Senegal - Economic Recovery Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15874 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL ECONOMIC RECOVERY CREDIT (CREDIT NO. 2582-SE) June 26, 1996 Country Operations Division Western Africa Department Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Monetary Unit: CFA fratic (CFAF) USS1.00 (I990) = CFAF 272 USSI.00(1991) = CFAF282 USSI.00(1992) =CFAF 265 USS1.00(1993) = CFAF283 US$1.00 (1994) = CFAF 555 USS1.00 ( 1995) -CFAF 499 WEIGHTS AND MEASURES Nletric Ssstem FISCAI YEAR July I -June 30 (until Jtine 30. 1991) JnIv 1-December 31 (18 months), for fiscal vears 1991/1992 Janiuar, I -December 31 (from Januan 1, 1993) ABBREVIATIONS 'AD ACRONY'MS AGETIP : ge 7oo cd c'.cc tarit des tI-,c culrs dinlt/e/il Ilic r/e Irte le so00s emp/li/rn (Public Works and Etnplc' ntent Project) BCEAO : unq,re centrde des Elulr.Idc I tfique d, IOtrest (Central Bank) BMOP : Bzrreuzr 'jr/u Acrin d Oewr me P-riuaire (Port Labor Office) CFA : Cenrrterutcactfin rci,cr-e fi icufure (African Financial Cornmunitm) CNCAS Cause ntct-imttjc' de credir qperi-ule srb/golacse (Agricultural Bank) CPSP : dcx.ce c/per/qt orr eir c Jr stailhrcsa,tiour des pri. (Fund for Price Equalization and Stabilizatiot) CRJ Cr'rtttc d, rsfru-mccjuru/a/rce (Legal Reform Commitrtee) DDI Direcct),,, dc (a derie ec dc I ic est/ssetwcewr (Directorate of Debt and Investrnent) DPS D: remr r del p,mr/srr,r esr/et deJ ctcisriquce (Directorate of Forecasting and Statistics) ESAF ,Enhanced structural adjustment facilit, (IMlF) FSP FotlcI/,ci,cr dcc sleer p;ri e (Pric ate Sector Foundation) GDP gross donrestic product G&NFS : goods ard con-factor ser, ices G&S : poods and serc ices GRCC : Groupe de refle,xrtn stcr 1, crornrpirlile er la crnissance (Competitir coess Rev iec, Group) ICS : Ittducstrie.schi/niqnes cdc.Se/egal (Chemical Comnpany) ONA : Office urin,mrcI dccssauinissewnel,c (National Sanitiation Office) PASA Progupr rne dcajnsltener seciorielpuar, /cgricul-re (Agricultural Sector Adjustment Program) PASCO : Pr-mjer d cai/r-em strncrrcr el cf de conrp/tivt/e (Priate Sector Adjustment and Contpetitieness Credit) PDRG Prile direcce-r do dc/ce/ ppencewtt inclegre c/e (c Ri e gapche (Master Plan for Integrated Deselopment of the Left Banik of the Senegal Riser) PFP : Policc Frameccork Paper PSACC P: rate Sector Adjustment and Competitiveness Credit ETI P : Prog,upcmne e,, ,iecl d incesfissencents publics (Three-Year Public Investment Program) PFEER : Real effectise eschange rate SENELEC Sociele nccrioncale d c/ee itc ie/c .S/eegal (Poser Company) SODEFiTEX : Sociue e d/c elopp/.;rpet.ci des fib,es textiles (Textile Company) SONACOS : Socicte ntior,rcale de crrncrrrererc/hsurio, des cr//agineux du Sen/gal (Groundnut Oil Company! ) SONES Sociele -tationltae des earu du Senegal (National Water Company) SONEES : Soc/cte ncariuo,u/e d'expl/cccaricir des eate du Sen/gal (National W'ater Supply Company) UEMOA : Union coar...niq,le el ....../ta/re o,esl-africaine (West African Economic and Monetar, Union) VAT Value-added tax  IMPLEMENTATION COMPLETION REPORT FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL ECONOMIC RECOVERY CREDIT (Credit No. 2582-SE) TABLE OF CONTENTS PREFACE... SUMMARY EVALUATION ...........................................j.. PROJECT BACKGROUND. EVALUATION OF OBJECTIVES AND DESIGN ............................................ ii PROJECT RESULTS AND SlJSTAINABILITY ............................................i jj BANK PERFORMANCE ........................................... iV BORROWER PERFORMANCE ........................................... iV SUMMARY OF OUTCOME AND FUTURE OPERATIONS ........................................... iV LESSONS LEARNED ........................................... V PART 1: PROJECT IMPLEMENTATION ASSESSMENT ............................................I 1. PROJECT BACKGROUND ............................................I II. PROJECT OBJECTIVES AND DESIGN ........................ ......... .....................2 Ill. ACHIEVEMENT OF PROJECT OBJECTIVES ......................................3 A. Macroeconomic Results. 3 B. Social Safety Net ......................................4 C. Continuation of Dialogue between Senegal and the Bank . .............................................5 IV. MAJOR FACTORS AFFECTING THE PROJECT ..............................................5 V. SUSTAINABILITY OF RESULTS ............................................. 6 Vl. PERFORMANCE OF THE BANK. 6 VII. PERFORMANCE OF THE BORROWER ..............................................6 A. Preparation and Implementation .............................................6 B. Disbursement and Procurement ..............................................7 C. Audits. 7 VIII. ASSESSMENT OF OUTCOME ..............................................7 IX. FUTURE OPERATIONS ............................................. .8 X. KEY LESSONS LEARNED ..8 PART 11: STATISTICAL ANNEX ..9 PART III: BORROWER EVALUATION ............................................. 