Tunisia - Economic and Financial Reforms Support Loan

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14779 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TUNISIA ECONOMIC AND FINANCIAL REFORMS SUPPORT LOAN (LOAN 3424-TUN) MAY 25, 1995 Country Operations Division Country Department I Middle East and North Africa Region This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EXCHANGE RATES Currency Unit = Tunisian Dinar (TD) 1987 1988 1989 1990 1991 1992 1993 1994 TD) per US$ Period Average 0.8287 0.8578 0.9493 0.8783 0.9246 0.8844 1.0037 1.0116 FISCAL YEAR OF BORROWER Fiscal year = Calendar year  FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA ECONOMIC AND FINANCIAL REFORMS SUPPORT LOAN (LOAN 3424-TUN) IMPLEMENTATION COMPLETION REPORT PREFACE EVALUATION SUMMARY.i PART I - PROJECT IMPLEMENTATION ASSESSMENT ........................ 1 A. PROJECT OBJECTIVES ...................................... 1 Background ............................................. 1 Objectives ............................................. 1 B. ACHIEVEMENTS OF MACRO OBJECTIVES ........................ 2 C. ACHIEVEMENT OF THE PROGRAM OF ECONOMIC REFORMS .... ...... 3 D. MAJOR FACTORS AFFECTING THE PROJECT/SUSTAINABILITY .... .... 4 E. BANK PERFORMANCE ...................................... 4 F. BORROWER PERFORMANCE .................................. 5 G. ASSESSMENT OF OUTCOME .................................. 5 H. LESSONS LEARNED ........................................ 5 PART II - STATISTICAL TABLES ................................- 7 Table 1: Summary of Assessments ................................ 7 Table 2: Related Bank Loans/Credits ................................ 8 Table 3: Project Timetable ................................. . 9 Table 4: Loan Data FY 95 ............. .................. 10 Table 5: Studies Included in Project ............................... 11 Table 6: Legal Covenants: Conditions for Effectiveness, II and III Tranche Release .......................... 12 Table 7: Bank Resources: Staff Inputs ........................... 5 Table 8: Bank Resources: Missions ........................... 16 ThIs document has a restricted distinbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiihout World Bank authorization. |   REPUBLIC OF TUNISIA ECONOMIC AND FINANCIAL REFORMS SUPPORT LOAN (LOAN 3424-TUN) IMPLEMENTATION COMPLETION REPORT PEFACE This is the Implementation Completion Report (ICR) for the Economic and Financial Reforms Support Loan (Loan no. 3424-TUN) in the amnount of US$ 250 million equivalent. It was approved on December 12, 1991 and became effective on December 23, 1991. The loan was closed on December 31, 1994, as scheduled. The first tranche of US$100 million, released upon effectiveness, was fully disbursed by December 31, 1991. The second tranche of US$70 million was released on August 20, 1993. The third tranche was released on September 23, 1994 and the loan was fully disbursed by November 21, 1994. Cofinancing for the project was provided by the Eximbank of Japan, the European Union and the Government of Germany. The ICR was prepared by Miria Pigato of the Country Operations Division of the Middle East and North Africa Region (MNICO) and reviewed by Sikander Rahim (MNICO). The ICR was sent to the borrower in June 1995. Preparation of this ICR started during March 1994. The basic information was drawn from the President's Report (Report no. P-5636-TUN), the Loan Agreement, supervision reports, internal Bank papers and numerous discussions with Bank staff members who were involved in the Tunisian adjustment program.   EVALUATION SUMMARY Introduction Bank lending in Tunisia during the 1970s and early 1980s emphasized support for long term investments in infrastructure, social development and agriculture. However, since the beginning of the adjustment process in 1986, the Bank has put $914 million for six adjustment operations in support of the economic reform program of the Government ( Table 2): 1) the Agricultural Sector Adjustment Loan (oan 2754-TUN) for US$ 150; 2) the Industrial Trade and Policy Adjustment Loan Ooan 2781- TUN) for US$ 150 million; 3) the Structural Adjustment Loan (oan 2962-TUN), for US$150 million; 4) the Public Enterprises Reform Loan Ooan 3109-TUN) for US$130 million; 5) the second Agricultural Sector Adjustment Loan Ooan 3078-TUN) for US$84 million; and 6) the EFRSL (oan 3424-TUN) for US$250 million. Loan objectives The Economic and Financial Reforms Support Loan (EFRSL) was aimed at providing quick disbursing assistance to overcome the fall in foreign exchange earnings (estimated at 5 % of GDP) caused by the Gulf war, while supporting the implementation of major reforms. The objectives of the reform program supported by the loan were consistent with the Government's development strategy: achieving higher growth and employment creation, restoring internal and external balances, strengthening private sector development and restoring Tunisia's access to commercial borrowing. To achieve these objectives, the reform program covered the following areas: a) liberalization of external trade and prices; b) promotion of financial markets including bringing banking regulations and supervision up to international standards; c) measures to make special investment incentives narrower and more cost effective, and d) a reform program of the system of social security. [Para.3] Implementation experience and results Overall, Tunisia's priorities of increasing growth within a framework of internal and external balance were substantially achieved. Deviations from expected outcomes were mostly due to exogenous factors and whenever slippages occurred, the Authorities took appropriate remedial actions. [Para.4] The liberalization of import and prices was almost completed during the EFRSL program. However, trade liberalization did not go as far