t e r n a t i o n a l p r i c e s , which i n a f l o o r - p r i c e system a r e caused by t h e time l a g between announcement of t h e p r i c e t h a t w i l l a c t u a l l y be p a i d and t h e production i t influences. 20 I n o t h e r words, t h e u n i t e x p o r t v a l u e of c o t t o n e x p r e s s e d i n CFA f r a n c s i s d e f l a t e d by a consumer p r i c e index u s i n g t h e end y e a r a s t h e b a s e , which r e q u i r e s t h a t a s a t i s f a c t o r y consumer p r i c e index be a v a i l a b l e . I f n o t , t h e t r e n d i n t h e nominal i n t e r n a t i o n a l p r i c e can be c a l c u l a t e d by a d j u s t i n g t h e f i g u r e s f o r p r e v i o u s y e a r s t o t a k e account o-f world inflation.  The system proposed here moreover has the advantage of reducing fluctuations in tax receipts as well as in CMDT's profit. As envisaged by the resolutions of the Selingue seminar, CMDT should function as an industrial and commercial company, so that it is motivated to control its costs. The performance contract linking it to the government for several years should clearly distinguish the activities related to cotton production, marketing, and processing (which are to be financed from cotton receipts) from its public s e m i c e activities (which would be financed by state subsidies, possibly from a direct allocation of tax receipts from the cotton subsector). The performance contract should also specify the formula for calculating producer prices (for seed cotton) on the basis of the guaranteed price (for cotton fiber). The formula should reflect a technical equivalence coefficient between cotton fiber and seed cotton, CMDT's normal remuneration for activities associated with cotton, and the desirable level of taxation of the subsector. The present tax Oystem should be simplified. Two systems are suggested which can ensure relatively stable receipts for the public coffers . In .the first system, the government would assess a proportional tax based on the value of cotton fiber production measured at the guaranteed price. Because the guaranteed price is stabilized, the revenue generated by the tax would be relatively stable. The government would also collect a tax on CMDT's profits and its share of dividends on its equity. This source of budget receipts would of course be less stable because it would depend on CMDT's profits and not its turnover, which determines the proportional tax. CMDT's profits would in all likelihood be less stable than the value of production.  In the second system, there would be no proportional tax on the value of production; rather, CMDT's profits and its share of dividends would be taxed. This approach would be more disadvantageous for CMDT and less so for the government than the first system because tax receipts would probably be more variable. The second system has the advantage of avoiding taxes on the value of exports, which is consistent with the logic of other proposals presented in this report. Nevertheless, such a tax can be justified as a substitute for direct taxation of the income of cotton growers. Smooth running of the cotton pricing system requires that the government allow the cotton stabilization fund to operate autonomously. It should be able to keep its funds independent from the public Treasury, ideally in an account with the BCEXO. Such a solution is also justified from a macroeconomic standpoint because it facilitates monetary regulation. Some of the money created as a result of export receipts would be stabilized during periods of rising prices, while additional money would be created as a result of drawings from the account when prices fell. 6.4 Conclusion To recapitulate, the recommendations for the cotton price policy are as follows. To ensure that producer prices reflect the international prices and that they are stable over the short run, it is recommended that a guaranteed export price be set. The past trend for the international price can be used to set this price, which would include the producer price and a reasonable contribution by the subsector to the national budget. To avoid Instability in the level of public receipts and prevent the use of stabilization funds for other purposes, an autonomous stabilization fund should be established and its reserves should be deposited in a BCEAO account.  Table 6-1. P r i c e I n d i c a t o r s f o r Cotton 1966/67 - 1987/88 ' (1) (2) (3) . (4) (6) (6) (7) (8) . (9) Official Real p r i c e Real Net Net Relative U n i t export U n i t export Producer price/kg o f i n 1980 price incomo/ha incomo/ha cotton/miIIet value/kg o f value/kg o f price/unit seed c o t t o n CFAF (CDP i n lE80 i n current cotton f i b e r cotton f i b e r export Year i n CFAF def 1 a t 0 r ) ~ CFAF CFAF~ nA l IF C J00 o r: ;: ;; ; i n CFAF i n 1980 CFAF' value (X) 1966-67 17.0 66.3 67.9 -- -- 2.8 -- -- -- 1967-68 17.0 46.7 66.7 -- -- 2.1 120.0 324.6 14.1 1968-69 17 .O 43.6 67:~ -- -- 2.1 133.4 342.0 12.7 1969-70 1970-71 17.0 22.6 41.1 61.7 68.6 67.3 -- -- -- -- 1.9 2.6 162.0 161.3 a68. 3 370.6 11.2 13.9 1971-72 1972-73 22.6 26.0 48.3 60.6 62.4 66.2 -- -- -- -- 2.6 2.6 169.6 230.2 842.3 464.6 14.1 10.9 1973-74 1974-76 26.0 87.6 47.7 69.6 62.8 72.6 -- -- -- -- 1 .6 2. a 274.1 260.1 623.8 366.0 9.1 16.3 1976-76 1976-77 87.6 87.6 63.6 49.8 68.8 66.8 -- -- -- -- 2.8 2.8 230.7 382.1 829.8 607.6 16.3 9.8 1977-78 46.0 64.4 66.8 84.6 41.7 2.6 342.7 414.1 13.1 1978-79 46.0 49.0 64.7 84.9 88.0 2.4 336.2 366.0 13.4 1979-80 66.0 66.0 66.0 61.8 61.8 2.2 371.9 871.9 14.8 1980-81 66.0 49.6 49.9 86.4 82.8 1 .6 461.3 416.0 11.9 1981-82 66.0 67.8 66.7 46.8 89.9 1.6 466.1 410.2 14.0 1982-83 66.0 68.4 63.0 64.2 44.6 1.6 648.4 460.4 11.9 1983-84 76.0 66.2 66.8 66.8 49.1 1.4 742.4 646.1 10.1 1984-86 76.0 68.4 62.7 61.9 44.1 1.4 671 .O 477.7 11.2 1986-86 86.0 62.8 n.8. 73.8 64.2 -1.6 386.3 284.9 22.1 1986-87 86.0 60.2 n.8. 66.8 46.2 -1.6 436.8 309.4 19.6 1987.-88 460.9 Blopo o f l i n e a r t r e n d 1@67/68 t o 1986/87 +O.7r na -0.O6r +2.0 +0.17 Inatabi ll t y f a c t o r (S) 6.6 na 14.4 14.4 18.4 l Er ~ o s r teal ~ r l c e i n 1980 CFA francs: o f f i c i a l p r i c e d i v i d o d by t h e C DP d e f l a t o r f o r t h e year d u r i n g which t h e c r o p year ends (re; def l a t o r ' i n Table 1-2). Er p o s t r e a l p r i c e i n 1980 CFA: o f f l c i a l p r i c e divided by t h e Lecai l Ion-Morrison consumor p r i c e i n d e r supplunentod by P o e l s (mee notes t o Tabla 1-2). Gross incomo por h e c t a r e ( y i e l d times o f f i c i a l p r i c e ) minus c o s t o f l n b t s . Same as column 4 b u t expressed i n 1980 CFA f r a n c s u s i n g t h e C DP d e f l a t o r (1980 = 100). Based on o f f i c i a l p r i c e s . For m i l l e t , t h e market p r i c e may have d i f f e r e d a p p r e c i a b l y from t h e o f f i c i a l p r i c e , i n p a r t i c u l a r a f t e r 1984-86. Expressed i n 1980 CFA francs u s i n g t h e C DP d e f l a t o r (1980 = 100) f o r t h e year d u r i n g which t h e crop year ends (see d e f l a t o r i n Table 1-2). The i n s t a b i l i t y c o e f f i c i e n t i s measured by t h e absolute mean d e v i a t i o n f r o m t h e 1968-87 l i n e a r t r e n d . + S i g n i f i c a n t a t 6% o r g r e a t e r . Sources: (1) (2) Lecai l Ion and Morrison 1986 and BCEAO; (3) Lecai l Ion and Morrison 1986 and Poels; (4) (6) (6) CMDT, as presented i n Hartmann 1988, 16 and Annex I V ; (7) (8) CMDT.  References Banque Centrale des Etats de 1'Afrique de l'0uest (BCEAO). Various Years. Notes d'information et statistiques. Bonjean, C. 1988a. "Contraintes et eficacite de la politique des prix agricoles: exemples de la Cbte d'Ivoire, du Kenya et de Madagascar: Dissertation, University of Clermont, France. Bonjean, C. 1988b. 'Rble des facteurs externes et de la politique economique dans l'evolution des prix reels payes au producteur: exemple du prix du cafe en Cbte dVIvoire, au Kenya et B Madagascar." Study prepared for the International Labor Organization. Centre d9Etudes et de Recherches sur le Developpement International, Clermont, France. Dittus, P. 1987. Structural Adjustment in the Franc Zone: The Case of u. Washington, D.C.: World Bank. Government of Mali, Ministry of Cooperation. 1983. "Evaluation des filihres coton et mars au Mali." Paris. Government of Mali, Ministry of Cooperation. 1986. "Analyse'economique de la filiere coton." Paris. Government of Mali, Ministry of Cooperation. 