Mali - Country assistance strategy

Docment of The World Bank FOR OMCaL USE ONLY Report No. 13746-MLI MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF MALI DECEMBER 1, 1994 Country Operations Divsion Western Africa Department Africa ReRion T|hk document has a restricted distribudtion and may be nsed by recipients only in the perforanuce of their official duties. Its contents may not otherwise be disclosed without World Bank- authorization.  Ihe Lut Country Assstance Sbtategy for Mal was dscussed by the Executive Diretors on November 12, 1992 CURRENCYEOLqVALEtAf Cuffmcy Unit = CFA Franc (CFAF) USS1.00 - CFAF 528 (October 13, 1994) CFAF 1 milion - USS 1,718 (October 13, 1994) SYSllEMf OF WVEIGHTrS AUND bMESURE: bMEURC I mete(m! = 3.28 fixt (ft) 1 kiometer (m) = 0.62 miles (mi) 1 squre kilomeWtr (on 2) 0.39 square mile (sq mi) I ehuare (ha) 2.47 acres (a) 1 metrc ton (t) 2,205 pounds (b) I iilgram (kg = 2.2046 pounds (lb) FISCAL YEAR Januazy 1 - Docember 31  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS AEF Afnca Enterprise Fund AGETIPE Agence d'Execution des Travaux d'Interet Publique AGSECAL Agricultural Sector Adjustment Credit AIDS Acquired Immune-Deficiency Syndrome APDF African Project Development Fund ASIP Agricultural Sector Investment Program CAS Country Strategy Paper CFA Communaute Financiere Africaine CFAF CFA Franc CMDT Compagnie Malienne pour le developpement des fibres textiles COMATEX Compagnie Malienne des Textiles CPPR Country Portfolio Performance Review DMT Divisional Management Team ED-SECAL Education Sector Adjustment Credit ERC Economic Recovery Credit ESAF Enhanced Structural Adjustment Facility ESW Economic and Sector Work GDP Gross Domestic Product GEF Global Environment Facility GREA Groupe Regional d'Eau et d'Assennissement / Regional Water and Sanitation Unit HUICOMA Huilerie Cotonniere du Mali HIV Hunan Immunodeficiency Virus IDA International Development Association ID Institutional Development IEC Information, Education, Communication IFC International Finance Corporation IMF International Monetary Fund ITEMA Industrie Textile du Mali MIGA Multilateral Investment Guarantee Agency NEAP National Environmental Action Plan NGO Non Governmental Organization NRM Natural Resources Managernent NTB Non tariff Barrier PAEP Population Action and Investment Plan PEIDP Public Enterprise Insttutional Development Projet PER Public Expenditure Review PESAP Public Enterprise Sector Adjustment Program PFP Policy Framework Paper PHRWS Population, Health, Rural Water Supply PNVA Projet National de Vulgarization Agricole PST Projet Sectoriel de Transport SAF Special Adjustment Facility SAL I Structural Adjustment Credit I SEPAMA Soci&t6 d'Exploitation des Produits Arachidiers du Mali SIKA Societe Industrielle de Karite SOMACI Societe Mamadou Sada Diallo and Freres (SOMACI) SOMISY Societe Miniere de Syama SPA Special Program of Assistance for Africa SSA Sub-Saharan Africa STD Sexually Transmitted Desease This document has a restricted distribution and may be used by recipients only in the performance of their |official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TA Technical Assistance TABABUS Transportation service in Bamako UEMOA Union Economique et Monetai}e Ouest-Africaine UNDP United Nations Development Program WID Women in Development  MALI COUNTRY ASSISTANCE STRATEGY (CAS) Table of Contents Page No. A. Historical Perspective and Recent Economic and Social Developments .....1 Political Background ....................................................... 1 Poverty Profile .......................................................2 Progress on the Reform Agenda ..............................................2 B. External Environment .......................................................5 C. Government's Development Objectives and Policies ................. ................6 D. Bank Group's Country Assistance Strategy and Operational Program ..... 10 Objectives of the CAS ...................................................... 10 Operational Program: FY95-99 (Base Case Scenario) . .......... 12 Economic and Sector Work . ................................................. 17 Portfolio Implementation ................ 18 IFCMIGA ........ 19 Aid Coordination ...................... 20 E. Agenda for Board Discussion ....................... 21 ANNEXES Summary of Objectives and Outputs 22 Annex 1 MALI - Selected Indicators of Bank Portfolio Performance and Management Annex 2 MALI - Bank Group Fact Sheet, FY91-99 IBRD/IDA Lending Program, FY95-99 MALI - IFC and MIGA Program, FY78-94 Annex 3 MALI - Priority Poverty Indicators MALI - Resources and Expenditures Annex 4 MALI - Key Economic Indicators Annex 5 MALI - Key Exposure Indicators Annex 6 Status of Bank Operations in MALI / Statement of IBRD Loans and IDA Credits Sumnuary of IFC Investments in Mali   MEMORANDUM OF THE PRESIDENT OF THIE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR MALI A. Historical Perspective and Recent Economic and Social Developments 1. On the economic front, 1994 represents a turning point for Mali. The devaluation in early 1994, offers the country the possibility to focus the development agenda on long term efforts to combat poverty. It provides a chance to reap the benefits of Mali's relatively low wages and comparative advantage in agriculture to generate economic growth and increased incomes for its impoverished population. Yet a number of structural measures and investments need to be undertaken to overcome underlying constraints to sustained growth. This Country Assistance Strategy (CAS) discusses how IDA could contribute to this challenge, building on the guiding principles outlined in the Economic Recovery Credit of February 28, 1994. The previous CAS was discussed by the Executive Directors on November 12, 1992. Political Background 2. As with many other West African countries, Mali has a legacy of socialist orientation with a dominant public and parapublic sector in all areas of the economy. Moussa Traor6, who in 1968 overthrew the democratically elected Government of Modibo Keita, ruled until 1991 when his repressive military dictatorship was overthrown in a popular uprising led by students and civil servants. A short and peaceful transition to democracy took place under Col. A. Toumani Toure, through a broad consultative process. Democratic elections ushered in the Third Republic under President Alpha 0. Konare in June 1992. The Government has grappled for a long period to find the right balance between restoring the authority of the State, considerably weakened in the face of growing power of several interest groups, and continuing to promote the democratization process. There have been three Government reshuffles since June 1992 and the present Govemment has begun to make progress in establishing this balance. Yet the political climate remains fragile and the smoldering Tuareg rebellion in Northern Mali remains a source of concern and instability.  -2- MALT: a uirofile Large and fraile land 1.2 milon km2 landlocked country in the Western Sawel. Sahelian zone of some 400,000 km2 of low (100400 nm) and igh vanable rainfall is suitable only for pastoral activity, arbe land limited to 25% of land ur. : Declining soil fertility, deforstaationan Overgrazing of aglad. Rapid population growth 9 million, growing at 3.2% anuaily, implying a dobling of poplao eery 22 years. 75% of the populton In runl areas and urban populatiotn growing at nearly 5% a year. Sigrificant potental for eonomic growth Important ailta (coton, rice, cereals) and livestoc production capacity. Large irtion potntial of the Niger nver delta. Gold, phosphate, diamonds eosits; only gold ac Import yeloic power poiof the Sengal River (Manantali) : Social indicators amonpt the worst in the World I n 1994 UNPP raing f lHuman: ResourcsDevelope, Mali rankedS 161 out of 73 countries.: Mal I W one of:the Ave countries in theworlddthat hav.the lowetleivfadultliteracy (below 201) and the leant e0veloped pria 000cainov (age boutO)Oi L& wcpectancy of 48 year high infant mortalityrlate 0I130 for tvey1000 live: birth. Poverty Profile 3. Poverty in Mali is widespread, a fact that is borne out by the country's extremely poor human resource indicators. As in most sub-Saharan African (SSA) countries, poverty in Mali is predominantly a rural phenomenon; the Assessment of Living Condtions (1993) estimated that about 86% of the poor are in rural areas, whereas only 75% of the population is rural. Nevertheless, the rapid erosion of traditional solidarity networks in urban areas is beginning to create pockets of poverty among particularly vulnerable groups (the urban unemployed, female heads of households, children under five, and the aged) in urban areas. There are also considerable regional disparities in the extent of poverty with the northern regions generally worse off than the southern regions. Economic reform policies implemented since the late 1980s, with a strong focus on agricultural reforms, and the recent devaluation have had a positive impact on rural incomes but the fundamental constraints of insufficient growth, and lack of access to basic social services need to be addressed to make a lasting impact on poverty reduction. Progress on the Reform Agenda 4. Internal Adjustment. The stabilization and structural reform programs that Mali has implemented since the 1980s were defined within the then-prevailing exchange rate policy constraints of the CFA zone. These reforns sought to improve the competitiveness of the economy by reducing domestic costs and price levels below those of competitors and trading partners so as to generate sustained growth needed to help raise standards of living and alleviate poverty. The reforms included a series of specific macroeconomic measures designed to achieve: (i) greater fiscal and mopetary discipline; (ii) containment of the public sector wage bill; (iii) restructuring of expenditures in favor of social sectors, and of operations and maintenance spending; (iv) simplification of the regulatory framework governing economic activities; (v) liberalization of domestic trade and prices; and (vi) disengagement of the State from certain public  -3 - enterprises and the strengthening of the management of enterprises remaining in the Government's portfolio. Sectoral reforms have aimed at increasing the efficiency of agriculture; raising primary enrollment ratios while bringing the growth of secondary and higher education in line with trends in labor market demands; extending access to primary health care services through greater community participation in primary health care delivery and management; and reducing the high fertility rate. 5. The reforms implemented so far, have yielded some encouraging results. Private sector and market forces started playing a more significant role in the economy with the elimination of key distortions and the removal of the more significant constraints to private sector participation. The overall fiscal deficit declined from 12% of GDP in 1991, to 9.6% in 1993. Despite declining terms of trade due largely to falling world market cotton prices, the current account balance improved marginally from 14.1% of GDP in 1991 to 13.8% of GDP in 1993. Inflation was kept in check at under 3% per annum on average. 6. Despite these improvements, the economy's lack of competitiveness limited the rate of growth necessary to increase per capita incomes. Real GDP growth, though increasing from an annual average of less than 2% over the first half of the 1980s, to about 3% between 1988 and 1993, was still insufficient to offset the country's high rate of population growth. Per capita income in 1993 was estimated at US$300, one of the lowest in the world. The continued depreciation of currencies of competitor countries in the region and Mali's worsening terms of trade further aggravated this lack of competitiveness. Gains in restoring macroequilibria were equally fragile. Savings and investment performance did not improve, and little progress was made in diversifying exports and in expanding the revenue base which depends heavily on external trade. On the sectoral front, while impressive progress was made in the implementation of agriculture reforms, little progress was achieved in the education sector. In health, family planning efforts remained weak, making only limited progress in reducing fertility rates. 7. Comprehensive Adiustment. Effective January 12, 1994, in close consultation with other member countries of the CFA zone, Mali changed the fixed parity of the CFA franc from 50 to 100 CFAF per FF thus dramatically deepening its adjustment strategy. The devaluation provides a real chance to restore the economy's competitiveness, lay the foundation for sustained longer term growth, and focus the reform agenda on longer term development challenges. This parity change and the accompanying measures spelt out in the fourth year Policy Framework Paper (PFP) (distributed to the Board on February 25 1994), constitute the centerpiece of Mali's macroeconomic framework for the 1994-96 period. The key accompanying measures include improved short term macro-economic management and the intensification of structural and sectoral reforms (particularly in the social sectors) to address long-term development constraints. This strategy is expected to promote private sector development, which should be the engine to future growth. 