16 MAP | This document has a restricteJ distribution and may be used by recipients only in the performance of their I official duties. Its contents may not otherwise be disclosed without World Bank authorization.   IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL ECONOMIC RECOVERY CREDIT Credits 2582-SE PREFACE This is the Implementation Completion Report (ICR) for the Economic Recovery Credit (ERC) in Senegal. for which an IDA credit Cr. 2582-SE was granted for the amount of SDR 18.2 million (US$25 million equivalent). This credit was approved by the Board of Executive Directors on March 17, 1994, and made effective on March 24, 1994. A supplement (Cr. 2582-1-SE) was also made effective on January 9, 1995 with a grant of SDR 2.3 million (US$3.2 million equivalent) from Fifth Dimension Program funds. The credit was fully disbursed in two tranches on March 29, 1994, and January 13, 1995. Both the credit and the supplement closed on December 27, 1995. This ICR was prepared by Abdoulaye Seck of the World Bank Resident Mission in Dakar (AF5SN). The Borrower contributed to the preparation of the ICR by submitting its evaluation of the project execution and achievements. The ICR was reviewed at Bank Headquarters by the Country Operations Division, Western Africa Department, and by Emmerich M. Schebeck, Projects Advisor of the same Department. The ICR is based on the Report and Recommendation of the President to the Executive Directors (Report No. P-6273-SE), material in the project files, the Country Assistance Strategy for Senegal (Report No. 13909-SE), and findings of the project completion mission of December 11 - 17, 1995.   IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL ECONOMIC RECOVERY CREDIT Credit 2582-SE SUMMARY EVALUATION PROJECT BACKGROUND 1. In the mid- 1970s. Senegal initiated a policy of public sector expansion, following a series of good harvests and a period of high prices for its export commodities. By the end of the decade, however, lower phosphate prices and a decline in groundnut production had resulted in a general state of both domestic and external disequilibrium. 2. Four structural adjustment operations undertaken with the Bank between 1981 and 1994 failed to solve the problem of high production costs in the Senegalese economy. With the economic recession of the mid-1980s. the country's lack of competitiveness began to worsen when Senegal could not utilize a parity change to respond to two exogenous shocks: (i) deterioration of the terms of trade and (ii) appreciation of the French franc against the dollar. By the end of 1993, the CFA franc was overvalued by an estimated 40%. In August 1993, the Government launched a stabilization program known as the Emergency Plan which failed because of the glaring overvaluation of the CFA franc and a lack of external financial assistance. By then, it had become clear that nothing short of a global adjustment strategy could bring about a sustainable recovery in growth and reduce poverty. On January 12, 1994, Senegal and its partners in the franc zone realigned their currency, changing the parity of the CFA franc from 50 to 100 CFAF per FF. EVALUATION OF OBJECTIVES AND DESIGN 3. The Economic Recovery Credit (ERC) was designed to provide emergency support to the post-devaluation reform program. This program was also supported by an IMF stand-by arrangement in the amount of US$63.3 million, converted into an ESAF in August 1994, at which point the Bank and the IMF approved a Policy Framework Paper (PFP) covering the period 1994-97. The ERC aimed at containing the adverse effects of the devaluation while continuing to implement necessary sectoral and structural reforms to - 11 -  ensure improved competitiveness. The objectives of the Economic Recovery Credit were to: (i) support the Government's reform program, outlined in its Statement of Economic and Social Policies dated February 23, 1994, and more particularly the measures aiming at minimizing the negative social impact of the devaluation in the short term; (ii) provide the necessary financial assistance during the transition period in which follow-up operations were being prepared; and (iii) continue the policy dialogue between the Government and IDA. 4. The ERC was conceived as a single tranche operation with all conditionalities front-loaded. This design was influenced by the fact that budgetary support needed to be made available rapidly in order for the Government to consolidate the gains of the devaluation and respect its financial program. 