1987. "Le coton en Afrique . de l'ouest et du centre." Etudes et Documents. Paris. Guillaumont, P. 1988. "L'action des politiques macro~conomiques sur les prix reels payes aux producteurs agricoles dans les pays A faible revenue: note methodologique." Clermont, France: Centre d9Etudes et de Recherches sur le Developpement International. Guillaumont, P., and S. Guillaumont. 1988. "La politique de prix pour les cultures d'exportation dans les pays en developpement: le problgme de la stabilisation." Clermont, France: Centre dVEtudes et de Recherches sur le Developpement International. Hartmann, A. 1988. Le secteur coton au Mali: sa viabilitk economique et financiere: un calendrier de reformes. Annex VII. Washington. D.C.: World Bank. International Monetary Fund. Various Years. International Financial Statistics. Washington, D.C. International Monetary Fund. 1987. Recent Economic Developments. Washington, D.C.: IMF. Lecaillon, J., and C. Morrison. 1986. Politiques economiques et performances agricoles: Le cas du Mali, 1960-1983. .OECD Development Center Papers. Paris. Levine, K.T. 1986. "Trends in Malian Agriculture Production." Washington, D.C.: World Bank. Majd, N. 1987. "A Comparison of Tax Systems in Sub-Saharan Africa." Washington, D.C.: World Bank, Country Economics Department. 'Mali: la fraude contre le developpement." Africa International No. 207 (July 1988). Marodon, R. 1988. 'Contraintes et efficacite de la politique des prix agricoles: Exemples du Niger, du Rwanda, et du Senegal." Dissertation, University of Clermont, France. Plane, P. 1988. "L'evolution tendancielle du taux de change." - In P. and S. Guillaumont, eds.. Strategies de developpement comparees: Zone franc et hors zone franc. Economica. Poels, J. Evolution trimestrielle des prix A la consommation A Bamako, Republique du Mali. Shalizi, Z., and L. Squire. 1986. Tax Policy for Sub-Saharan Africa. Washington, D.C.: World Bank. Stryker, J.D. et al. 1987. Incentive System and Economic Policy Reform in - Mali. AIRD. World Bank. 1987a. 'Mali: Public Sector Economic Management." Washington, D.C.: World Bank, Africa Region. World Bank. 1987b. World Development Report 1987. Washington, D.C. World Bank. 1987c. World Tables, 4th ed. Washington, D.C. World Bank. 1988a. Public Enterprise Sector Adjustment Program 1988. Washington, D.C. World Bank. 1988b. World Development Report 1988. Washington, D.C. Annex 1. Simplified Simulation of the Different Types of Turnover Tax in Mali Annex 2. Simulation of Effective Direct Income Taxes for Different Types of Companies Annex 3. Determinants of the Real Producer Price for Cotton in Mali (by Pascale Phelinas)  SIMPLIFIED SIMULATION OF TBE DIFFERENT TYPES OF TURNOVER TAX IN MALI This annex examines the fiscal bias introduced by the tax on businesses and services ( U S ) . Two types of bias are examined: that which results from the degree of the company's vertical integration and that which results from the breakdown of sales between the domestic market and exports. The analysis shows that reform of the U S can eliminate the bias due to the degree of integration for companies selling on the domestic market. but only a value added tax will solve the problem for exporters. Current Situation Assuming a Uniform IAS of 20 percent Companies selling on the domestic market Case 1: Company purchasing its physical inputs and using outside services: Intermediate consumption, before taxes Outside services (excluding transportation) before taxes Value added 80 Total turnover, before taxes CFAE 230 IAS paid by the company: (230-100) x 0.2 CFAF 26 IAS borne by the product: 26 + (150 x 0.2) = 26 + 30 = CFAF 56 Case 2: Company with greater vertical integration, producing its own services Intermediate consumption, before taxes CFAF 100 Value added 13 0 Total turnover, before taxes CFAF 230 IAS paid by the company: (230 - 100) x 0.2 = CFAF 26 IAS borne by the product: 26 + (100 x 0.2) = CFAF 46 Conclusion: Because of less than full deductibility for taxes already paid, the product manufactured by company 2 pays less tax than that manufactured by company 1. Case 3: Fully integrated company, producing its own physical inputs and services U S paid by the company and borne by the product : 230 x 0.2 = CFAF 46 Conclusion: The product manufactured by company 3 pays the same taxes as that manufactured by company 2 (because intermediate consumption in case 2 is tax deductible). Exporting Companies Case 1: The company is exempted from the taxes it would have to pay if it sold the product on the domestic market (i.e., CFAF 26). U S paid by the company: CFAF 0 U S borne by the product: CFAF 30 Case 2: The company is exempted from the tares under the same conditions as company 1 (i.e., CFAF 26). IAS paid by the company: CFAF 0 IAS borne by the product: CFAF 20 Case 3: The company is exempted from its entire tar liability (i.e., CFAF 46). U S paid by the company: CFAF 0 U S borne by the product: CFAF 0 ~onclusioa: The greater the vertical integration of exporting companies, the lighter their tar burden. In other words, even if intermediate consumption ia tax deductible for exporting companies, there is still a bias in favor of the most integrated firms. Situation Assuming Outside Semices Can Be Daducted, U S Remaining at 20 Percent Companies selling oa the dcmestic market Case 1: US paid: (230 - 150) r 0.2 = CFAF 16 U S borne by the product: CFA 16 + 30 = CFAF 46 Case 2: U S paid (230 - 100) x 0.2 = 26 U S borne by the product: 26 + 20 = CFAF 46 Case 3: U S paid and borne by product: 230 x 0.2 = CFAF 46 Conclusion: The products bear the same tar burden in each company because the IAS is no longer a cascade tar, with an inherent bias against small companies. Erporting canpanics Case 1: The company is exempted from the taxes that it would have to pay if it sold its product on the domestic market (i.e., CFAF 16). U S paid by the company8 CFAF 0 U S borne by the product: CFAF 30 Case 2: The company is exempted from the taxes it would have to pay if it sold its product on the domestic market (i.e., CFAF 26). U S paid by the company: CFAF 0 IAS borne by the product: 20 Case 3: The company is exempted from all taxes borne by the product (i.e., CFAF 46). . U S paid by the company: CFAF 0 U S borne by the product: CFAF 0 Conclusion: For exporting companies. broadening the range of tax deductions does not change the magnitude of the tax burden and still provides an advantage for the most vertically integrated companies. Asslrming a VAT of 20 Percent is Substituted for the US C q a n i e s selling on the domestic market Case 1: Tax borne by the product: 230 x 0.2 = CFAF 46 Tax paid (reflecting deduction for taxes previously paid): CFAF 46 - 30 CFAF 16 Case 2: Tax borne by the product: 230 x 0.2 = CFAF 46 Tax paid: 46 - 30 = CFAF 16 Case 3: Tax borne and paid: 230 x 0.2 = CFAF 46 Conclusion: The product gives rise to the same tax burden for all companies. Exporting companies: The three types of companies now enjoy a tax exemption of CFAF 46. The tax burden is therefore zero. The companies can either deduct any tax paid on domestic sales or seek a CFAF 30 refund in the first case or CFAF 20 in the second. No taxes are paid in the third case. Conclusion: The tax burden borne by the product is identical (zero) regardless of the company's degree of vertical integration. The benefit for exporters in comparison to companies selling domestically is the same (CFAF 46) regardless of the size of the company.  SIMULATION OF EFFECTIWZ DIRECT INCOME TAXES FOR DIFFERENT TYPES OF COMPANIES Corporation Income CFAF 100 Tax on industrial and comercia1 profits (BIC) 452 - -45 55 Tax on securities (IRVM) 182 General income tax (IGR) 502 (max. rate)* -22.6 Net income CFAF 22.5 Overall tax rate: (100 - 22.6)/100 = 77.51 * With the average IGR rate of 15 percent, the IGR paid is CFAF 6.8 and net income is CFAF 38.3, making the overall tax rate: (100 - 38.3)/100 161.72 Partnership Income CFAF 100 Tax on industrial and commercial profits (BIC) 252. General income tax (IGR) 502 (mar. rate)* Net income CFAF 37.5 Overall tax rate: (100 - 37.5)/100 = 62.52 * With the average IGR rate of 152, the IGR paid is 11.3 and net income is CFAF 63.7, making the overall tax rate: (100 -63.7)/100 = 36.32.  