as anticipated in the President's Report. The list of products to remain under QRs that was submitted to the Bank for third tranche release included some items which did not fall wholly within the categories agreed during negotiations. The Tunisian Government maintained that all quantitative restrictions will be eliminated in the context of the GATT Agreement, joined in 1994, and the free trade agreement with the European Union (which was signed on April 12, 1995). Thus, a waiver for this condition was recommended and accepted on a no objection basis by the Board. The financial sector is perhaps the area were the largest progress was achieved. Reforms included a new regulatory and supervisory framework of the banking system and the removal of the cap on the spread of deposit bank lending rates over the money market rate. Distortions in the taxation of financial instruments were eliminated; Govermment borrowing trough the mandatory purchases of low yielding 10 years bonds was replaced by an auction process. The Treasury will redeem the entire stock of bonds before 1996 and is ahead of time. A unified Investment Code, approved in December 1993, replaced several sectoral Codes. The new code represents an important improvement on the past, because it ensures greater neutrality and transparency of investment incentives. However, it still contains fiscal incentives (e.g. 10 years tax holidays to  exporters) that are much too generous, compared to international standards, costly to the budget and above all inefficient; moreover, the sectoral bias of the Code is maintained by the continued reliance for approval and monitoring of the advantages on sector committees, instead of a centralized body. The reform of the social security system was included in the EFRSL at the request of the Tunisian authorities. Progress in this area included the adoption of guidelines in respect of the investments of the social security funds and an original program of self-targeted food subsidies to the needy. However, the adoption of the reform program of the social security system was delayed because some of the studies to be prepared for second tranche release took longer than anticipated. For third tranche release the Bank and the Government agreed on the principles and objectives of the reform, while its implementation was delayed to the future. [Para.6] The loan became effective, with release of the first tranche of US$100 million equivalent, on December 23, 1991. The second tranche, of US$70 million equivalent, was released on September 1993, 9 months behind the schedule foreseen at the time of the Board presentation because of delays in the preparation of action plans of audited banks, and to difficulties in finding an agreement on certain aspects of the new Banking law and of the draft Investment Code. The third tranche was released a year after the release of the second. It could have been released earlier but the promulgation of the Investment Code implementing legislation took longer than anticipated. The loan closed on December 31, 1994, as scheduled. [Para.7] The Bank's preparation performance was satisfactory. The loan was prepared and presented to the Board in a very short time, about nine months. The staff was familiar with the country and qualified. The Bank's supervision performance was adequate, except perhaps in the area of social security reform, because it underestimated the enormous work that it is necessary in order to prepare a reform program. [Para.9-10] The borrower's contribution to the preparation of the loan was satisfactory. A high commitment to the objectives of the reform was maintained throughout the implementation period. With the exception of a waiver on the maintenance of certain products under quantitative restrictions for third tranche release, the compliance of covenants was very good. All requested studies (but one) were completed, although with some delay. The goods and services financed by the Bank were procured according to the procedures and eligibility criteria set forth in the legal documents. There were no delays in the submission of eligible documentation in accordance with procurement procedures. Audits of the Loan accounts for 1991, 1992 and 1993, as required by the Loan Agreement, were received in time and found satisfactory. [Para. 11] The outcome of this operation is satisfactory and sustainable. It achieved its major objectives and is likely to achieve substantial development results, without major shortcomings. Trade and price liberalization, a more neutral system of incentives and a competitive and strengthened financial system will allow the private sector to play an increasingly important role in the development of the economy. [Para. 12] Summary of findings. future operations and key lessons learned. The program of reforms supported by the EFRSL was successfully prepared and implemented: it was built on the foundations established by the SAL and other adjustment operations and it could count on a broad political consensus. The lessons learned are the following: a) the success of an adjustment operation depends on many factors, most importantly, a Government willing to take the lead in promoting a program of reforms; and the - ii -  willingness, from the Bank, to cover the need for financial assistance in the country. In Tunisia, at a time when the SAL reforms were coming to a halt, the Government understood the need for moving on. Thus, the EFRSL program was "owned" and politically sustainable. In turn, the position of the Tunisian advocates for adjustment reforms was strengthened by the Bank support; b) a complex reform program such as the one supported by the EFRSL can be prepared in a relatively short period of time when the Bank staff involved is familiar with the country and qualified; c) a successful operation needs excellent