5. The objectives of the credit were clearly defined and consistent with the Government's economic policy reform program. The credit's scope and timing were appropriate and responsive to the country's circumstances and priorities. It contributed to the Government meeting most of its financial requirements and implementing measures to ensure real depreciation and improve the country's competitiveness. PROJECT RESULTS AND SUSTAINABILITY 6. The objectives of the ERC were generally met. The results are likely to be sustainable provided that the Government remains committed to the reforms introduced under the ERC. 7. Appropriate budgetary and monetary policies contributed to the Government's success in controlling inflation. Average annualized inflation in 1994 was below the program goal, while the REER had depreciated by an estimated 36.3% by December 1994. This significant gain in competitiveness paved the way for a recovery in exports and a resumption of growth. GDP growth in real terms in 1994 was 2%, lower than projected but a net improvement over 1993 (-2.1%). Increases in producer prices for oil-quality groundnuts and cotton allowed rural incomes to increase by 32.5%. Devaluation of the CFA franc by 50% made it possible to simplify and reduce tariffs, giving impetus to future reforms. 8. On the social front, a temporary subsidy of CFAF 15 billion was allocated to limit the upward movement of prices for such products as rice, wheat flour, pharmaceutical products, and books (education sector). However, the effect of the social safety net - iii -  appears to have been weakened by the urgent nature of the program, which did not allow for sufficient time to organize appropriate targeting mechanisms. BANK PERFORMANCE 9. Overall Bank performance in identification, preparation, and appraisal was satisfactory. The Bank responded appropriately to an emergency situation requiring urgent measures. However, as it was a one tranche operation with all conditionalities front-loaded, supervision by the Bank following credit effectiveness was weak. In spite of this, negotiations on the Sixth-Year and Seventh-Year PFPs, as well as those on the Private Sector SECAL, gave Bank staff the opportunity to ensure that the authorities were maintaining their reform efforts. BORROWER PERFORMANCE 10. The Borrower's performance was satisfactory. The Borrower complied with all legal and financial covenants including the submission of the audit report received by the Bank in October 1995. The Government encouraged dialogue with those affected by the reforms by setting up a tripartite Devaluation Management Commission; it was thus able to develop a consensus on the reform program and prevent social unrest. An open and healthy dialogue with the Bank and the IMF was maintained and all agreed reforms were undertaken. SUMMARY OF OUTCOME AND FUTURE OPERATIONS 11. The outcome of the ERC is satisfactory. Following the devaluation, the program supported by the ERC resulted in a depreciation of 36.3% of the REER, a major gain in competitiveness that paved the way not only for Senegal's export recovery but also its resumption of growth, which reached 2% in 1994. Higher producer prices increased rural income and thus contributed to poverty alleviation. The social safety net could have been more effectively targeted, although the measures achieved in the ERC mitigated the impact of the parity adjustment on the most vulnerable groups in the population. Finally, the devaluation and the ensuing fiscal reform process acted as powerful stimuli for structural reforms in Senegal. 12. The ERC, by creating a favorable environment, prepared the way for subsequent operations. The Private Sector Adjustment and Competitiveness Credit and the Agricultural Sector Adjustment Program, approved by the Board in February and June 1995 respectively, aim at increasing the competitiveness of Senegalese enterprises by promoting real competition. An adjustment program to address administrative reforms - iv -  and the budgetary process and improve the efficiency and the capacity of Government to carry out policies is being considered for FY98. LESSONS LEARNED 13. Three lessons can be drawn from implementation of the ERC: First, Government's firm commitment to the reform program was a key element in the success of the operation. Second. budgetary support in a single-tranche disbursement was a satisfactory response to an emergency situation. Because the credit was tied to adjustment measures on which the Government was firmly committed, IDA was able to provide financial assistance when needed, thus laying the ground for the preparation of subsequent and more comprehensive adjustment lending. Third, as far as poverty reduction is concerned, specific mechanisms for targeting vulnerable groups should be identified beforehand so that the impact on such groups can be maximized. Geographic targeting combined with established programs, such as food or cash-for-work, could be considered to have a stronger impact on the poor. -v -  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL ECONOMIC RECOVERY CREDIT Credits 2582-SE PART I: PROJECT IMPLEMENTATION ASSESSMENT Project Identity Program Name: Economic Recovery Credit (ERC) Credit Number: Credit No. 2582-SE Amount: SDR 18.2 million (US$25 million equivalent) Terms: IDA Credit: Standard with 40-year maturity Borrower: The Republic of Senegal Date approved: March 17, 1994 Date effective: March 24, 1994 Date Closed: December 27, 1995 1. PROJECT BACKGROUND 1. In the mid- 1970s, Senegal initiated a policy of public sector expansion, following a series of good harvests and a period of high prices for its export commodities. By the end of the same decade, however, lower phosphate prices and a decline in groundnut production had resulted in a general state of both domestic and external disequilibrium. In the 1980s, the country began to receive major bilateral and multilateral assistance in support of various stabilization and structural adjustment plans. In particular, the World Bank funded four structural adjustment programs and two sector adjustment operations between 1981 and 1994. Weaknesses coupled with hesitations in instituting structural reforms were to push Senegal into a serious crisis situation. 