ANNEX3 DE- S OF TEE REAL PRODUCER PRICE FOR COTTON IN HhtI by Pascale Phelinas September 1988  Table of Contents Introduction 1. Background of the Cotton Subsector and Producer.Prices 1.1 Structure of the Cotton Subsector 1.2 Producer Prices 1.2.1 Nominal Price 1.2.2 Real and Relative Prices 2. Determinants of the Real Producer Price for Cotton 2.1 External Factors: International Terms of Trade 2.1.1 Unit Export Value of Cotton 2.1.2 Value of the Dollar in Relation to the Currencies of Partner Countries 2.1.3 Inflation in Trading Partner Countries 2.1.4 International Terms of Trade for Cotton 2.2 Domestic Factors 2.2.1 Marketing of Cotton 2.2.2 Fiscal and Parafiscal Policy 2.2.3 Exchange Policy 2.3 Summary  Introduction Cotton is important to Mali's economy, accounting for 16 percent of agricultural production and 40 percent of the country's receipts in f~rei~n'exchange. Mali has a comparative advantage in cotton growing; its production costs are far below those in most other African producer countries (Iiartmann 1988: Government of Mali 19871. Until the cotton crisis in 1985186 and 1986187 when world prices plunged. Mali's competitiveness in cotton was indisputable. When the crisis seriously undercut the profitability of that activity, the government responded by adopting a number of adjustment measures to reduce costs across the board in its subsector. Because cotton is vital to the country's economy. Mali has always sought to stimulate cotton growing. and the producer price policy has played no small role in this respect. A number of studies have shown that production decisions by cotton growers are based primarily on the price announced before the planting season (see Levine 1983: Lecaillon and Morrison 1986). The real price ultimately received by producers depends on a set of factors affecting both nominal prices and those of the goods purchased by the producer--exchange rate'. marketing and processing costs, taxation, domestic inflation, and international prices. Moreover, the government's room for maneuvering in the setting of producer prices is constrained by world prices. Bec'ause Mali accounts for a relatively small share of the world market, the price at which the fiber is sold is a totally exogenous variable. . This study seeks to show the respective influence of exogenous factors and economic policy factors on real producer prices. The first section describes the cotton subsector in Mali and changes in the real and relative prices for cotton over the last 20 years. The analysis of the macroeconomic determinants of the real price is developed in the second section. 1. Background of the Cotton Subsector and Producer Prices Efforts to develop cotton growing began before independence on Office du Niger land and in the Mali Sud region under the' aegis of the French Textile Development Company (CFDT). Since that time. the cotton subsector has undergone a number of refonns. 1.1 Structure of the Cotton Subsector Initially, cotton activities were primarily the responsibility of CFDT: cotton production on Office du Niger land was very marginal and ceased in 1971. The Haute Vallee Operation was launched in the early 1970s to develop crops in its project area, including cotton. Cotton production never accounted for more than 5 percent of total production. During the 1970s the authorities* efforts to develop cotton took new directions. Farmer infrastructure was stressed. activities involving cereals were begun. and the first village associations were established. In 1975 the Malian Textile Development Company (CMDT) succeeded CFDT. Its objective is to "promote cotton production and in general agricultural development and a higher standard of living for farmers in cotton-growing areas" (Ministry of Production, Republic of MalilCMDT Agreement, June 1985). Since 1980 CMDT has directly supplied growers with inputs (fertilizer, insecticides, farm equipment). It also provides technical assistance, acts as an exclusive purchasing agent for the seed cotton sold by village associations, and handles the processing of cotton into fiber. Most fiber is exported. The remainder is sold to local spinning mills, the Malian Textile Company (COMATEX), and the Textile Industry of Mali (ITEMA). On-site processing of seed cotton is handled by two refineries, Vegetable Oil Products Company of Mali (SEPOM) and Cotton Oil Refinery of Mali (HUICOMA). Until November 1986 the Malian Export-Import Company (SOMIEX), a state-owned company, had a monopoly on cotton exports. Since then, CMDT has been authorized to export cotton directly and SOMIEX has played only a minor role. SOMIEX had oversight solely for cotton exports under international trade agreements and was totally eliminated from the subsector in July 1988. Before 1983 SOMIEX owned the cotton delivered by CMDT and received all export receipts. Earnings were split evenly between the Treasury and SOMIEX and used to finance subsidies for staple products. Since the start of the second Mali Sud rural development project in 1983-84, all financial flows in the cotton subsector have been controlled by the Office of Price Stabilization and Control (OSRP), which manages the Cotton Account at the Development Bank of Mali (BDM) and the Cotton Guarantee Fund. All receipts from cotton exports are paid into the Cotton Account. The account is used to finance all costs borne by CMDT in marketing the fiber and to replenish the Guarantee Fund. The account also pays for a number of taxes (IAS, CPS) and funds the repayment of loans made under the Mali Sud development project. (See Figure A-1 for a simplified flowchart of the cotton subsector). The Guarantee Fund, held by the Central Bank of West African States (BCEAO) is actually a stabilization fund. Its resources come from the balance in the Cotton Account and STABEX payments in the event of losses on cotton exports. 1.2 Producer Prices Until 1986 Mali followed a policy of administered prices. Since then, the system has been partially dismantled. Most prices are now based on market forces (margins are nevertheless controlled), with the exception of prices for products such as cotton that are considered strategic by the government .  Figure A - 1 . S i m p l i f i e d F l w c h a r t f o r t h e Cotton Subsector =? Farmers Ginning ( I Sales of Cotton fiber C O M ~ ~ I rn 1 I I / v / * Guarantee , / W Fund (bCUO) b= &I QS Refund 9 a l i Sud I1 Dev. Project, Loan Repayments 1.2.1 Nominal p r i c e Producer p r i c e s f o r c o t t o n a r e s e t by d e c r e e and p u b l i s h e d a t t h e s t a r t of t h e crop y e a r . A l l p a r t i e s involved i n t h e c o t t o n s u b s e c t o r p a r t i c i p a t e i n t h e d e t e r m i n a t i o n of t h i s p r i c e through t h e Technical Committee of t h e National P r i c e and Income Commission. The committee proposes producer p r i c e s , i n p r i n c i p l e on t h e b a s i s of t e c h n i c a l s t u d i e s of production c o s t s and t h e i n t e r n a t i o n a l p r i c e . I t s f i n d i n g s a r e submitted t o t h e Council of M i n i s t e r s , which makes t h e f i n a l d e c i s i o n . P r i c e changes can be s p l i t i n t o two major p e r i o d s : -- U n t i l 1974 producer p r i c e s were very s t a b l e . The average annual i n c r e a s e was 3.6 p e r c e n t . I n 1974 t h e ' i n t e r n a t i o n a l commodities markets were hard h i t by t h e petroleum c r i s i s . P r i c e s tumbled and t h e c o u n t r i e s producing those c o m o d ' i t i e s i n c r e a s e d t h e i r producer p r i c e s s u b s t a n t i a l l y . I n Mali t h e p r i c e of c o t t o n soared by 50 p e r c e n t . Subsequent i n c r e a s e s were l e s s s p e c t a c u l a r : 20 p e r c e n t i n 1977 and 18 p e r c e n t i n 1982. I n 1984 new t e n s i o n s a r o s e on t h e i n t e r n a t i o n a l c o t t o n market, s p u r r i n g a s t e e p climb i n p r i c e s . The producer p r i c e i n Mali r o s e by 31 p e r c e n t between t h e 1983-84 and 1985-86 crop y e a r s . A t t h e beginning of t h e 1985-86 crop y e a r t h e producer p r i c e was s e t a t CFAF 85 p e r kilogram. Because of t h e s h a r p drop i n i n t e r n a t i o n a l p r i c e s i n 1985 and 1986, t h e r e has been no i n c r e a s e s i n c e t h a t time and none i s envisaged f o r t h e 1988-89 crop year. However, t h e p r i c e has been maintained. The average annual growth r a t e between 1974 and 1988 was 6.7 percent. Cotton growers i n Mali a r e p a i d l e s s than o t h e r A f r i c a n producers (Government