8. Economic performance in the first six months following the devaluation has been impressive on several fronts. The real effective exchange rate depreciated by about 40% (between December 1993 and June 1994), the overall fiscal deficit on a commitment basis and excluding grants was CFAF 40.9 billion compared to a target of CFAF 77.2 billion and inflation is estimated at 26% compared to the projected level of 35%. However, customs revenue performance has  been significantly below program targets (roughly 30% lower), due in part to weak customs administration and continued customs fraud. The impact of this has been exacerbated by a shift in import sources in favor of neighboring CFA countries, imports from which are subject to substantially lower tariff rates. So far, customs revenue shortfalls have been more than compensated for by improved recovery of arrears on other taxes and larger payments by public enterprises of debt obligations on account of on-lent loans. Nevertheless, the issue of customs performance and the larger issue of expanding the narrow tax base needs to be addressed to ensure sustainability of fiscal balance gains. 9. In the real sector, livestock exports to neighboring countries are now more competitive with imports from the European Union and South America. Recorded exports to C6te dlvoire in the first half of 1994 have nearly tripled over the previous comparable period. The financial viability of the cotton sector has been restored, with profits for the 1993/94 crop year projected to reach about CFAF 20 billion. Local rice is now able to compete with imports from Asia without recourse to excessively high levels of protection. Exports of vegetables such as potatoes and onions to neighboring countries have also increased. These favorable effects in agriculture mean increased returns to farmers and a boost to rural incomes. In the cotton sector, under the performance contract signed at the end of June 1994, farmers will receive a 47% increase in the floor price of seed cotton, and an increase in their share of sector profits from 25% to 33%. 10. The indications of expansion of industrial activity are equally encouraging. HUICOMA, the cottonseed oil plant, has dramatically expanded sales to regional markets, where its product is now very competitive. Two key textile producing enterprises which had remained closed for several years, have recently reopened operations. It is also expected that a third vegetable oil producing venture will resume operations soon. The sustainability and the firther expansion of this initial encouraging supply response will depend, among others, on the rapidity and the effectiveness with which the current levels of excess liquidity of the domestic banking sector can be channeled to finance private investment activity. 11. On the social front, the initial anticipation of widespread disturbances resulting from severe adverse short term impacts of the parity change, has not materialized. The Govemnment has gone to great lengths to build adherence to the program by mounting a public education campaign explaining the need for the change, its likely impacts and the accompanying measures to address adverse effects. It has in particular provided weekly reviews of price movements in the press indicating areas and particular markets where prices are lowest. Labor unions, were also consulted on the issue of wage increases. Furthermore, the moderate inflation trend observed since the devaluation, and the provision of CFAF 13 billion for safety net expenditures, has helped mitigate adverse social impacts. The Government has also taken steps to prevent shortages of essential drugs and of school books for primary school students.  -5- B. External Environment 12. The impacts of a series of external factors are magnified in a country such as Mali given its extreme dependence on agriculture, on a single export crop --cotton--, and on external financing. Key external factors include: (a) Climatic conditions: the droughts of the 1980s (particularly 1983-84 and 1987-88) drastically reduced agricultural, and in particular grain, production. In view of this, the Banks strategy has placed increased emphasis on imnproved natural resources management, expansion of irrigated land, and technical support to private investments in irrigation and agro-processing; (b) World price variations for key exort: Cotton contributes about 44% of export earnings. The most recent crisis in the cotton sector resulted from a 30% decline in international prices of cotton between 1990-93, compounded with a sharp decline in the value of the US Dollar. This put significant strain on the external account balance, on the government budget, and reduced fanner incomes and rural standards of living. Gold currently accounts for about 18% of exports but has a potential to become an even greater export earner, and thus world market gold price movements are expected to be an increasingly important external factor; and, (c) Economic perfomiance in donor countries and continued donor stoodwill: So far Mali has not suffered major external financing cut-backs from the recent slumps in the economies of its key donor countries or from the increased competition for foreign aid. External aid inflows have averaged about CFAF 113 billon (about 16.3% of GDP) annually over the last 5 years, and finance about 85% of investment spending and roughly 33% of current expenditures. Mali has also benefited from generous bi-lateral debt relief under the Paris Club. In 1992, about CEAF 5 billion of its bilateral debt - covering all arrears to end September 1992, and obligations for the consolidation period from October 1992 through August 1995, was rescheduled under enhanced Toronto terms. Since the devaluation, about CFAF 2 billon of debt to France, CFAF 1.7 billion of debt to Switzerland, and about US$14 million of debt to Italy have been canceled. 13. Recent global economic forecasts suggest that the external environmnent for developing countries, including Mali, will be positive with solid gains in world output, demand and trade, more stable real commodity prices, reasonable levels of real interest rates and sustained large private capital inflows. Mali is also expected to benefit from the relatively high degree of geographical diversification of its export markets with more exports going to the faster growing developing countries (particularly of Asia) than to developed countries. Malis recent success in expanding exports of cotton, livestock and gold is likely to receive a significant boost from the devaluation of the CFA. World prices for Malian export commodities are expected in a base case scenario to average 20%1/ higher than in the recent past. In a low case scenario, some price declines can be expected but still smaller than that of the 1980s. The impact of loss of tariff preferences under the Uruguay Round is projected to be negligible, largely because of the low share of industrial countries in Malian exports. The prospects for more private foreign investment, particularly in the minerals sector, also appear good. 14. Despite this overall positive projection of external factors, Mali's dependence on external financing (particularly for balance of payments support), leaves it vulnerable to the increased  -6 - demand on foreign aid funds due to recent changes in Eastern Europe and in the ex-Soviet Union. The Government is anxious to wean the country off such high levels of aid dependence. It has stated its objective to eliminate the need for budgetary support within the next few years. 