2. The structural adjustment programs financed by the Bank failed to solve the problem of high production costs in the Senegalese economy. The recession and the problem with competitiveness began to worsen in the mid-1980s when Senegal was not able to use a parity change to respond to two exogenous shocks: (i) deterioration of the terms of trade (-14% between 1983 and 1990); and (ii) appreciation of the French franc  against the dollar following the Plaza Agreement of September 1995. The resulting overvaluation of the CFA franc was accentuated by the devaluation introduced by certain competing countries (Nigeria, Ghana. etc.). Between 1981 and 1989. the real effective exchange rate (REER) in Senegal was to appreciate by 92% compared to Ghana, 75% compared to Nigeria, and 40% compared to China. By the end of 1993, the CFA franc was overvalued in Senegal by an estimated 40%. This massive loss of competitiveness was to produce a falling off in exports and a structural deficit in the current account balance. The fact that the Government then adopted a highly protectionist trade policy and multiplied the number of special arrangements in its efforts to mitigate the effects of such a loss resulted in further productivity loss for domestic enterprises, and a decline in customs revenue. 3. The overall downturn in activity led to a shrinkage of the tax base, and thus to revenue losses and new downward pressures on education and health expenditures. In August 1993, the Government launched a stabilization program known as the Emergency Plan. Although it consisted of vigorous measures, such as a 15% reduction in the public sector payroll, and a series of measures to increase revenue (in particular, increases in customs duties and petroleum product prices), the Plan failed because of the glaring overvaluation of the CFA franc and a lack of external financial assistance. GDP growth in 1993 was negative (-2.1%). The budget deficit, on a commitment basis and excluding grants, was equivalent to -4% of GDP. Payment arrears continued accumulating: CFAF 47 billion in domestic arrears and CFAF 174 billion in external arrears, giving a total equivalent to 13.8% of GDP. The current account deficit grew to -5.6% of GDP, due to the sharp drop in exports (-7.2%). By this point, it had become clear that nothing short of a global adjustment strategy could bring about a sustainable recovery in growth and reduce poverty. Effective January 12, 1994, Senegal, in agreement with its partners in the franc zone, realigned its currency, changing the parity of the CFA franc from 50 to 100 CFAF per FF. II. PROJECT OBJECTIVES AND DESIGN 4. Objectives: The Economic Recovery Credit (ERC) was designed to support the reform program introduced by the Government following the devaluation of the CFA franc as set out in its Statement of Economic and Social Policies adopted on February 23, 1994. This program also had the backing of an IMF stand-by arrangement, later converted into an ESAF in August 1994 when the Bank and the IMF approved a Policy Framework Paper (PFP) covering the period 1994-97. The objectives of the ERC were: (i) to support the Government's reform program, and more particularly the measures aimed at minimizing the negative social impact of the devaluation in the short tern; (ii) to provide necessary financial aid for the transition period, while follow-up operations were being prepared; and (iii) to continue the policy dialogue between the Governrment and IDA. - 2 -  5. Design: The ERC formed part of the IDA strategy for creating the conditions that would ensure a positive post-devaluation supply response. It was intended as a quick- disbursing adjustment operation set up to provide budgetary aid at the appropriate time, and to make funding available for investment operations. 6. Benefits: The ERC was expected to help the Government in managing the transition following the currency realignment, assisting it in maintaining macroeconomic equilibrium and meeting the immediate social needs of the post-adjustment period. In addition, human resources development would be accelerated by increasing access to basic services and developing opportunities for income creation in both rural and urban areas. 