intersectoral and interministerial coordination. This was provided in Tunisia by the Ministry of Plan (now Ministry of Economic Development); d) any component of the reform program which is not well prepared and discussed in detail with the Government before the loan is signed is likely to cause implementation delays. [Para. 13] - iii -   PART I - PRO.JECT IMPLEMAENTION ASSESSMENT A. PROJECT OBJECTIVES Background 1. In 1986 a balance of payments crisis due to a decline in oil export earnings and excessive levels of public sector investments forced Tunisia to take drastic stabilization measures: the exchange rate was devalued, public investment was cut back and bank credit was tightened. A program of economic reforms aimed at reestablishing domestic and external balances, liberalizing internal controls and increasing the outward orientation of the economy was then began. Both the Bank and the Fund supported this program, the former with a series of adjustment loans and the latter with a Stand-by and an Extended Arrangement. Reforms included the elimination of the requirements of prior authorizations for investment and bank loans, the introduction of a far-reaching fiscal reform, comprising a VAT and simplification of direct taxation with a maximum marginal tax rate of 35 percent; and the beginning of the liberalization of interest rates, trade and prices. Strong economic results followed quickly, with GDP growth averaging 3.5 percent during 1987-1989 in spite of droughts in both 1988 and 1989. Both the budget and the current account deficit fell and non-oil exports grew at an annual average of 14.7 percent in volume during 1987-89, compared to 5.4 percent during 1980-86. 2. But the outbreak of the Gulf war in 1990 interrupted this performance: tourism fell, manufactured exports declined because of the loss of the Iraqi market and capital inflows from Arab countries and direct foreign investments decreased significantly. The Government of Tunisia reacted to the crisis by tightening monetary policy and restraining demand: a supplementary budget with increased revenues and cuts in expenditures was approved in March 1991, thus limiting the budget deficit to 3.4 percent of GDP. But the uncertainty about the war produced stockpiling, which led to a rise in the current account deficit to 5.4 percent of GDP in 1990. As the Bank had long recognized, Tunisia was suffering because of its vulnerability to political events in the region. Thus, when the Government formally requested quick disbursing assistance, the response was favorable. Similarly, the IMF supported the country by prolonging its Extended Arrangement, which was due to expire in July 1991, to a fourth year since Tunisia had remained in compliance but had not drawn on it. The Arrangement was successfully completed in July 1992. Objectives 3. The Economic and Financial Reforms Support Loan (EFRSL) was aimed at providing quick disbursing assistance to overcome the balance of payments and income effects of a drop in foreign exchange earnings (estimated at 5 percent of GDP) caused by the Gulf war, while supporting the implementation of major reforms. By supporting a macroeconomic program to restore internal and external balances, achieve higher growth and employment creation, strengthen private sector development and restore Tunisia's access to commercial borrowing, the loan did indeed give fresh impetus to the adjustment process. The program of reforms covered the following areas: a) liberalization of external trade and prices; b) promotion of financial markets including bringing banking regulations and supervision up to international standards; c) measures to make special investment incentives narrower and more cost effective, and d) a reform program of the system of social security. - 1 -  B. ACHIEVEMENTS OF MACRO OBJECTIVES 4. Tunisia's priorities of increasing growth within a framework of internal and external balance were substantially achieved. Deviations from expected outcomes were mostly due to exogenous factors, and not to policy slippage. Fluctuations in GDP growth occurred - especially because of a great rise of agricultural output in 1992 and a fall in 1993 due to differences in rainfall during the two years - but were consistent with the expected GDP trend rate of 5 percent p.a. Exports of manufactures grew less than expected in 1992 and 1993, because of sluggish demand in Europe, the main destination market, and produced a larger than expected current account deficit. The Government's response to the shortfall on exports and the higher current account deficit was to devalue the dinar in early 1993 and to maintain a tight monetary policy to restrain demand. On balance, the overall economic performance of the economy was good and where slippages occurred, the Authorities took appropriate remedial actions. 5. A feature of the SAL that was maintained in the EFRSL was the adoption of a set of macroeconomic targets to be monitored during the program (see Table 1). Deviations from these targets were expected to trigger policy discussions with the Bank followed by corrective action. These indicators were i) the ratios of external debt service to GDP; ii) the net resource transfer to Tunisia; iii) the ratio of budgetary interest payments to budget revenue; iv) the growth in the volume of exports of manufactures; and v) the ratio of private borrowing to total borrowing. During the review period, the performance of the indicators was satisfactory, but somewhat short of target. Most of these indicators were endogenous, in the short run, and therefore not subject to the Government's direct control. As already the experience of the SAL had shown, they were not very useful. The problem lies in the choice, almost impossible, of a set of macroeconomic indicators that can accurately signal corrective actions to be taken by