15. Given the small size of its local market, Mali could derive significant benefits from the recent formation of the West African Economic and Monetary Union (llEMOA)'. The larger size of the regional market will allow Mali to exploit its irrigated cultivation potential -- of an estimated 500,000 hectares of irrigated rice potential, not more than 150,000 hectares are currently under cultivation - and become a major cereal exporter in the Sahel. It can also further expand its exports of livestock and of fruits and vegetables (notably green beans, onions and potatoes) within the region. Progress in implementing the Union's Treaty is proceeding well and it is expected that a common external tariff and intra-union preferential tariffs will be introduced in 1996. C. Government's Development Objectives and Policies 16. The Government's development objectives are to accelerate economic growth by building on recent economic and social reforms, continue the process of democratization, and, above all, to alleviate poverty and improve the well-being of its citizens. To achieve these objectives, Mali must confront formidable constraints - a largely illiterate population, one of the lowest primary school enrollment ratios in the world; weak institutional capacity; a poorly developed private sector; and inadequate infirstructure. 17. The Government's development strategy emphasizes: (i) human resources development; (ii) improved productivity in agriculture; (iii) improved natural resources management; (iv) promotion of private sector growth, and (v) institutional development. The individual sector strategies expounded below all reflect these key elements of the Government's strategy. 18. This strategy is set within the framework of greater decentraliztion. The Government is anxious to achieve more active participation of the population at large in decision making and in the management of their local communities. This requires the transfer of power to elected bodies at that level and should improve accountability and transparency in decision-making, all key elements of improved governance. The Government is committed to this effort, yet there are important prerequisites for success of the process, which currently do not exist in Mali. In particular, technical, institutional, legal as well as administrative capacity would need to be strengthened considerably at all levels of government but particularly at lower levels. Inter- governmental fiscal relations will also need to be clearly defined. A high level committee put in place to plan and manage this change, is still preparing a "blueprint" for the process. 19. Human Resources Development. In the education sector, the Government's strategy is to expand access to primary education, while improving quality at all levels through improved management and use of sector resources. Other elements of the strategy include enhancing the quality and relevance of professional and vocational education, and the promotion of private ICompising Benin, Burkina Faso, Cote Dlvoire, Mali, Niger, Senegal and Togo.  -7 - participation in the sector. Until recently however, the Government has failed to implement this declared strategy and as a consequence, the education sector is in deep crisis. On the one hand, Mali is among the five countries in the world that have the lowest level of adult literacy (below 20%) and the lowest coverage of primary education (below 30%). On the other hand, the Government already spends over 20% of its recurrent budget on the sector, but only about a third of these resources is devoted to the priority target of developing primary education. Compared to other countries in the region, the cost-effectiveness of resource use in the sector is particularly low. Further investments to expand primary education coverage and improve quality are unlikely to be effective before the numerous structural and administrative constraints to effective resource use in the sector are removed. 20. Recently, the Government has begun to move on key policy issues in the sector aimed at increasing efficiency and at expanding primary enrollment. It has decided to expand the use of double shift teaching, redeploy staff out of administrative into teaching positions, and from Bamako towards the regions where the needs are the greatest; increase participation of communities; promote private schools; restructure the sector budget in favor of primary level; and increase financing for operations and maintenance expenditures, in particular for educational materials. A controversial aspect of the Government's strategy in the sector is the decision to create a new university. If not limited to largely restructuring and strengthening the existing "Grandes Ecoles" into a more cost-effective system of higher education, this initiative would be inconsistent with the Government's declared priority of developing primary education. It would contribute to further skewing of sectoral resource distribution in favor of post-primary education. 21. In health, the Government's fundamental objective is to radically improve the health standards of the Malian population in the shortest time possible, and to achieve declining fertility rates. The approach emphasizes the promotion of primary health care through the provision of a package of preventive and curative services, improved referral services, greater decentralization of the health care system and greater community participation in management and financing of primary health care service delivery. A drugs policy, aimed at ensuring a reliable supply of a list of 189 affordable generic drugs in all public and community health facilities, is being implemented. The strategy also seeks to encourage the private sector (which provides about 50% of the national drug market) to switch to generic drugs. 