7. Risks: Although there were short-term risks of urban disturbances in the short term in reaction to employment loss, inflation, and a decrease in the standard of living, two important factors were expected to help avoid them: (i) the provision of supporting measures under the ERC such as a subsidy fund (social safety net) and temporary price controls; and (ii) support from major opposition parties for the economic reform program as the only way out of the crisis. III. ACHIEVEMENT OF PROJECT OBJECTIVES 8. The ERC accomplished its key objectives. Careful management of overall demand following the devaluation of the currency by 50% made it possible to limit inflation and to depreciate the REER significantly. The Government undertook a series of key macro- economic and structural measures which regained and consolidated competitiveness. A. Macroeconomic Results 9. After devaluation of the CFA franc, an appropriate budgetary and monetary policy enabled the Government to gain control of inflation and to depreciate the real effective exchange rate by 36.3% in 1994. Although the public sector payroll was held below the prescribed figure of CFAF 149 billion, a steeper than anticipated drop in Government revenue, especially from imports, resulted in a budget deficit equivalent to 5.7% of GDP instead of the 3.6% initially projected. The drop in revenue from imports was a consequence of the decline in import volume, itself traceable to three factors: (i) some displacement of demand toward local products; (ii) accumulation of significant stocks of major products in late 1993 in anticipation of the devaluation; and (iii) a shift in the structure of imports toward less heavily taxed capital goods. Because of this revenue shrinkage, the country's external arrears could not be eliminated entirely by December 1994 as anticipated. The downward trend in revenue flows was mirrored in capital expenditures: CFAF 100 billion instead of the CFAF 112 billion projected in the program. Credit policy was equally prudent: after the devaluation, the Central Bank raised its discount rate from 10.5% to 14.5%, with a resulting increase in credit to the economy of only 11.2% in 1994, well below the ceiling of 24.4% projected in the program. -3 -  10. Average annualized inflation in 1994 was 32.1%, below the program goal of 39%, while the REER had depreciated by an estimated 36.3% by December 1994. This significant gain in competitiveness paved the way for a recovery in exports and a resumption of growth. Exports (current francs) showed very significant growth in sectors such as tourism (118.3%), fisheries (134.7%), salt, groundnut products (314.2%), and phosphoric acid. In aggregate, exports expanded by 8.1% in real terms in 1994. In conjunction with a decline in imports, this increase in export business resulted in a current account deficit of -9.3% of GDP, compared to the figure of -10.7% projected initially. There was an equallv clear resurgence in both the cement and textile sectors. GDP growth in real termns in 1994 was 2.0%. lower than projected but a net improvement over 1993 (-2.1%). 11. Producer prices for oil-quality groundnuts, cotton, and rice rose by 43%, 29%, and 6% respectively. While the upswing in groundnut prices produced higher earnings, the upward trend in cotton and rice prices was not strong enough to have the same impact. Rural incomes are estimated to have increased by 32.5% in 1994 compared to 1993. 12. Prior to realignment of the exchange rate, Senegal had long used second-best solutions to offset the appreciation of the CFA franc, and in particular instruments such as export subsidies and very high import tariff barriers. This was a situation conducive to the proliferation of economic rents, faulty resource allocation, and increased tax evasion. Devaluation of the CFA franc by 50% made it possible to reduce tariffs, which in turn preserved the depreciation in the REER. Customs duties were thus lowered from a pre- reform bracket of 6%-124% to one of 5%-45%. Standard values and minimum charges were eliminated. The number of product categories was reduced from seven to four, and the customs stamp duty was made uniform. Export subsidies were eliminated. Indirect taxes were also recast for greater simplicity and lower rates: there are now two instead of five VAT rates; and the new rates are in the 10%-20% range instead of the pre-reform bracket of 7%-34%. B. Social Safety Net 13. In order to provide against the short-term adverse impact of the devaluation on the most vulnerable groups, a temporary subsidy of CFAF 15 billion was appropriated for use in limiting the upward movement of prices for such products as rice, wheat flour, pharmaceutical products, and books (education sector). Subsidy funds were allocated as follows: rice prices, CFAF 8 billion; wheat prices, CFAF 2.5 billion; pharmaceutical prices, CFAF 2.5 billion; and education, CFAF 2 billion. The effect of the social safety net appears to have been less significant, doubtless because the subsidy arrangements were too loosely targeted. Given the urgent nature of the program, there was not enough time to organize appropriate targeting mechanisms, so that the potential impact on the poorest groups was diluted. A report on the standard of living survey conducted in Senegal prior to the devaluation estimated that it was 14 times more expensive to alleviate poverty through a non-targeted approach than through an accurately targeted system. In the - 4 -  specific case of the book subsidy. its purpose was defeated when France negotiated directly with publishers to keep their CFAF prices for textbooks unchanged. The proceeds of this component of the subsidy were used to ensure payment of the scholarships of Senegalese students abroad instead. 