the Government. The value and the evolution of most of these indicators depend on many endogenous and exogenous factors: the appropriate policy reactions that the Government should take when they change may often be outside the loan conditionality or time frame of the program. Table 1. Macroeconomic Indicators (in percent) Forecast Actual 1991 1992 1993 1994 1991 1992 1993 1994 GDP Growth 3.0 2.8 4.8 5.2 3.9 8.0 2.1 4.4 Current Account Deficit/GDP 5.0 2.9 2.9 2.5 4.3 5.3 5.9 4.6 Budget Deficit/GDP 3.4 2.7 2.5 2.3 4.3 2.9 2.5 2.6 Debt Service/GDP 11.1 10.3 9.1 8.5 10.6 8.6 9.2 9.5 Net Transfer of Resources/GDP 1.6 0.5 0.9 0.8 1.5 1.4 0.0 0.9 Manufactured Exports Growth 10.0 7.9 7.8 7.5 3.4 3.2 3.9 10.0 Private Borrowing"'./Total Borrowing 61.9 64.5 68.3 70.6 54.6 55.0 76.5 62.5 Budgetary Interest Payments/Govemment 10.7 13.6 13.4 17.9 11.1 11.9 12.2 12.6 Revenue Source: President Report, MN1 Database. Actual data on private borrowing are estimates. -2  C. ACHIEVEFM OF THE PROGRAM OF ECONOMIC REFORMS 6. The Government's program supported by the EFRSL included four main areas of reform: a) liberalization of imports and prices. In 1991, 72 percent of production and agriculture and manufacturing had been protected by quantitative restrictions. About 70 percent of producer prices were freed but distribution margins remained almost universally under control. In 1994, according to the methodology proposed in the Loan Agreement, only 24 percent of production was still protected by QRs; 85 percent of producer prices were free and the share of products with distribution margins subject to price controls was decreased to 25 percent of domestic absorption, well below the 40 percent required by the conditionality. However, trade liberalization did not go as far as anticipated in the President's Report. The condition called for the complete elimination of all quantitative restrictions except on i) security related goods, ii) subsidized basic consumption articles; iii) certain luxury goods not produced in Tunisia; and iv) a few articles previously agreed with the Bank (essentially some textile products, to be liberalized a year after the release of the third tranche). The list of products to remain under QRs that was submitted to the Bank for third tranche release included, in addition to the products listed above, some agricultural goods (olive oil, nuts, potatoes), some artisanal products (carpets) and cars. The Tunisian Government maintained that they would be liberalized in the near future, in the context of the GATr Agreement, joined in 1994, and the free trade agreement with the European Union (which was signed on April 12, 1995). Given that the objective of this condition has been achieved, a waiver was recommended and accepted on a no objection basis by the Board. b) the development of rinada markets and the strengthening of the regulatory and prudential framework of the banldng system. This is perhaps the area were the largest progress was achieved. Distortions in the taxation of financial instruments that hampered the development of financial markets were removed; the mandatory purchases by banks of low-yielding 10 years Government bonds was replaced by an auction process resulting in higher yields for both the banks and the public; moreover, the Treasury agreed to redeem practically all the outstanding bonds by end of 1996 and is ahead of schedule. The banking law was revised and the regulatory and supervisory framework of the banking system was put in line with the best international standards; audits were conducted on the quasi totality of the banks and action plans for strengthening or restructuring those reviewed were prepared and implemented. Regulations of the stock market underwent a comprehensive reform. Finally, the last remaining constraint on interest rates, a cap on the spread of deposit bank lending rates over the money market rate, was removed before the release of the third tranche of the loan. c) the reform of the system of incentives. This reform consisted in the replacement of several sectoral Investment Codes, providing costly fiscal and financial incentives to different sectors in the economy with a Unified Investment Code, expected to limit incentives to a f- ,v clearly defined objectives and cases of market failure. A unified Investment Code was indeed adopted in December 1993 (Law #93-120). It was prepared on the basis of a comprehensive and excellent study carried out by Tunisian experts, which suggested the replacement of the "vertical", multi-objective approach existing in the old Codes with "horizontal" objectives: exports, regional development, acquisition of technology, protection of environment. However, in the final formulation of the Code the objectives were enlarged to include the promotion of agriculture, support activities (education, culture, scientific research, etc), small enterprises and new entrepreneurs. And the Code fell short of the "significant simplification and reduction in the current system of financial and fiscal incentives" that was advocated in the Development Policy Letter. Although it represents an improvement on the past, the Code contains fiscal incentives (e.g. 10 years tax holidays to exporters) that are much too generous, compared to international standards, -3 -  costly to the budget and above all inefficient; moreover, the sectoral bias of the Code is maintained by the continued reliance for approval and monitoring of the advantages on sector committees, instead of a centralized body. d) adoption of a reform program of the social security system. Social protection in Tunisia consists of a few highly fragmented social security funds, covering major lifecycles risks, and a system of targeted assistance. At the time of the appraisal mission, the Authorities insisted on having the reform of the social security