of Mali 1987,801, a s i s shown by t h e following comparison ( i n CFA f r a n c s p e r kilogram): Cameroon Niger Cdte d ' I v o i r e Benin Togo Burkina Faso C e n t r a l A f r i c a n Republic Chad Senegal Mali 1.2.2 Real and . r e l a t i v e p r i c e s Mali has no d a t a t h a t s a t i s f a c t o r i l y t r a c k changes i n consumer p r i c e s . The o f f i c i a l index, prepared by t h e s t a t i s t i c a l o f f i c e s , r e f l e c t s only t h e p r i c e s of f o o d s t u f f s . As t h e r e was no b e t t e r a l t e r n a t i v e , t h e d e f l a t o r used h e r e i s t h e i m p l i c i t GDP d e f l a t o r index ( s e e Chapter 1 of main r e p o r t ) . Even i f t h a t index poorly r e f l e c t e d t h e c o s t of l i v i n g i n r u r a l a r e a s , i t can be reasonably assumed t h a t i t s t r e n d i s s i g n i f i c a n t . Figure A-2 shows t h r e e subperiods i n t h e r e a l producer p r i c e f o r cotton: -- From 1967 t o 1974 i n c r e a s e s in t h e nominal p r i c e were small and l a r g e l y o f f s e t by i n f l a t i o n . -- I n 1975 and 1977 t h e r e a l p r i c e index r e t u r n e d t o i t s 1970 l e v e l . However, from 1978 onward t h e i n c r e a s e i n t h e general p r i c e l e v e l weakened t h e purchasing power of c o t t o n growers and r e a l p r i c e s tended t o f a l l u n t i l 1981. -- From 1982 onward, t h e curve again began t o swing upward and t h e t r e n d from 1981 t o 1987 shows an upturn. For t h e period from 1967 t o 1987 a s a whole, t h e r e a l p r i c e f o r c o t t o n does n o t show any c l e a r t r e n d (average i n c r e a s e o f 0.3 p e r c e n t a year) . For r e l a t i v e p r i c e s it can be seen from Figure A-2 t h a t changes i n t h e r e l a t i o n s h i p of c o t t o n p r i c e s t o t h o s e f o r o t h e r crops d i d ' n o t favor cotton. With r e s p e c t t o groundnuts, c o t t o n r a p i d l y l o s t i t s r e l a t i v e appeal a t t h e end of t h e 19608, but recovered somewhat d u r i n g t h e 1970s. The end of t h e p e r i o d was marked by a f u r t h e r d e t e r i o r a t i o n i n t h e r e l a t i v e cottonlgroundnut p r i c e . The comparison of c o t t o n and c e r e a l p r i c e s i s more complex. O f f i c i a l producer p r i c e s f o r m i l l e t , sorghum, and maize a r e an u n r e l i a b l e i n d i c a t o r of p r i c e s a c t u a l l y received by f a n n e r s . The p r i v a t e market f o r c e r e a l s has always been a c t i v e i n Mali and handles most t r a n s a c t i o n s . However, t o t h e e x t e n t t h a t CMDT handled c e r e a l s t r a n s a c t i o n s i n i t s a r e a of j u r i s d i c t i o n , i t can be assumed t h a t t h e o f f i c i a l p r i c e was e f f e c t i v e ? ! guaranteed t o producers. As regards paddy, t h e O f f i c e du Niger has always marketed most of t h e production from i t s a r e a s a t t h e o f f i c i a l p r i c e . The e a r l y 1980s were marked by d e r e g u l a t i o n of t h e c e r e a l s market. M i l l e t and sorghum were d e r e g u l a t e d i n t h e 1981182 crop y e a r but paddy only i n 1986187. Deregulation has a p p a r e n t l y sparked an i n c r e a s e i n producer prices. The t r e n d s t h a t can be seen from Figure A-2 show a very c l e a r d e t e r i o r a t i o n i n t h e p r i c e of c o t t o n r e l a t i v e t o c e r e a l s f o r t h e p e r i o d a s a whole. The d e c l i n e was g r e a t e r i n t h e 1960s. Between 1970 and 1980, r e l a t i v e p r i c e s remained f a i r l y s t a b l e . Beginning i n 1980, c e r e a l p r i c e s i n c r e a s e d more s t e a d i l y t h a n d i d c o t t o n p r i c e s , e s p e c i a l l y i f t h e market p r i c e f o r c e r e a l s i s taken i n t o account.  Figure A - 2 . Cotton .Prices i n Mali. 1 9 6 0 - 8 6 A - R e l a t i v e cotton/ groundnut p r i c e 2.0 / h Relative cotton/ 1 Relative cotton/ millet-sorghum cotton/umize price . 0 1 I I 1963 1970 19eo Real price index 1970 = 100 Nominal p r i c e index 1970 = 100  2. Determinants of t h e Real Producer P r i c e f o r Cotton The r e a l p r i c e received by c o t t o n growers f o r t h e i r product depends on both e x t e r n a l and domestic f a c t o r s . While i t can be assumed t h a t t h e i n t e r n a t i o n a l p r i c e plays a preeminent r o l e , a number of economic p o l i c y measures, p a r t i c u l a r l y those involving t r a d e , f o r e i g n exchange, and t a x a t i o n p o l i c i e s , can have a s i g n i f i c a n t impact on t h e r e a l producer price. A simple model can be used t o l i n k t h e r e a l purchase p r i c e t o those e x t e r n a l and domestic f a c t o r s and t o measure t h e impact of each on producer purchasing p0wer.l The r e a l producer p r i c e can be expressed a s follows : where Pp = nominal producer p r i c e index z = index of t h e c o e f f i c i e n t of equivalence between t h e farm-gate p r i c e and t h e i n t e r n a t i o n a l p r i c e 8 = nominal p r o t e c t i o n c o e f f i c i e n t index tw = index of i n t e r n a t i o n a l terms of t r a d e f o r c o t t o n re* = r e a l e f f e c t i v e exchange r a t e index PC = implicit G D P d e f l a t o r index. The equation y i e l d s t h e r e l a t i o n s h i p between t h e r e a l p r i c e index, e x t e r n a l f a c t o r s ( t w ) , t e c h n i c a l f a c t o r s ( 2 ) . and economic p o l i c y f a c t o r s ( d and re*) . 2.1 E x t e r n a l Factors: I n t e r r u t i o a a l Terms of Trade The i n t e r n a t i o n a l terms of t r a d e f o r a product can be d e f i n e d a s i t s i n t e r n a t i o n a l value expressed i n a basket of c u r r e n c i e s i n r e l a t i o n t o a world i n f l a t i o n i n d i c a t o r . The i n t e r n a t i o n a l terms of t r a d e f o r c o t t o n can thus be broken down i n t o t h r e e elements: t h e border p r i c e i n d o l l a r s , t h e value of t h e d o l l a r i n r e l a t i o n t o t h e basket of c u r r e n c i e s of t h e major t r a d i n g p a r t n e r c o u n t r i e s , and i n f l a t i o n i n those p a r t n e r c o u n t r i e s . Changes i n t h e s e t h r e e f a c t o r s a r e b r i e f l y discussed below. 2.1.1 Unit e r p o r t v a l u e of c o t t o n I n t e r n a t i o n a l t r a d e in c o t t o n accounts f o r some 30 p e r c e n t of world production. The United S t a t e s dominates t h e market w i t h 30 p e r c e n t of world e x p o r t s . The USSR i s t h e second l a r g e s t e x p o r t e r , w i t h about a 15 p e r c e n t share. I n r e c e n t years t h e People's Republic of China has become 1 The methodology (which i s d e t a i l e d i n an attachment a t t h e end of t h i s annex) was developed a t t h e Center f o r S t u d i e s and Research on I n t e r n a t i o n a l Development by P. Guillaumont, C . Bonjean, and R. Marodon. (See i n p a r t i c u l a r . Marodon 1988 and Bonjean 1988). a p l a y e r , w i t h about 6 p e r c e n t of world e x p o r t s . Mali accounts f o r a very small s h a r e of t h e market (Government of Mali 1987. 70-71). A f t e r a long p e r i o d of s t a b i l i t y , world c o t t o n p r i c e s began a r e l a t i v e l y s t e e p climb i n 1973 ( s e e Figure A-3). I n j u s t one y e a r t h e i n t e r n a t i o n a l p r i c e jumped 64 p e r c e n t . The market l e v e l e d o f f between 1 9 7 4 and 1976, w i t h t h e b o r d e r p r i c e s t a b i l i z i n g a t about USSl,OOO/ton. I n 1977, t h e r e was a n o t h e r s t e e p r i s e i n t h e f.0.b. p r i c e (37 p e r c e n t ) . Cotton p r i c e s remained very f a v o r a b l e u n t i l 1984, when t h e t r e n d r e v e r s e d . I n 1985 and 1986 p r i c e s c o l l a p s e d , p r i m a r i l y because of an enormous i n c r e a s e i n world production and c o t t o n e x p o r t s from China. I n 1987, c o t t o n p r i c e s recovered markedly, although they a r e s t i l l below t h e average f o r t h e 1977-84 period. 