14. The Government emphasized that it was committed to maintaining expenditures on human resources development, the quality of which is considered the best long-term guarantee of growth. Education expenditures in fact rose by 12% in 1994. Priority was given to primary schooling, which absorbed 79.3% of investment spending. Expenditures on health rose by 0.5% in real terms, with the primary health care system absorbing 51% of investment spending in the sector as a whole. In conjunction with the realignment of the exchange parity in January 1994, the Government also exempted both social services and essential commodities from the VAT. C. Continuation of Dialogue between Senegal and the Bank 15. Following the devaluation of the CFA franc, a major obstacle to reform was removed. The new climate created by the devaluation enabled the Bank to join forces with Senegal to prepare two major adjustment programs to follow up on the ERC, namely, the Private Sector Adjustment and Competitiveness Credit (Cr. 2681-SE) and the Agricultural Sector Adjustment Program (Cr. 2738-SE), both approved by the Board in FY95. Senegal's estimated financing needs following the devaluation totaled CFAF 597 billion. However, before the necessary structural reforms could be put into effect, appropriate steps were needed to secure the success of the devaluation, and it was in this spirit that the ERC was designed. IV. MAJOR FACTORS AFFECTING THE PROJECT 16. The program benefited from high international prices for Senegal's main export commodities, namely groundnuts, cotton, and phosphoric acid. Major assistance was also provided by both bilateral and multilateral donors, enabling the Government to cover its substantial financing needs. 17. The Government's willingness to engage in dialogue, and its commitment to reform, were determining factors in the overall success of the program. By establishing a tripartite Devaluation Management Commission, it was able to develop a consensus in support of sometimes painful reform measures. 18. The program was implemented through the Ministry of Finance, which possessed the ability to provide the kind of post-devaluation management required, thanks mainly to the Options Group set up in October 1992 and supported by an Institutional Development Fund Grant from the Bank. -5 -  V. SUSTAINABILITY OF RESULTS 19. The main results of the ERC are likely to prove durable for four reasons: (i) the trade policy distortions that previously undermined the competitiveness of Senegal's enterprises were made superfluous by the marked depreciation of the REER; (ii) unlike deflationary internal adjustment, competitive devaluation generates the kind of growth that attracts further support; (iii) quite apart from the Government's commitment, major civil groups, the independent press, and both management and labor associations are in favor of continuing the reform process; and (iv) the adjustment programs prepared by the Bank as follow-up operations to the ERC should help remove obstacles to strong growth, thereby encouraging the partisans of reform. However, these results are subject to Government's continuous commitment to the reform program. Moreover, it should pay attention to administrative reforms in customs in order to consolidate revenue mobilization. VI. PERFORMANCE OF THE BANK 20. The Bank's performance was satisfactory during each phase of the program except for supervision. Credit processing was completed in less than three months. The Bank proved itself flexible here, in view of the difficulties it had encountered with previous adjustment lending in Senegal. The emergency nature of the operation explains the Bank's flexibility in the a--a of disbursement procedures, which were eased to allow quick release of credit funds. The Bank's initial appraisal of Senegal's commitment, and of the benefits and risks associated with the operation, was carried out correctly. However, as it was a single tranche operation with all conditionalities front-loaded, follow-up by the Bank was weak. In spite of this, negotiations on the Sixth-Year and Seventh-Year PFPs, as well as those on the Private Sector SECAL, gave Bank staff the opportunity to verify that the authorities were maintaining their reform efforts. VII. PERFORMANCE OF THE BORROWER A. Preparation and Implementation 21. Overall, Government's performance was satisfactory. The key objectives of the program were accomplished, in particular depreciation of the REER by 36.3%. The