system included in the loan because they were anticipating that the funds would incur large deficits and they would raise the cost of labor. The objectives of the reform were: to link benefits more closely to contributions and to institute guidelines for the investments of the reserves of the funds; to lay the ground work for a system providing optional insurance releasing therefore budgetary resources to be used for protecting the really needy; and finally to reform the current system of consumer subsidies. Progress in this area included the adoption of guidelines in respect of the investments and related operations of the social security funds and an original program of self-targeted food subsidies to the needy. However, the preparation of the reform program of the social security system was delayed because some of the studies to be prepared for second tranche release took longer than anticipated. For third tranche release the Bank and the Government agreed on the principles and objectives of the reform, while its implementation was delayed to the future. D. MAJOR FACTORS AFFECTING THE PROJECT AND SUSTAINABILITY 7. The loan became effective, with release of the first tranche of US$100 million equivalent, on December 31, 1991. The second tranche, of US$70 million equivalent, was released in September 1993, 9 months behind the schedule foreseen at the time of the Board presentation because of delays in the preparation of action plans of audited banks, and to difficulties in finding an agreement on certain aspects of the new Banking law and of the draft Investment Code. The third tranche was released a year after the release of the second. It could have been released earlier but the promulgation of the Investment Code implementing legislation took longer than anticipated. The loan closed on December 31, 1994, as scheduled. 8. Tlhe project has achieved its main objectives and is therefore satisfactory and sustainable. This is because it was built on solid formulations and it is part of a broader development agenda firmly pursued by the Government. Trade and price liberalization, a more neutral system of incentives and a competitive and strengthened financial system will allow the private sector to play an increasingly important role in the development of the economy. However, the reform process is not over. Further progress is required in reducing tariff barriers, opening up to non European countries, developing the private sector, reforming the public administration, privatizing. Thus, the Bank has still a role to play in assisting Tunisia in the last phase of adjustment. E. BANK PERFORMANCE 9. The reform program supported by the EFRSL was consistent with both the Government's development strategy, as articulated in the VIII five year Plan (1992-1996) and with the Bank's assistance strategy. The loan was prepared in a very short time: the identification mission took place in April 1991, the appraisal in July and the loan went to the Board in December 1991. The Bank responded promptly to the Government's assistance request. The skill mix of those who participated in the -4 -  identification and appraisal missions was adequate. The loan was supported by economic work, namely a report on "Trade, fiscal and financial incentives", which was presented to the Board, as a gray cover, in November 1991. A study on "The Social Protection System", (Report No. 11376-TUN) issued in 1993, helped the Bank and the Tunisian authorities to clarify the issues related to the reform of the security system. The Bank was also very active in looking for cofinancing. The amount of cofinancing was as follows: $120 million, from the EXIMBANK, Japan; 40,000 ECU (about 50,000 US$) from the European Community. Coordination with the IMF was excellent during all phases of the loan preparation. 10. The Bank's supervision performance was adequate. Delays for the release of the second and third tranche were due to the complexity of certain reforms and the need to have them discussed and accepted by different interest groups in Tunisia. Perhaps the area where the Bank could have helped the Authorities more was the reform of the social security system. After the production of the report on the Social protection system, the Bank did not follow up with adequate staff inputs probably because it underestimated the enormous work that was necessary in order to prepare a detailed reform program. F. BORROWER PERFORMANCE 11. The borrower's contribution to the preparation of the loan was highly satisfactory and qualified. The commitment to the objectives of the reform was high throughout the implementation period. With the exception of a waiver on one condition related to the maintenance of certain products under quantitative restrictions for third tranche release, the compliance of covenants was very good. With the exception of one, all requested studies were completed (although with some delay). The goods and services financed by the Bank were procured according to the procedures and eligibility criteria set forth in the legal documents. There were no delays in the submission of eligible documentation in accordance with procurement procedures. Audits of the Loan accounts for 1991, 1992 and 1993, as required by the Loan Agreement, were received in time and found satisfactory. G. ASSESSNTM OF OUTCOME 12. The outcome of this operation is satisfactory. It achieved its major objectives and is likely to achieve substantial development results, without major shortcomings. H. LESSONS LEARNED 13. The EFRSL was successfully prepared and implemented. The lessons learned are the following: a) The success of an adjustment operation depends on many factors, most importantly, the Government willingness to take the lead in promoting a program of reforms; and the willingness, from the Bank, to cover the need for financial