2.1.2 Value of t h e d o l l a r in r e l a t i o n t o t h e c u r r e n c i e s of p a r t n e r countries To t h e e x t e n t t h a t t h e i n t e r n a t i o n a l p r i c e f o r c o t t o n i s denominated i n d o l l a r s , t h e p r i c e of c o t t o n expressed i n t h e b a s k e t of c u r r e n c i e s of Mali's p a r t n e r s depends on t h e v a l u e s of t h e U.S. currency on f o r e i g n exchange markets. The d o l l a r tended t o weaken i n t h e 1970s, a l t h o u g h t h e r e were s e v e r a l b r i e f upswings, p a r t i c u l a r l y i n 1974 and t h e n i n 1976 and 1977. A t t h e s t a r t of t h e 1980s t h e v a l u e of t h e d o l l a r began an a s t r o n o m i c a l r i s e and peaked a t a record l e v e l i n 1985. I t plunged i n 1986 and 1987, marking a " r e t u r n t o normalcy" on t h e exchange markets. 2.1.3 Inflation in trading partner countries I n f l a t i o n i n M a l i ' s t e n main p a r t n e r c o u n t r i e s (from which i t i m p o r t s ) was c a l c u l a t e d by t h e geometric mean of t h e consumer p r i c e i n d i c e s i n t h o s e c o u n t r i e s . The r e s u l t i n g index i s an i n d i c a t o r of world i n f l a t i o n p e r c e i v e d by Mali. The average annual growth i n consumer p r i c e s i n M a l i ' s t r a d i n g p a r t n e r s was 9 . 1 p e r c e n t between 1967 and 1987. There was a c o n s i d e r a b l e i n c r e a s e i n 1974 (18.3 p e r c e n t following t h e f i r s t o i l shock. The impact of t h e second o i l shock was more moderate (12.3 p e r c e n t i n c r e a s e i n 1 9 8 0 ) . The end of t h e p e r i o d was marked by a c l e a r slowdown i n world i n f l a t i o n ( s e e Figure A-3) . 2.1.4 I n t e r n a t i o n a l terms o f t r a d e f o r c o t t o n Measured over t h e p e r i o d under c o n s i d e r a t i o n (1968-87). t h e t r e n d i n i n t e r n a t i o n a l terms of t r a d e i s downward. This t r e n d became more a c u t e i n 1978, w i t h a b r i e f i n t e r r u p t i o n i n 1984 and e s p e c i a l l y a f t e r 1985. For about t h e l a s t t e n y e a r s Mali has t h u s had t o f a c e r e l a t i v e l y disadvantageous p r i c e c o n d i t i o n s on t h e i n t e r n a t i o n a l markets. Table A-1 shows t h a t changes i n t h e e x p o r t p r i c e e x p r e s s e d i n d o l l a r s l a r g e l y e x p l a i n t h e movements i n t h e r e a l i n t e r n a t i o n a l p r i c e o r i n t e r n a t i o n a l terms of t r a d e f o r c o t t o n . However, u n t i l 1980 world i n f l a t i o n and t h e r e l a t i v e weakening of t h e d o l l a r had an a d v e r s e e f f e c t on t h e terms of t r a d e . These two f a c t o r s s i m u l t a n e o u s l y h e l d back i n c r e a s e s i n c o t t o n p r i c e s and i n t e n s i f i e d d e c l i n e s .  Figure A-3. Changes in the Determinants of the Real International Price for Cotton (base year = 1970) 161. Real international Unit export value o f cotton i n U.S. U .S. dollars in relation to the currencies o f partner countries '"I  Tab1e.A-1. Determinants of the Real International Price for Cotton. 1969-87 ( i n chain i n d i c e s ) Year Pw Pwc re / r tw Notes: Pw: Exportpriceofcottonindollars. Pwc: I n f l a t i o n in partner countries. relr: Change i n the currency basket in r e l a t i o n t o the d o l l a r . tw: Real international price f o r cotton. Source: Tables A-9 and A-10.  From 1981 to 1985 the slowing of world inflation and a sharp rise in the value of the dollar were responsible for a pronounced recovery in . the real international price for cotton. Beginning in 1985. however, a fall in the value of the dollar intensified the decline in prices. 2.2 Domestic Factors The level at which the producer price for cotton is set depends in part on the price at which the fiber can be traded on the international market. The exchange rate, marketing and processing costs, and the tax burden borne by the cotton subsector also help determine the producer price. These factors are examined in the following sections. 2.2.1 Marketing of cotton Prior to November 1986 the marketing of cotton was overseen by CMDT and SOMIEX. The primary collection and processing of cotton are still handled by CMDT. SOMIEX was responsible for export operations, but that function is now the responsibility of CMDT. Until 1983-84 CMDT and SOMIEX based price schedules on an estimated operating account. The price schedules had to cover all factors in the cost. The procedure for their approval was the same as that for producer prices, and the final decision was taken by the Counc'il of Ministers. This system vas changed in 1983-84, and the various costs of market intervention activities are established in the budget estimates approved by OSRP. Several comments need to be made about the changes in the line . items of the schedules and budgets (Tables A-6 and A-7 at the end of this annex) . There was a sharp increase in CMDT's selling price in 1983-84 and 1984-85 (55 percent in two years). This surge in the factory-gate price was due primarily to higher ginning costs resulting from allocations to provisions for the construction of a new plant . 2 As a result, the f .o.b. cost increased 50 percent in the same period. From 1984-85 to 1987-88 the cost of fiber f.0.b. port of shipment went down from CFAF 642/kilogram to CFAF 440/kilogram. As of the 1985186 crop year, the government adopted a number of measures to bring the before- tax cost of local cotton down to a level compatible with the world price. 2 As CMDT is a public enterprise, all fixed assets are owned .by the state. CMDT's accounting system therefore has no line items for depreciation. Allocations to provisions are used to replace equipment.  As part of those measures. CMDT'was to substantially reduce its collection and ginning costs along with those for f.0.b. preparation. With the exception of ginning costs, the budget estimates (Tables A-6 and A-7) do not show a significant decrease for those line items between 1984-85 and 1987-88 and 1984-85 (see Table A-2) is excluded from total ginning costs, ginning costs per se actually increased between 1984-85 and 1987-88 in nominal and real values. Table A-2. Cotton Ginning Costs in CFfil? Francs per Ton in Mali. 1983184 to 1987188 Category 1983 1 84 1984185 1985186 1986187 1987 I 88 Allocation to provisions 61,503 73.864 Ginning costs 49,617 47,730 51,757 44.140 71,117 Total ginning costs 111,120 121,594 51,757 44,140 71,117 Source: Table A-7. The other measures to reduce the before-tax price involved a reduction of input subsidies, elimination of CMDT's remuneration, and postponement of repayments under the Mali Sud I1 project. Moreover, the difficulties of measuring taxes caused a bias in the calculation of actual processing and marketing costs. For some line items it was not always possible to isolate the amount of taxes paid. It can be reasonably assumed that until 1985-86 the bias was fairly constant and the before-tax price variation significant. However, after 1985-86. the' fall in processing and marketing costs is overestimated to the extent that it reflects some of the tax exemptions granted to the cotton subsector. As a whole for the period from 1972 to 1988, marketing and processing costs represented a relatively large share of the f.0.b. price (between 30 and 40 percent until 1983).  Real marketing and processing costs rose an average 3.5 percent per year between 1972 and 1987 (see below). The market intervention costs of CMDT and SOMIEX increased in real terms up to 1985 and then began to decline in 1986 and 1987 . 