22. The Government'spopulation policy seeks to slow down the current high population growth rate, through proactive family planning programs. A Priority Action Program for Population (PAIP) being finalized by the Government Will set forth a medium- long term strategy and action plan to enhance the onset of fertility decline. It is expected that the contraceptive prevalence rate will double from the current level of 5% to 10% by 1997. While the incidence of HIV in Mali is still relatively low (estimated at 4%), this could increase rapidly given the high prevalence of STDs, widespread practice of polygamy and frequent contacts with high HIV exposure areas such as C6te d'Ivoire. So far, the strategy has focused on raising public awareness on the disease and the importance of measures to prevent its spread. The results of a Bank- financed rapid assessment of HIV/STD prevalence in main urban centers is currently being analyzed.  -8 - 23. Agricultural Productivity. Despite rapid growth and productivity recorded in agriculture and in livestock in the recent past, performance is still limited by the inadequacy of existing technology and production systems and rapid degradation of the environment. In 1992, the Government prepared a rural development Master Plan which sees agriculture as the engine for the country's growth. The strategy emphasizes: (i) improved natural resources management to promote sustainable growth; (ii) further redistribution of responsibilities from the public towards the private sector and rural communities; (iii) restructuring the Ministry of Rural Development to increase its efficiency; and (iv) improved and expanded agricultural extension and research services. 24. Women play a pivotal role in agriculture in Mali. Besides having the ultimate responsibility for food production, they are active in other agricultural activities including cash cropping, animal husbandry, food processing and marketing. Moreover, women's agricultural work is growing as more men migrate to cities for work. Women at the same time, face more severe constraints than men in their access to land, extension services, and to credit. The Government recognizes the important role of women in this sector and is beginning to address their particular constraints. In the area of extension, the ongoing Agricultural Services project has moved from an initial focus on male farmers to mixed groups. A workshop held in April 1994, defined a detailed action plan to increase women's access to agricultural support services. 25. Natural Resources Management. Resource degradation is the main environmental threat in Mali. However, localized pollution, notably water pollution from gold-washing operation, pollution of urban water and non-degradable solid waste are growing concerns. The burden of degradation and pollution is heavily borne by the poor, and especially women and children. The Govemment's environmental management strategy seeks to arrest, and progressively reverse environmental degradation by focusing on preventive actions. An integrated resource management program for the agricultural, pastoral and forestry sector, based on a participatory approach that gives greater say and responsibility to local communities, is currently being implemented. The National Environmental Action Plan (NEAP) under preparation will be an important first step in including stakeholders in a broad debate on options for a long term environment strategy. The highly successful Onchocerciasis Control program, has already allowed production to resume in areas where the disease had previously kept population densities and agricultural production very low. 26. Urban population has been growing rapidly since 1960. It is estimated that by 2030, some 38% of the total population of Mali will live in urban areas. In contrast, municipal revenues are low on account of a narrow tax base, massive evasion of taxes, and inadequate cost recovery for municipal services. Moreover, housing markets do not function adequately, leading to unauthorized and under-serviced peri-urban settlements. Two IDA projects are assisting the Govermnent in its effort to improve the environment in urban areas, and to develop a sustainable municipal policy. The Government is also undertaking a study under the Private Sector Assistance project, on mechanisms for housing finance. 27. Private Sector Growth. Since the late 1980s, the Govemment of Mali has recognized the importance of a strong private sector for achieving sustained rapid growth. The main constraints to private sector growth in Mali are: (i) high costs of doing business due to the complexity of  regulations and business laws and a legal system ill-adapted to enforcing business contracts; (ii) weak private sector capabilities and technical know-how given long period of high protection from international competition, and historical concentration on short-term trading and commercial activities rather than on long-term investment; (iii) continued important public sector role in the economy, crowding out private sector activity; (iv) highly segmented financial system with limited competition and weak term financing capabilities; (v) limited supporting infrastructure; and (vi) high costs of key inputs notably energy and transport. Despite some progress under SAL I in addressing these issues, the constraints to private sector development still remain severe. Weaknesses in the financial intermediation function is particularly acute. Addressing these constraints, will demand a more aggressive strategy than has so far been implemented. 28. Given Mali's landlocked location and the size of the country, the development of the transport sector is a critical element of the Government's efforts to achieve lower production costs. Today, transportation accounts for approximately 20-30 percent of the cost of most essential goods. The Government's transport policy is to increase efficiency by promoting greater competition between different modes of transport and enterprises in the sector, and to improve the conditions of existing infrastructure notably in the transport and rail subsectors through a policy of adequate asset maintenance. 29. Mali is entirely dependent on costly petroleum product imports from either Dakar or Abidjan. Despite extensive investments in the energy sector, less than 5% of the population has access to electricity. Yet Mali has good hydro-electric and renewable energy (solar) potential. The sector policy seeks to rationalize sector management so as to improve quality and reduce delivery costs, and to develop low cost, local sources of energy. 