assistance in the country. In Tunisia, at a time when the SAL reforms were coming to a halt, the Government understood the need for moving on. Thus, the EFRSL program was "owned' and politically sustainable. In turn, the position of the Tunisian advocates for adjustment reforms was strengthened by the Bank support. - 5-  b) A complex reform program such as the one supported by the EFRSL can be prepared in a relatively short period of time when the Bank staff involved is familiar with the country and qualified. c) A successful operation needs excellent intersectoral and interministerial coordination. This was provided in Tunisia by the Ministry of Plan (now Ministry of Economic Development). d) Any component of the reform program which is not well prepared and discussed in detail with the Governrment before the loan is signed is likely to cause implementation delays. -6-  PART I - STATIWICAL TABLES Table 1: Summay of A _ts A. Achievement of Obiectives Substatial Partid Ngligible WdAsDiOakl Macro policies x Sector policies x Financial objectives x Institutional development x Physical objectives x Poverty reduction x Gender issues x Other social objectives x Environmental objectives x Public sector management x Private sector development x Other (exploration promotion) B. Proiect Sustainabilitv -Liel Unlikely Uncesain x C. Bank Performance HiblvS Satisfactor Satfatdogr Deficient Identification x Preparation Assistance x Appraisal x Supervision x D. Borrower Performance Hiablv Satisfactorv Satisfc Deficient Preparation x Implementation x Covenant Compliance x E. Assessment of Outcome Hijbly -ihWx Satisfactory Satisfactor Unsatfactor Unatisfhac x -7-  Table 2: Related Bank Loam/Credits Year of Loan/Credit Purpose Approval Status Tide Loan 2754 To support Government's agricultural September Closed June 30, 1989 AAL sector reform program, focussing on 1986 Agricultural increasing producer prices, reducing Sector subsidies on inputs, strengthening Adjustment Loan extens ion and research and increasing USS150 M interest rates. Loan 2781 To support the initial phase of February Closed in December 1939, one year behind schedule. ITPAL Government's adjusnent program for 1987 The fulfiOnmnt of certain conditions (concening Industrial Trade the industrl sector, including price labor issues, the introduction of a VAT tax and the and Policy Ads and trade liberalization and fisal design of a foreign exchange risk system) took longer Loan US$150 M reform. than expected. Loan 2962 To support the medium-term June Closed in June 1991, 26 months behind chedule. SALI macroeconomic adjustent program of 1983 The deay was due to slow implemnbttion of Structural the Government and continue the trade liberalization measures, because of a severe drought, Adjustment Loan liberalization and foreign exchange risk rising unemployment and declining investment. US$150 M coverage reforms initiated under the lTPAL; reform of taxation through introduction of VAT and simplification of income tax. Loan 3109 To support the Government's public July Closed in June 1993, 2 yea later than planned PERL enterprise reform, including legal and 1989 because of slow progreu in privatization (for feara of Public institutional reforms; to reinforce the social unrest), and delays in the preparation of Enterprises Government's program of divestiture performnnce contrmcts. Reform Loan and restructuring. US$130 M Loan 3078 To support the reforms of the June Expected to be cloeed in December 1994, extension ASAL 11 marketing, institutional and price 1989 to June 1994. Agricultural framework in agriculture, reorienting Sector public investent in agriculture and Adjustment Loan improving the management of natural US$84 M resources. Loan 3671-80 To finance the needs of new and November Project under supervision, expected to close in 1999. Private exising private enterprises by 1993 Invedrment channeling funds through eligible Credit Project financial intermediaries. US$120 M -8-  Table 3: Project Timetable Steps in project cycle Date planned Date actual / latest estimate Identification - Preparation 04/91 04/91 Apprais 07/91 07/91 Negotiations 11/91 11/91 Board presentation 12/91 12/91 Signiing 12/91 12/91 Effectiveness 12/91 12191 H Tranche 12/92 08/93 |m Tranche 12/93 09/94 Loan Closing 12/94 12/94 Sources: World Bank Management Information System, Back to Office Reports, President's Report - 9 -  Table 4: Loan Data FY 95 (Amount: US$250 million) _ | Disbursed Caeled Repaid 250.00 250.00 0 0 Loan Dimbursment FY 92 FY 93 FY 94 FY 95 (i) Pbanned 100.0 70 80 0 |i) Actua 100.0 0 70 80 - 10 -  Table 5: Studies Included in Project Study Purpose Status A. Invedsmet To review the existing incentive system; to Completed prepare an action program for the The ficl incentive system etblishment code. B. Social Security Reform * Improving coverage of the social - To examine methods of extending the Completed security sytem coverage of the existing social scurity system to the entire population. * Investnent strategy - Formulating guidelinoa regarding risk and Completed liquidity of investments by social security funds and insurance companies. * Social security number - To examine the problems involved in Completed establishing a unique system of social security numbers for individuals. * Family assistance mechanisms - To examine the current sytem of fimily Completed asistance benefits and their possible replacement. * Unemployment insurance - To examine the (a) deirability and (b) the Not Completed feasibility of providing incone support to the unemployed. - 11 -  Table 6: Legal Covenants: Conditions for Effectiveness, H and m Tranche Release Description of Covenant Conditions for EffUivene: Section 5.01 a) The Borrower has submitted for adoption by its Chamber of Deputies a draft Fiscal Year 1992 Finence Law (Loi de Fnces) allowing the