3 2.2.2 Fiscal and parafiscal policy The taxation of the cotton subsector is rather complex. For the sake of simplicity, domestic taxes will be distinguished from those on exports. Domestic taxes. The cotton subsector pays a large number of domestic taxes, including the following: -- Tax on businesses and services (US). Under the accounting system used by CMDT and SOMIEX, the U S is not posted separately for each line item (transportation, ginning, financial costs, earnings, etc.) in the price schedules and budgets. They therefore include the U S . -- Municipal and crop protection taxes, respectively CFAF 100 and CFAF 1,000 per ton of seed cotton. The figures are given in fiber equivalent. -- Business pennit (patente) and'land taxes. These two taxes do not appear directly on the price schedules and therefore could not be isolated. The same is true for the contribution to the National Housing Fund, the contribution for research, and the interstate road transportation tax. -- Tax on industrial and commercial profits (BIC), applicable to CM)TVs activities as a whole. As such, it was not possible to identify the amounts for cotton operations. The tax benefits granted to the cotton subsector since 1985-86 affected all of these taxes, with the exception of the U S . However, the U S on earnings was included in the exemptions. As the tax component could not be properly isolated from processing and marketing costs, the impact of the exemptions in terms of lower taxes could not be wholly reflected in the books; taxes were therefore overestimated beginning with 1985-86. Before that, they were - 3 Data are from Tables A-3 and A-8. systematically underestimated. However,.to the e x t e n t t h a t t h e t a x system was not changed s u b s t a n t i a l l y , the trend i s s t i l l s i g n i f i c a n t . Direct and i n d i r e c t export t a x e s . Cotton exports a r e s u b j e c t t o t h r e e main taxes : -- Tax f o r export s e r v i c e s (CPS), which i s 3 percent of t h e export value. This t a x was e s t a b l i s h e d i n 1974 t o finance the debt s e n r i c e . Payments a r e made t o the Debt Amortization Fund. -- The export t a x , which was gradually reduced and then eliminated i n 1981-82. -- Theoffice o f P r i c e StabilizationandControl(0SRP)tax. which was introduced i n 1972 on two products, c o t t o n and f u e l s , and abolished i n 1981182. I n d i r e c t export taxes represent the d i f f e r e n c e between the c o s t f.0.b. p o r t of shipment, including export t a x e s , and t h e f.0.b. p r i c e a c t u a l l y received. Before t h e Mali Sud I1 p r o j e c t , export earnings were s u b j e c t t o a s p e c i a l t a x ( t a x c o n j o n c t u r e l l e ) t h a t was paid t o the Treasury. The p o r t i o n kept by SOMIEX was used t o subsidize consumer s t a p l e s . Since 1983-84 payments have been made d i r e c t l y t o t h e Cotton Account. P r o t e c t i o n and t a x a t i o n . Changes in t h e nominal p r o t e c t i o n c o e f f i c i e n t (shown i n Figure A-4) i n d i c a t e t h a t c o t t o n production was very heavily taxed (from 40 percent t o more than 60 percent)-between 1972 and 1984. During t h e years i n which t h e world p r i c e f o r c o t t o n was p a r t i c u l a r l y high, taxes were r e l a t i v e l y heavier than during periods when export p r i c e s were low. Thus, i n 1973, 1974, and 1977, through taxes and p a r a f i s c a l charges, t h e public c o f f e r s received about 45 percent of t h e a c t u a l f . 0 . b . p r i c e ; producer p r i c e s accounted f o r only 28 percent on average ( s e e Table A-3). I n 1983 and 1984 producers received about t h e same share of t h e i n t e r n a t i o n a l p r i c e (on average 29 p e r c e n t ) , whereas taxes were r e l a t i v e l y lower than in 1973 and 1974 (abut 25 percent of t h e f . 0 . b . p r i c e ) owing t o a surge i n marketing and processing c o s t s , which accounted f o r 43 percent o t h e export p r i c e i n 1983 and 50 percent i n 1984. Conversely, i n years when t h e world p r i c e s f e l l , a s i n 1972, 1975, and then from 1978 t o 1980, producers received a s much a s 40 percent of t h e border p r i c e (38 percent on average) thanks t o lower p a r a f i s c a l charges, which accounts f o r some 20 percent of t h e f.0.b. p r i c e . Since 1985, t h e p r o t e c t i o n c o e f f i c i e n t has been nearing 1, reaching a record l e v e l of 1.57 i n 1986. The c o t t o n c r i s i s forced t h e government t o g r a n t s i z a b l e t a x exemptions t o t h e c o t t o n subsector so t h a t i t could maintain i t s competitiveness, enabling producers t o keep more than h a l f t h e export price.  Table A-3. Relationship o f the I n t e r n a t i o n a l P r i c e Expressed i n CFA t o the Current Exchange Rate rnd t h e Nominal Producer P r i c e (in C FA francs por kilogram and percentages) Category 1972 1973 1974 1976 1976 1977 1978 1979 1980 1981 1982 1983 1984 1986 1988 1987 1988 1 . Average export p r l c e 180 230 274 230 271 882 848 886 872 481 486 871 As % of export p r l c a 100 100 100 100 100 100 100 100 100 loo loo loo 2 . Taxes 28 20 11 As % of export p r l c e 8 4 2 3 . Tmx payments t o Cotton Account 6 70 81 80 46 1 8 87 86 69 118 8a 29 As % of export p r t c a 3 80 80 18 17 85 11 11 16 28 18 4 4 . Marketing and procarslng coots 67 62 88 88 107 97 160 140 142 170 191 484 As % of export p r l c a a8 27 80 86 89 26 44 42 88 87 4I 66 6 . Producer p r l c a 145 171 197 As % of export p r l c a 81 37 29 6 . Farm-gat. oqulvmlant of export p r l c a (1 d n u r 4) 103 168 191 147 164 286 198 196 280 291 274 237 7 . Noml qs l protoctlon c o e f f l c l a n t (6/6) 0.60 0.62 0.88 between fmrm-gmk mnd border p r l c e r (611) Oi64 0 . 7 8 0 . 7 0 0.64 0.61 0.76 0.66 0.68 0.62 0.83 0.59 0.86 -- - Source: Calculstlonr bared on data I n Tables A-6, A-6, and A-7. Figure A-4. Changes in the Nominal Protection Coefficients for Cotton in Mali, 1972-88  2.2.3 Exchange p o l i c y The r e a l e f f e c t i v e exchange r a t e f o r t h e CFA f r a n c i n Mali was c a l c u l a t e d from t h e b i l a t e r a l exchange r a t e s and t h e cumulative i n f l a t i o n d i f f e r e n t i a l between Mali and i t s main t r a d i n g p a r t n e r s : Belgium dlIvoire France Italy Japan 1.5Z 21.1Z 44.9Z 2.2z 1.7Z Fed. Rep. of United United Netherlands Germany Kingdom Senegal States 2.21 9.1Z 2.51 11.11 3.72 The weighting was based on t h e share of each country i n Mali's o f f i c i a l imports in 1 9 7 5 . From Figure A-5 it can be seen t h a t t h e r e were two d i f f e r e n t periods i n t h e l e v e l of t h e r e a l e f f e c t i v e exchange r a t e : -- U n t i l 1976 t h e r e a l e f f e c t i v e exchange r a t e hovered n e a r i t s equilibrium l e v e l . There was a s l i g h t tendency f o r it t o r i s e , e s p e c i a l l y i n 1968 and 1969 and again in 1972 and 1973. -- Beginning in 1977 t h e C FA f r a n c i n Mali began t o weaken; t h e index of t h e r e a l e f f e c t i v e exchange r a t e l o s t 1 0 percentage p o i n t s between 1977 and 1981. The currency began a s h a r p e r d e c l i n e i n 1982, which continued u n t i l 1987. The cumulative i n f l a t i o n d i f f e r e n t i a l i s l a r g e l y behind t h e changes i n t h e r e a l e f f e c t i v e exchange r a t e . Uhereas u n t i l 1975 p r i c e s increased much f a s t e r i n Mali than i n i t s t r a d i n g p a r t n e r s , s i n c e 1 9 7 6 t h e r e has been a d i s t i n c t e a s i n g of i n f l a t i o n i n Mali i n r e l a t i o n t o i t s t r a d i n g p a r t n e r s . Ultimately, u n l i k e t h e experience i n o t h e r c o u n t r i e s , a f i x e d p a r i t y helped maintain t h e value in l o c a l currency of each kilogram of c o t t o n exported. I f t h e e q u i l i b r i u m l e v e l of t h e exchange r a t e i t i s rt assumed t o be t h e 1970 f i g u r e , t h e spread between t h e f . 0 . b . p r i c e expressed i n C FA f r a n c s a t t h e o f f i c i a l exchange r a t e and t h e f . 0 . b . p r i c e converted i n t o C F A f r a n c s a t t h e r e a l exchange r a t e can be considered an i m p l i c i t production subsidy. The p r o t e c t i o n c o e f f i c i e n t must then be a d j u s t e d t o r e f l e c t t h e d e c l i n e 'in t h e r e a l exchange r a t e , i n o r d e r t o provide a b e t t e r i n d i c a t i o n of r e a l t a x a t i o n l s u b s i d i z a t i o n . The c a l c u l a t i o n and i n t e r p r e t a t i o n of t h e p r o t e c t i o n c o e f f i c i e n t a d j u s t e d f o r t h e overevaluation o r underevaluation of a given currency give r i s e t o p a r t i c u l a r l y d e l i c a t e problems i n t h e case of an a g r o i n d u s t r i a l crop w i t h high processing c o s t s . W e p r e f e r r e d t o avoid g i v i n g r e s u l t s h e r e t h a t a r e difficult t o interpret.  Figure A-5. Real E f f e c t i v e Exchange Rate for the CFA Franc i n Mali and Cumulative I n f l a t i o n D i f f e r e n t i a l Between Mali and the Main Trading Partners. 