30. Institutional Development. The improper functioning of public institutions has considerably hampered the implementation of key aspects of the Government's reform effort. Weaknesses in insitutional capacity are evident in the lack of accountability and transparency in most transactions within the public sector as well as between the public and private sectors. Progress is being made on these issues with the transition to democratic government, but much more remains to be done. Efforts made to improve civil service efficiency under the ongoing SAL I have been largely unsuccessful and the Government is yet to spell out a clear policy on institutional development. It is expected that two workshops on this issue to be held before the end of 1994, will serve to define such a strategy and an action plan for its implementation. In an effort to build local capacity in economic policy analysis and evaluation, an Economic Policy Research Center is to be set up with the assistance of the African Capacity Building Foundation. 31. Expenditure patterns. Government expenditure patterns in the recent past have not always been in line with its stated development objectives. Public financing of the health sector has dropped significantly, in the face of growing needs in the sector. An inordinate share of education sector expenditures has gone to finance student scholarships spending at higher education and secondary levels. Military spending has averaged 11% of total spending. While this is comparable to levels in other Sub-Saharan Africa (SSA) countries, current levels may increase if a peaceful solution cannot be found to the Tuareg rebellion in the North. Development spending has fallen in the recent past but the more critical issue concerns the budget's capacity to meet the future recurrent cost implications of even the existing development expenditure program.  - 10- D. Bank Group's Country Assistance Strategy and Operational Program Objectives of the CAS 32. The Government's declared development strategy identifies the key long-term constraints to Mali's development, is focused on addressing them and is broadly sound. The sectoral strategies that constitute the overall strategy have been largely discussed and agreed between the Bank and the Government in the context of the preparation of various investment and adjustment operations. The Bank will continue to work closely with the Government in defining clear and appropriate strategies in areas where this is lacking (e.g. in institutional development, and the definition of a more aggressive private sector promotion strategy). Furthermore, closer coherence needs to be established between the Government's declared strategy on the one hand, and public expenditure choices and the implementation of reform measures on the other hand. 33. The objective of the Bank's assistance to Mali is to help the Government achieve the key development objectives outlined above. The ultimate goal is the alleviation of poverty. The pillars of this poverty alleviation strategy are: (i) sustained broad-based economic growth; (ii) human resources development; and (iii) a special focus on the needs of the most vulnerable through a strengthened social safety net system, appropriate macroeconomic and sectoral reform measures, and carefully targeted interventions (see table directly below). None of these can be achieved or sustained without sound macroeconomic management, and strong local institutional capacity. The key instruments for achieving these intermediate goals will be investment and adjustment lending, coupled with a strong and active policy dialogue and ESW program. The program will also move towards greater use of the integrated sector investment instrument with strong coliaboration with other donors. 34. The proposed operational program incorporates three scenarios (base, core and high case). Given the overwhelming and pervasive nature of development constraints in Mali, the base as well as the high case scenarios include interventions in most of the key sectors. In some other areas, notably telecommunications and in mining, technical and financial support can and should come from the private sector, while the Bank focuses on the creation of a more enabling sector environment. The Bank's priority in Mali, is clearly on education, health and natural resources management. In the event of adverse developments, we would scale down to a core program consisting largely of operations in these areas (paras. 51-52).  * 11 - THE BANK'S POVERTY ALLEVIATION STRATEGY IN MALI LAUNCH AND SUSTAIN GROWTH OF 5% ANNUALLY Lending ESW and other (i) consolidate and improve competitiveness gains (e.g. SAL II Macrooconmic Rcport FY 96); (ii) provide suppori4g infrastructu (e.g. Transport Private Sector Aswssment Sect Projet FY94); and (tu) improe efficiency in proision of key agriculture support services (Agrcuiture Sector Support Lestock Sector Study Operaton FY97). HUMAN RESOURCES DEVELOPMENT AND EXPANDED ACCESS TO SOCAL SERVICES Lendin - -BESW and other ......... ~~~~~~~~~~~~~~~~~~~~~~~........................................... (i) Increase pimay ewollmt rates (EdSECAL FY95; Public Exendit Review (PER); Seminar on Primary Education Project FY96); (ii) Promote labor:skills in resuts of Cairo Populaion Conference; Rapid line with labor market needs (eg Vocational Educaton Project Aeusment of V: prevaence- FY96); (iii) Expand access to pnmary and preventie health care (cg. Health/AIDS Project FY98); (iv) Accelerate onset of fertiity decline- ad lower popu-a-ion -rowth -ate (Pov-ty: Project FY97); (v) Primote ieased efficiecn in post.prima-y education -tmry Education Proect 9) : -TAItGT)ACONS TO ADI).ESSN EEDS OF SVVLNEIL4BL GROUP. ~~~~~~~. . .... ........ . . . :. - -,... . ::., . . .. . . . .. . ...-.. -: -L-e: -:-:: nvn -E- - - --: --BSW and other: (i) Strengthen: Jaeyntsse SAL it FY 96- budgtr PubicE:xpenditure :Reie (PR) Wokso prvision for- safty niet: nding). (l) Address uutritiorad on -Iun0r with NGQs. Rapid An d needs of vulerble groupi particularly women anXhildren HV -prevalenc (Poverty Prwject FY97); (iii Ib. - : r. .or ::. -oor (AGETIPE 1 supplement FY95,: AGETIE II FY97); and (iv) . ::.- .. ..... Promote female literacy (Primary Education Pmrjet FY96). 35. Aid Effectiveness. Bank lending to Mali has been highly effective in the recent past in diverse areas such as agricultural reform, macroeconomic management, restructuring the incentive framework, and urban public works programs. The impact of our assistance on overall growth was however constrained by the economy's lack of competitiveness resulting from the severe overvaluation of the CFA franc. The recent parity adjustment thus augers well for substantial improvements in the effectiveness of Bankes assistance. Effectiveness of our lending will be further enhanced by: (i) increased country and beneficiary ownership; (ii) strengthened implementation; and (iii) continued close collaboration with other donors.  - 12 - Operational Program: FY95-99 (Base Case Scenario). Macroeconomic management 36. One adjustment operation (SAL II) is planned for FY96. It will support: (i) implementation of policies to raise domestic revenue effort by expanding the tax base and addressing the problem of tax (particularly customs) fraud; (ii) continued fiscal, and in particular wage restraint; (iii) continued improvement in the regulatory and incentive framework; (iv) completion of the Government's public enterprise reform program; and (v) strengthening of the social safety net system through adequate budgetary provision. In addition, sectoral operations will continue to target improved efficiency and effectiveness of the allocation and use of current resources. On the external account, efforts to improve the productivity and competitiveness of the agriculture sector, and the diversification of exports should help achieve sustained improvement. It is expected that these efforts will all combine to eliminate budgetary and balance of payments financing gaps by 1997. The strategy thus envisages an end to balance of payments support operations beyond FY96. Human Resources Development 37. The education sector perhaps presents the greatest area of challenge, for without a dramatic improvement in education attainment, Mali cannot hope to generate or sustain the rapid rates of growth needed to overcome poverty. Four (1 adjustment and three investment) operations are planned in this sector over the FY95-99 period. The proposed Sector Adjustment operation is designed to support removal of structural constraints in the education sector. As indicated in para. 19, such refonrs are critical for achieving rapid expansion in primary enrollment, quality improvements at all levels, and development of post-primary education better aligned with labor market demands. Implementation of these reforms is considered a prerequisite to the success of any future donor investments in this sector and would allow IDA to proceed with three other investment operations in the sector over the FY95-99 period. A follow up to the ongoing Education Sector project is planned for FY96, conditional on successful implementation of the reform package. This will focus on basic education, and in particularly of girls. A Vocational and Technical Education project planned for the same year, will address the needs of the labor market for vocational and technical skills. The third investment operation, planned for FY99, will support reforms and investments at the secondary and higher education levels. 38. The ongoing Population, Health and Rural Water Supply project will remain an important vehicle of Bank intervention in the health sector for much of the period. While this project will help lay the foundation for a preventive health care system, at the end of the project, health conditions will still be deplorably low, and the contraceptive prevalence rate will be far too low to cause the start of the demographic transition towards low fertility rates. Therefore, increasingly active Bank involvement in this sector is foreseen over the period. A follow-up Health project is planned for FY98, based on a participatory beneficiary assessment of needs in this area. This project would also address AIDS prevention.  - 13 - Focus on Needs of Vulnerable Groups 39. All operations will be carefully vetted with a view to ensuring that the interests of vulnerable groups are not compromised or put at risk. Targeted interventions planned for the period include a Poverty project for FY97, with a focus on nutritional needs of women and children in peri-urban areas. This project will put into operation some of the key recommendations of the recently completed Assessment of Living Conditions and the soon to be held Hunger Conference. The recent supplement to the ongoing Public Works and Capacity Building Project (AGETIPE) and the follow up AGETIPE II, planned for FY97 are targeted towards the employment needs of urban workers with little or no skills. The follow-up Primary Education project (para.37), will have a component that focuses on raising female enrollment. As agreed in the PFP, specific budgetary allocations will be made for social safety net expenditures (SAL II FY96). The Bank will assist the work of the committee that has recently been set up to manage these funds. Efforts will continue to ensure improved monitoring of the living conditions of vulnerable groups. Sustained Economic Growh 40. Agriculture and Rural Development. The four new operations planned in this sector over the period are all geared towards improving its productivity and competitiveness. They address the key elements of the Government's sector strategy outlined in para.23. Two operations planned for FY95 promote private activity and are both critical for realizing a strong supply response. The Agro-processing project will promote private sector diversification into the production and processing of non-traditional exports while the pilot Private Irrigation project will promote private sector participation in the provision of and management of irrigation infrastructure and services. An Integrated Sector Support operation is planned for FY98. This operation will: continue efforts to improve the availability and quality of extension services to farmers, and in particular to women farmers; assist in the restructuring of the Ministry of the Rural Development to allow greater decentralization of functions and focus of public sector role on critical support functions; and assist in achieving the improved functioning of the key livestock sector. 41. To support Government's efforts to address the pressing needs for basic economic infrastructure in the rural areas, an integrated subsector investment project (ASIP) planned for FY99, will focus on the expansion and the rehabilitation of the network of rural feeder roads. This is also a critical element of efforts to promote agricultural productivity, improve the well- being of the 75% of the population that lives in rural areas and thus stem the tide of rural-urban migration. The Department will also work with the Regional Water and Sanitation Unit (GREA) to help the Government finalize its national strategy and implementation plan for a rural water supply program. 42. Natural Resources Management, The ongoing Natural Resources Management project addresses the main issues of environmental management. Two other operations will provide support in this area: a proposed GEF-supported project planned for FY95 will assist Mali in meeting household energy requirements in a sustainable manner; and a follow up Natural Resources Management project is planned for FY99.  - 14 - 43. Infrastructure. The Bank's support to the Government in this area is geared first and foremost towards ensuring adequate maintenance and management of existing infrastructure and in a second place, extending the network of infrastructure. The recently approved Transport Sector Project, an integrated sector investment operation is the main vehicle for support to Governrment in this area. It will strengthen sector institutional capacity by reorganizing transport and road services, and restructuring public transport enterprises. It also includes a 5-year investment program for the road, rail and air transport subsectors. 44. Government efforts to improve urban development will be assisted through one Urban project (with one component focused on secondary urban centers and another on the Bamako Region) and through a second labor intensive Public Works project (AGETIPE II), planned for FY96 and FY97, respectively. The latter operation will also address the needs for urban employment generation. 45. Support to the Malian energy sector consists of (i) strengthening sector management to improve production and distribution of quality, low cost energy through the ongoing Power II project; (ii) rehabilitating existing infrastructure through the planned Selingue Dam Rehabilitation project planned for FY95; and (iii) developing least cost energy sources, including the Manantali hydro-electric project planned for FY96. 46. Private sector Development. In addition to improving human and physical infrastructure, Bank assistance to Mali's effort to develop its private sector will aim at establishing a legal and regulatory framework that is simple, predictable, equitable and well enforced; strengthening intermediary and business support institutions; promoting broader and stronger state-private sector consultations and collaboration; and strengthening the financial interrnediation function. This will be done through.three new operations. A Banking and Financial Sector Reform operation, planned for FY97 will address the current weaknesses in financial intermediation. A component of the proposed Institutional Development (ID) Project (para. 47) will address some of the issues in contract enforcement and in particular the effective functioning of administrative and commercial courts. As mentioned in para. 36, the next adjustment operation (FY96), will also support further improvement of the regulatory framework, and completion of the Government's public enterprise reform program. The Bank's dialogue with the Government will continue to advocate closer and more regular government consultation with the private sector in defining reform measures to promote its development. Building and Strengthening Local Institutions and Capacity 47. The proposed ID Project (FY96) will be the key lending instrument. It will focus on strengthening the overall effectiveness and efficiency of the Malian civil service, and in particular, financial and legal administration. The legal component will assist Government in removing barriers to women's participation in economic activity through appropriate revisions to the relevant codes (parental, marriage, and commercial), ensuring consistency across these codes, and monitoring their implementation. It will support Government efforts for greater decentralization by assisting the Committee for decentralization in defining the blueprint for the process and in particular addressing the issue of fiscal relations between different levels of Government. The operation will build administrative capacity at regional and municipal levels of Government. A  - 15 - component of the project will support a large-scale national consensus building effort on a long- term vision for Mali and on the reforms and investments required to reach this vision. It is envisaged that financing wifl be provided under the operation for the soon to be established Economic Policy Research Center (para. 30). Proposed Lending Program FY95-99. 48. The proposed base case program Composition or Ppowed Lending Program described above, reflects an increase of FY9s-99 about 40% compared to annual average kanes for Base and Core Seeanos lending over the FY91-94 period. USS million % Mali's internal adjustment efforts Agrikulbe 30-80 15-16 followed by the solid performance since Industty/Enerv 10-,5 5-18 the devaluation justifies the proposed lnfiatruCtr 40-115 20-22 increase and an expansion of the Popultion and HR, 100-145 50-29 portfolio within the limits of o-wAdjus --40 0- Capacita Buiding 20-20 10-4 implementation capacity and -- 0-l administrative and financial _ sustainability. It is also consistent with Total 2004500 100 IDA's commitment to support the Government's efforts to achieve and deepen positive impacts of the recent parity change. 49. Growth Prospects and Financing Requirements. The base case scenario assumes continued strong performance on short-term macroeconomic management, implementation of structural reform measures to sustain competitiveness gains and success in regional integration efforts. As a result, GDP growth is expected to average about 5% annually. This growth is expected to come largely from agriculture with considerable expansion expected in cotton, cereals and livestock production. Plans are underway to increase cotton ginning capacity and there is considerable capacity to increase irrigated rice (para 15) and livestock production. Output of non-traditional products such as exotic, fruits and vegetables is an emerging area of growth and the Government is already encouraging private sector efforts to tap this potential. The improvement in competitiveness is also expected to allow fuller use of existing capacity in industries such as textiles, tanneries and leather, and agro-processing. Output of the mining sector is expected to increase to over 15 tonnes annually from the current level of about 3 tonnes by 1999 -- the Siama Mine is expected to raise output to 6 tonnes by 1995, and the planned Sadiola Hill Mining Venture which will come on stream by 1996 (para. 61), is expected to produce at least 10 tonnes of gold annually by 1999. This growth performance should allow average annual real export growth of about 8.8% over the period. Investment is projected to increase to 27% of GDP. A large part of this increase is purely a reflection of the high import content of investment and the anticipated larger increase in the price of investment goods relative to the GDP deflator. Nevertheless investment in the social sectors, mining and in agro-industry, in particular are expected to expand significantly. This increase will be financed largely from external sources but domestic saving is projected to increase to about 10