Borrower to take all necemry action to reduce the share of its imports subject to quantitative restrictions by at least fifteen percentage points (15 percent), in terms of Domesdic Production Value of NAP Chasification itwn 6632 to item 6414 applicable aS of Fiscl Year 1989, from the level in effect as of M y 30, 1991; b) The Borrower has reduced the aggregate shar of goods subject to price control at the distribution stage by at least ten percentage points (10 percent) in terms of their value of Domestic Production, as determined on the basis of the Domestic Production Value of NAP Classification item 111 to item 6414 applicable as of Fiscal Year 1989, from the level in effect as of May 30, 1991; c) The Borrower has taken any and all neceary action, satisfactory to the Bank, to amend the requirement on deposit banking institutions to hold twenty percent (20 percent) of their deposit assets in Bons d'Equipement, and to permit such institutions to hold any available freely market traded treasy securities of the Borrower, other than Bons d'Equipement; d) The Borrower has furnished to the Bank an action plan, acceptble to the Bank, for the redemption over four (4) years, covering the period 1993-1996, of any and all outstanding Bons d'Equipement issued after Fiscal Year 1988; e) The Borrower has furnished to the Bank the relevant extrcts, satisfactory to the Bank, of the Borrower's draft Fil Year 1992 Finance law (Loi de Finane), submitted for adoption by its Chamber of Deputies, which extracts shall: (i) amend the tax trment of financial instruments so as to remove an1 restrictions limiting the sale, purchase and freedom of transfer of said financial instuments within the Borrower's territory; and (ii) harmonize the taxation of income derived from special savings accounts with the taxation of income derived from odher financial indstuments within the Borrower's territory; f) The Borrower has taken any nd all necesary action, stisfictory to the Bank, to allow each deposit bank operating within its territory to provide its loans at an interest rate above the prevailing Money Market Rate plus three percentage intered points (3 percent), provided, however, that the difference between said Money Market Rate and each such bank's respective average lending rate in respect of all of its loan, excluding Rediscounted Preferential Credits and Special Resource Credits, does not exceed three percentage points (3 percent); g) The Central Bank has adopted a program of actions to strngthen its prudential banking supervision capabilities, which program shl be satisfactory to both the Bank and the Borrower; h) The Central Bank has adopted regulations, satisfactory to the Bank, for inter aIhs: (i) the provisioning and clasafication of loans, as of January 1, 1992, by bsnlking institutions opeating within the Borrower's territory; (ii) the fixing of maximum loan concentrtion for each of said banking ins on at forty percent (40 percent) of such institution's respective aggregate own funds; (iii) the definition of group ownership and control in respect of said institutions' borrowen; (iv) the definition of auditing principles upon which auditors must ba their opinions, and the removal of ceilings on the cost of long-version audits; and (v) the obligation of banking institutions operating within the Borrower's territory to provide to the Centrl Bank quarterly profit and loss accounts; and i) The Borrower has increased, by at least one percentage point (1 percent), the interest rate on Rediscounted Preferential Credit, based on a methodology satidactory to the Bank.  II1 Tranche Relean Scheduloe 4 Part A: Actions referred to in Paragraph 4 (a) of Schedule I 1) Coatnued maintance by the Borrower of a macro-economic framework consient with the objectives of the Program, as determined on the basis of indicators acceptable to the Bank. 2) The Borrower has reduced the shn of impots subject to quantitative restrictions by at least thirty percentage poiits (30 percent), in terms of Domestic Production weghts, as detemined on the basis of the Domestic Production Value of NAP Classification item 011 1 to item 6632 applicable as of Fiscal Year 1989, from the level in effect as of May 30, 1991. 3) The Boowwer has increased the aggregate share of goods not ubject to price control at the distribution sage to at lea"t forty percentage points (40 percent) in terms of their value of the Domesic Absorption in Fiscal Yesr 19S9, as measured on the basis of a methodology satisfactory to the Bank. 4) The Borrower hs: (1) removed any and all taxation requirements, and reLated rights and obligations, that restrict or otherwise impair the development and operation of an efficient seconday market for the purchase, sale and ftee trade of financial instruments within the Borrower's territory; and (ii) has adopted rules and regulations, satisfactoy to the Bank, exempting from taxation at least one quarter (1/4) of all specific provisions and interest suspenaion. 5) The Cental Bank has adopted regulations, stisfactory to the Bank, for inter alia: (J) reducing the maximum loan concentration permitted for esch banking intitution operating within the Borrower's territory to thirty-five percent (35 percent) of such institution's respective aggregate own funds; (ii) setting forth sandard audiing principle in respet of banking institutons operating within the Borrower's territory, which principles shall be consistent with intentionally accepted auditing practice and sha include, intr alia, the obliption to provide lng-verinon audit reports; and (iii) regulating the provision by said infitutions to the Cental Bank of required accounting nd statistical documentation, which regulation shall become effective not later than January 1, 1993. 