1969-87 Cumulative i n f l a t i o n d i f f e r e n t i a l 1CD 90 I I I I I I I I 5 1970 1980  It is nevertheless clear that from 1976 to 1984 taxation of the cotton subsector as measured by the unadjusted nominal coefficient, is overestimated. From 1985 onward the positive effects of tax exemtpions for the producer substantially strengthened the effect of the "depreciatedn CFA franc in Mali. The major trends for the factors affecting the real producer price of cotton have just been analyzed. The method given in Attachment 1 to this annex can be used to assess the relative impact of each of these factors on the real price. That impact is measured by using chain indices calculated from simple indices for each factor. For a given year, the chain index is equal to the simple index for that year as compared to the simple index for the preceding year. Thus, the effect of each factor on the real price as well as any offsetting effect between them can be analyzed for each year. The following conrments relate to the chain indices shown in Table A-4. 1. The impact of the international terms of trade for cotton on the real product price was considerably softened by the taxation policy for the cotton subsector. In point of fact, positive changes in the real price often corresponded to a worsening of the international terms of trade owing to compensatory movements in the protection coefficient. The tax and parafiscal policy thus played a key role in determining real producer prices. The measures taken generally made it possible to maintain producer prices when international prices fell off substantially; in this respect 1975, 1978, 1979, and especially 1985 and 1986 are particularly significant. Conversely, the sudden jump in the terms of trade for cotton in 1973-74, 1976-77, and 1983-84 was largely offset by an increase in indirect taxes. For the period 1972-87 as a whole, the changes in the real international price for cotton were not favorable to producer prices; the trend in the international terms of trade was in fact negative for the period (see Figure A-6). However, the unfavorable changes in the international terms of trade were partially offset by a steady lessening of the tax burden of the cotton subsector. 2. Analysis of the impact of the domestic marketing policy on the real producer price is a more delicate matter. Because changes in the z coefficient are linked to movements in the international price, they do not measure increases or decreases in marketing and processing costs. Thus in 1973-74 and 1977 the increase in z reflects that of the border price; it does not reflect lower marketing costs. However, from 1982 to 1985 the steep increase in marketing costs was primarily  Table A - 4 . Determinants of Real Producer Prices for Cotton i n Mali, 1972-87 ( i n chain i n d i c e s ) Year . P~ z 0 tW re * Note s : Pp : Real producer price f o r cotton. z : Coefficient of equivalence between farm-gate price and border price. 8 : Nominal protection c o e f f i c i e n t . tw : Real international price f o r cotton. re* : Real e f f e c t i v e exchange r a t e . Source: Table A - 1 1 . responsible for the drop in z. In 1986 and 1987, when world prices plummeted, the before-tax cost price fell. However, we know that the increase in z is overestimated for those two years (see above) and its positive impact on the real price was less in actuality than is shown in Table A-4. In sum, marketing and processing costs between 1972 and 1980 had a negative effect on real producer prices. 3. The fact that the real effective exchange rate changed very little suggests a priori that the exchange policy had a marginal impact on the domestic terms of trade for the producer. However, over the long run, despite the deterioration in the international terms of trade and the penalizing impact of trade policy and taxation of the sector, the real price for cotton was maintained (or even slightly increased) between 1972 and 1987. Producer purchasing power increased, primarily because of a weakening of the currency in real terms. 2.4 Conclusion The economic policy followed by most African countries has often been blamed.for the continent's poor agricultural performance. This study sought to illustrate the impact of certain economic policy measures on the real prices for cotton in Mali, along with the role played by exogenous factors. The main findings clearly show that trade, tax, and exhange policies are powerful instruments that can cancel out or strengthen the impact that changes in the international terms of trade for cotton have on producer purchasing power. Throughout the period under consideration, the deterioration in the international terms of trade blocked increases in producer prices. Pressure from this factor was particularly marked during the cotton crisis in 1985-86. Trade policy largely curbed increases in the real prices for cotton. Reacting to the 1985-86 plunge in world prices, the government formulated a Crisis Resolution Plan (Plan de Sortie de la Crise) to reduce costs in the sector. It nevertheless appears that CMDT did not generate substantial savings on the costs of its market intervention activities, meaning that there is still considerable scope for improving competitiveness in the sector. Taxes and parafiscal charges, used to stabilize producer prices, substantially held down producer purchasing power until 1984. After that point, depressed prices on the international markets led the Malian authorities to considerably limit all taxation of the cotton subsector. The measures they took were an important factor in maintaining the real price of cotton.  F i n a l l y , the exchange p o l i c y was an important economic p o l i c y v a r i a b l e - o v e r the long run. Given the rather penalizing impact of the other f a c t o r s on the r e a l price of cotton, only depreciation of the r e a l e f f e c t i v e exchange rate made i t p o s s i b l e f o r that price t o be maintained.  Figure A - 6 . Determinants of the Real Producer Price for Cotton in Mali, 1972-87 (base year = 1972) C o e f f i c i e n t o f equivalence between farmgate p r i c e and border p r i c e ( 2 ) I n t e r n a t i o n a l cl?r?s o f t r a d e a l I Real e f f e c t i v e 1 exchange r a t e I 4 a I -- ndn 7984  Table A-5. Producer P r i c e s f o r Main Crops i n M a l i , 1960-89 ( i n CFA f r a n c s p e r kilogram) Year Paddy ~ i l l e t l ~ o r g h u m ~ Maize cottonb round nuts^ Note: Crop y e a r n-n+l i s c o n s i d e r e d t o be c a l e n d a r y e a r n + l ( e . g . , c r o p y e a r 1967-68 i s n o t e d a s 1968). The p r o d u c e r p r i c e h a s been d e r e g u l a t e d s i n c e 1983-84. a Before 1967 t h e f i g u r e s a r e f o r p r i c e s from r e g i o n s w i t h s u r p l u s e s . A f t e r 1967 p r i c e s a r e s t a n d a r d throughout t h e t e r r i t o r y . b First quality. c Unshelled groundnuts. Source: OSCE, from DNAE.  Table A-7. P r i c e Schedule. -- Budget. f o r E x p o r t Cotton F i b e r , CYDT, 1971/72 t o 1987/87 ( I n CFA franc. par ton) Category 1971/72 1972/73 1973/74 1974/76 1976/76 1976/77 1977178 1978/79 1979/80 1980/81 Purchase p r i c e 24,260 24,476 24,363 36,876 37,000 37,000 43,000 46,000 66,000 66,000 Market cost. 860 886 1,263 1, coo 1,673 1,861 1,723 1,319 1,443 2,362 Cpl l e c t l o n c o s t Road maintenance I n p u t oubsldlas 2,000 2,oOO 6,667 6,760 6,367 6,600 8,988 9,000 6,000 8,260 Extenalon 3,000 3,162 6;066 6,067 6,946 6,078 6,078 4,466 4,071 7,316 CFDT t e c h n l c a l support -- -- -- 1,260 1,260 1,260 1,260 1,260 1,260 1,260 M a l i Sud Ip r o j e c t repayment -- -- -- -- -- -- 2,806 2,788 600 600 Recurrent charger under Ma1 1 Sud I p r o j e c t -- -- -- -- -- -- -- -- -- -- Seed c o t t o n f a c t o r y - g a t e cost p r l c o (In f i b e r P equl va 1ent) 86,626 88,330 104,360 138,006 144,989 147,624 179,830 182,338 194,078 210,038 I W W OInnlng 16,704 16,827 20,820 16,000 20,023 22,726 27,346 22,308 24,488 36 ,'308 Inourance 1,666 1,340 2,167 1,201 1,207 1,899 1,982 1,269 1,883 2,036 Bank I n t a r o s t 3,266 6,116 7,414 6,000 9,286 9,611 19,013 9,663 8,988 9,981 CMDT remuneratl on Municipal t a r Crop protection t a r -- -- -- -- -- -- 2,646 2,660 2,681 2,660 OSRP t ar 6,000 6,000 17,600 -- 6,000 7,600 7,600 7,600 7,600 7,600 F ibar factory-gate cost p r l c e 111,403 116,880 162,619 164,469 189,660 197,862 249,449 236,383 261,469 280,814  Tablo A-7. P r i c e Schedules -- Budgetr f o r Export Cotton Fiber, CYDT, 1971/72 t o 1987/87 (continued) (In C FA f r r n c r par ton) Category 1981/82 1982/83 1983/84 1904/86 1986/86 1986/87 1987/88 Purchrro p r l c o 66,000 66,000 74,700 76,000 84,818 84,763 84,779 Yrrkot c o r t r 2,362 2,8711 8,187 8,880 2,860 8,144 4,808 Collection c o r t 6,272 9,434 11,972 12,930 11,888 111,270 11,838 Rord m r l n k n r n c o 166 167 263 272 206 41 666 Input rubrldlor 12,084 12,088 14,911 21,676 6,008 2,492 -- Extonrlon 7,816 11,612 16,940 11,876 12,601 9,874 9,869 CFDT techn lc r l r u p p o r t 1,260 1,260 1,260 1,260 1,260 1,260 1,260 Y r l l Sud Ip r o j e c t roprymont 600 6,000 8,717 11,814 Exrnpt Exunpt Exrnpt Recurrent chrrgor under Mali Sud Ip r o j e c t -- -- -- 12,889 11,299 8,069 1,966 Seod cotton f r c t o r v - a r k c o r t p r l c o ( I n flb;r- equi volont) 249,167 276,670 886,062 400,202 1140,660 307,789 1102,776 sinning 81,116 60,000 111,120 121,694 61,767 44,140 71,117 Inrurrnco 8,028 828 1,820 2,164 1,726 2,466 943 Bank I n t o r o r t 11,446 16,644 19,812 22,247 12,977 16,1149 14,779 CUD1 r r n u n o r r t l o n 16,081 27,871 27,780 81,676 -- -- -- Munlclprl t r x 262 268 266 266 Exampt Exunpt Exrnpt Crop p r o t o c t l o n t r x 2,626 3,222 2,668 2,660 Exrnpt Exunpt Exrnpt OSRP trx 7,600 -- -- -- -- -- -- Flbor f a c t o r y - g r k cort prlco Source: O f f i c e o f P r i c e S t r b i l i z r t i o n and Control.  