6) The Borrower has submitted for adoption by its Chamber of Deputies a banking law satisfactory to the Bank. 7) (a) The Borrower and the Bank hall have carried out a joint review, based on data acceptable to the Bank, of the individual financial position of each audited or inspected banking insfitution operating within the Borrower's territory; and (b) Taking into consideration the Bank's recommendations puruant to such review, the Borrower has put into operation action plans for, inter alia, srengthening or restructuring each of said banking institutions. 8) The Cental Bank has adopted a progra, acceptble to the Bank, for auditing and examining the overall viability of banking institutions accounting for at least two-thirds (2/3) of the banking operations carried out within the Borrower's territory. 9) The Borrower has taken all action necessary, satisfactory to the Bank: (a) limiting the duration and selectivity of tax advantages accorded to investors under the Borrower's investment codes; and (b) adopting satisfactory maes to reform related financial advantages. 10) Without Hmitaion or restiction to the provision of Section 5.01 (i) of this Agreeme, the Borrower has increased, by at leat two percentage point (2 percent), the interest rate on Rediscounted Preferential Credits, based on a melhodology atisfictory to the Bank. 11) The Borrower has adopted guidelines, acceptable to the Bank, in respect of the invedments and related operations of its social security funds.  El Trnche Rdease Schedule 4 Part B: Actions referred to in paragraph 4(b) of Schedule I 1) Continued maintenance by the Borrower of a macro-economic framework considtent with the objectives of the Program, as deternined on the basis of indicators acceptable to the Bank. 2) The Borrower has taken all necory measures, satisfactory to the Bank, to elininate all quantitative restrictions on imports of all goods, except for the following goods which have been previously specified in agreanmnt with the Bank: (a) ecurity related goods; (b) basic consumption articles whose consumer prices are subsidized by the Borrower, (c) certain hmury goods which are not produced withn the Borrower's territory; and (d) certain other articles previously approved by the Bank. 3) The Borrower has reduced the aggregate share of goods not subject to price control at the distribution stage to at leat sixty percentage point (60 percent) in terms of their value of the Domestic Absorption as of December 31, 1989, as measured on the basis of a methodology atisfactory to the Bank. 4) The Borrower has achieved progress, utisfactory to the Bank, in carrying out the action plan referred to in Section 5.01 (d) of this Agreement. 5) The Borrower has removed any and all percentage interest point ceilings applicable to the lending rate or rstes charged by each deposit barn operating within its territory. 6) The Central Bank has adopted regulations, satisfactory to the Bank, for, inter alia, reducing the maxinum loan concentration permitted for each banking institution operating within the Borrower's tetvitory to twenty-five perceage points(25 percent) of srch institution's tol own funds and providing for the establishment of a surharge, in the form of an addition to own funds, for exceeding the said maximum of twenty-five percentage points (25 percent). l7) The Borrower and the Bank have carried out a joint review, based on data acceptable to the Bank, of the individual financial positions of each audited or inspected banking institution operating within the Borrower's territory. 8) The Bank and the Borrower have carried out a joint review, based on terms of reference acceptable to the Bank, of the progress achieved in carrying out the action plans referred to in sub-paragrph 7 (b) of Part A of this Schedule. 9) The Central Bank has adopted a program, acceptable to the Bank, for auditing and examining the overall viability of banking institutions accounting for all banking operations carried out within the Borrower's territory. 10) The Borrower has: (a) carried out the action plans referred to in sub-paragraph 9 (b) of Part A of this Schedule; and (b) adopted an Investment Code and relted implementing regulations, all satisfactory to the Bank. 11) The Borrower has adopted a program, satisfactory to the Bank, for reforming it social security ystem, and has carried out the measures of said program in respect of the most disadvantaged groups of ita population.  Table 7: Bank Resources: Staff Inputs Plannxed* Revised Aclual Stage of project cycle Weeks US$** Weeks USS Weeks USS** Through appraisal 70.6 l Apprisal - Board 70.6 Board - effciveness Supervision 92.8 Completion 6.0 TOTAL 240 Source: World Bank Management Information System * No planned figures available. ** MIS did not provide dollar amounts. - 15 -  Table 8: Bank Resources: Missions Performance rating* Number Days Specialized Implemen- Develop- Stage of Month/ of in saff skills tation ment prject cycle year persons field** represented satus objectives Types of problems Through 04/91 8 100 3 E Identification appraisal 2 R Preparation 2 F I D Appraisal 07191 10 140 4 E Appraisal through 2 R Board 2 F approval 2 D Supervision 05/92 3 30 2 E 2 1 I F 11/92 4 60 2 E 2 1 Slow implementation of I F the planned audits of 1/3 1 R of the banking sysem mnd of measr concerning banking supervision and prudential regulation. 04/93 3 20 2 E 2 1 Slow implementation due I F to: (i) delays in the preparation of the bank's action plans; CiH) disagreeme on parts of banking legisation and on investment code proposl. 09/93 3 12 2E, I F 2 1 No Form 590 in files. 12/93 2 20 1 E 2 1 Delays in taking reasure 1 F (i) to liberalize int rates; CiH) to reform the _______ ______ __________ ________ social security system. Sources: Back to Office Reports, Form 590s E = Economist F = Fuiancial Specialist R = Research Assistant D = Debt Specialist - 16  I  .M A'S : rIN Report No: 14779c Type: I'C-R