A-35 Table A-8. Cotton Fiber Exports, 1968-88 Quantity Value Unit Value Year in tons in millions in CFAFl ton in USS/ton of CFAF Source: Central Bank of West African States and Office of Price Stabilization and Control.  Table A-9. Price Indexes f o r . C o t t o n i n Mali, 1967-87 (base year = 1970) Date PC re* re r PP Notes: PC: I m p l i c i t G DP index. re*: Real e f f e c t i v e exchange r a t e index. r e : E f f e c t i v e exchange r a t e index. r: Index of t h e nominal exchange r a t e r e l a t i v e t o t h e d o l l a r . Pp: Index of t h e r e a l producer p r i c e f o r c o t t o n . For t h e method of c a l c u l a t i n g r e and re* see Table 1-1 of t h e main report. Source: and IMF, CERDI d a t a bank, based on World Bank ( 1 9 8 7 ~ ) I n t e r n a t i o n a l Financial S t a t i s t i c s .  Table A-10. Determinants of the International Terms of Trade for Cotton, 1967-87 (base year = 1970) Year Pw Pwc relr tw Notes: Pw: FOB price index for cotton expressed in dollars. Pwc: Average consumer price index for main trading partners. re: Effective exchange rate index. r: Index of the nominal exchange rate relative to the dollar. tw: Index of the international terms of trade for cotton. Source: Based on data in Tables A-8 and A-9.  Table A-11. Determinants of Real Producer Prices, 1972-87 (base year = 1972) Date PP z 8 tw re* Notes: Pp: Real producer price for cotton. z: Coefficient of equivalence between the farm-gate price and the border price. 8: Nominal protection coefficient. tw: Real international price for cotton. re*: Real effective change rate. Source: Based on data from preceding tables.  METHOD FOR ANALYZING THE IMPACT OF THE DETERMINANTS OF REAL PRODUCER PRICES~ Construction of the model The real price of the product in question should be broken down into the factors directly representative of the country's economic policy (called domestic factors) and exogenous factors contingent upon the international environment (external factors). Let Pp = nominal producer price P'w = international price for the product in dollars Pw = international price for the product expressed in the local currency (Pw = P'wlr) r = nominal exchange rate in relation to the dollar (absolute). The product must be "tradable", so that for each year its international price can be broken down. An analysis of the production and marketing process makes it possible to distinguish Pp = the share corresponding to the producer price C = the share corresponding to marketing, transportation, and processing costs for the product T = the share corresponding to taxes and subsidies under the tax and parafiscal policy affecting the sector. These components have to be consistent with the following identity : Pw*. the farm-gate equivalent of the international price in local currency, is therefore determined by Two economic policy indicators can then be shown: z = F%v*/Pw and 0 = PpIPw* (3) where z represents the coefficient equivalence between the producer price and the border price, taking into account the marketing, transportation, and processing costs of the product, and 8 is the nominal protection coefficient . 4 Method devised by P. Guillaumont 1986; Bonjean 1988a; and Morodon 1988.  The following r e l a t i o n s h i p i s then e s t a b l i s h e d between t h e producer and i n t e r n a t i o n a l p r i c e s : = w ~ p / ~ z l 8 and PplP'w = ( z e 8 ) I r . (4) The i d e n t i t y i s v e r i f i e d i f t h e parameters a r e expressed i n an index i n r e l a t i o n t o a base year ( i n d i c e s a r e noted by ^ ) : The r e a l producer p r i c e can then be expressed a s follows: A A A A A A A Pp/Pc l 100 = [ ( z l 8) I r ] l ( P 9 w /PC) , A where PC i s the consumer p r i c e index ( i t i s assumed t h a t i t i s a s a t i s - f a c t o r y i n d i c a t o r of r u r a l consumer p r i c e s o r a t l e a s t t h a t changes i n t h e . r u r a l index do not d i f f e r markedly from t h e index f o r t h e e n t i r e c o u n t r y ) . The expression P'w1r.P~ can be considered t o be t h e q u o t i e n t of two elements, twlre*: A A A A A A A A A t w = (P'wlr) 100 = (Pwclre) and re* = r e l (PcIPwc), (7 A where tw i s t h e r e a l i n t e r n a t i o n a l p r i c e index f o r t h e product. o r i t s ' i n t e r n a t i o n a l terms of t r a d e , ' expressed in t h e l o c a l currency ( a concept very s i m i l a r t o t h e commn concept of n e t border terms of t r a d e ) , Pwc i s t h e average consumer p r i c e index in t r a d i n g p a r t n e r c o u n t r i e s (averaged using a s t r u c t u r e i d e n t i c a l t o t h a t used t o c a l c u l a t e t h e e f f e c t i v e exchange r a t e ) , and re* i s t h e r e a l e f f e c t i v e exchange r a t e index, c a l c u l a t e d from t h e nominal e f f e c t i v e exchange r a t e ( r e ) and t h e r a t i o between t h e consumer p r i c e i n d i c e s i n t h e country i n question and i t s trading partners. A The index t w can be w r i t t e n a s follows: The i n t e r n a t i o n a l terms of t r a d e f o r t h e product thus depend on the export p r i c e i n d o l l a r s , consumer p r i c e s i n t r a d i n g p a r t n e r c o u n t r i e s , and a monetary index, a l l t h r e e of which a r e c l e a r l y e x t e r n a l v a r i a b l e s . A l l t h e above i n d i c a t o r s taken t o g e t h e r y i e l d t h e following equation : . A A A A A A PplPc l 100 = ( z 8 l t w ) I re* 100 Impact of t h e f a c t o r s on r e a l p r i c e s The impact of t h e f a c t o r s on r e a l p r i c e s cannot be measured d i r e c t l y using t h e a r i t h m e t i c equation given above.  That equation expressed in logarithms is as follows: A A A - - A A A P CLO^ z + LO^ 0 + Log tw LO^ P ~ ~ = re* ~ o g 2Log 100 (10) and hence, . A A A A - A A d Log Pp/Pc = d Log z + d Log 8 + d LO^ t w d LO^ re* (11) The elasticities just shown above are hence all equal to 1 or -1, reflecting the fact that an increase or decrease of xL in one of the variables results in a proportional change in the real price index. An annual analysis must be made of price fluctuations. For each year, the impact of a given factor must be examined as well as any offsetting effect among variables. That impact can be quantified by calculating chain indexes based on simple indexes prepared during the identification of the real price determinants. The chain index for each year is derived by comparing the gross index for that year to the index of the preceding year. The magnitude of the increase or decrease in relation to the preceding year is then apparent for each variable being studied. Thus a chain index equal to 110 for year n means that the variable in question increased 102 between n-1 and n. The advantages of impact analysis in this form are twofold: -- The identity of the relationship between the real price and technical, international, and macroeconomic factors is maintained. For each year, if ( z ) is noted on the chain index for the variables involved, w e still have: n n A A f 2 2 n A (PpIPc) 100 = ( z 8 tw) I re*) 1/100 -- As a breakdown shows the annual impact of the variables, possible subperiods can be identified or at least groups of years for which one of the factors had an overriding impact on the others and must clearly be isolated as the key determinant in the decline or recovery of the real price.