Government also encouraged dialogue on the reform program. A committee comprising representatives of the Government, the private sector, and unions was created to discuss the main issues regarding the post-devaluation reform program. This dialogue was very - 6 -  successful in avoiding major social conflicts. However, program implementation was compromised by disappointing results in restoring revenue flows. Total revenue amounted to CFAF 301.5 billion in 1994 compared to CFAF 395 billion projected in the program. B. Disbursement and Procurement 22. The proceeds of the Credit were used to reimburse 100% of the foreign exchange cost of eligible general imports. Procurement by public agencies and the private sector of imports valued at over US$5 million was by simplified international competitive bidding. In the case of contracts below this threshold but over US$5,000, public sector agencies followed standard government practices found acceptable by IDA in the past. In order to permit rapid access to credit funds, no limits were placed on imports of oil or foodstuffs. In the same vein, the cut-off date for retroactive financing was August 15, 1993, sufficiently far back to ensure immediate utilization of the funds. A Special Account was opened with the Central Bank to facilitate disbursements, and the initial deposit was recovered with the release of the first tranche. C. Audits 23. In October 1995, Government delivered the audit of the credit accounts. A single audit was carried out for both credits since the second and last disbursement was made in January 1995, and there were no further developments. The audit was carried out in accordance with accepted current practice in the profession. However, the Bank expressed the wish to see subsequent audits conducted according to standards of the International Federation of Accountants. VIII. ASSESSMENT OF OUTCOME 24. The outcome of the ERC is satisfactory. Following the devaluation, the program supported by the ERC resulted in a depreciation of 36.3% in the REER, a major gain in competitiveness that paved the way not only for Senegal's export recovery but also its resumption of growth, which reached 2% in 1994. The higher producer prices increased rural incomes and thus contributed to poverty alleviation. The social safety net instituted could have been more effectively targeted; in spite of that, the measures achieved in the ERC managed to mitigate the impact of the parity adjustment on the most vulnerable groups in the population. Finally, the devaluation and the ensuing fiscal reform process acted as powerful stimuli for structural reformns in Senegal. - 7 -  IX. FUTURE OPERATIONS 25. The ERC represents the first generation of post-devaluation measures. It has created a favorable environment for the introduction of second-generation measures. The latter consist of a structural adjustment and a sector adjustment program, whose objectives are to increase the competitiveness of Senegalese enterprises by promoting real competition. The Private Sector Adjustment and Competitiveness Credit (Cr. 2681-SE), the first of these operations, which was approved by the Board in February 1995, aims to liberalize external trade, eliminate monopolies, reduce factor costs, and reform the labor market in the interest of greater flexibility. 26. The Agricultural Sector Adjustment Program (Cr. 2738-SE), the second of these operations, which was approved by the Board in June 1995, is designed to bring about reformis in the agricultural product exports system, liberalization of the rice subsector, and eventual privatization of the production and marketing of products still handled by public sector agencies. 27. An adjustment program addressing administrative reform and the budgetary process is planned for FY98. X. KEY LESSONS LEARNED 28. There are three main lessons to be drawn from the implementation of the ERC: First, Government's firm commitment to the reform program was a key element in the success of the operation. Second, budgetary support in a single-tranche disbursement was a satisfactory response to an emergency situation. Because the credit was tied to adjustment measures on which the Government was firmly committed, IDA was able to provide financial assistance when needed, thus laying the ground for the preparation of subsequent and more comprehensive adjustment lending. Third, as far as poverty reduction is concerned, specific mechanisms for targeting vulnerable groups should be identified beforehand so that the impact on such groups can be maximized. Geographic targeting combined with established programs, such as food or cash-for-work, could be considered to have a stronger impact on the poor. -8 -  PART II: STATISTICAL ANNEX Table 1: Summary Evaluation A. Achievement of Objectives Total Partial Negligible Not applicable Macroeconomic policv Sector policy Financial sector Institutional development Economic activities Poverty reduction _ Gender issues i Other social goals _ Environment Public sector V Private sector development __ B. Project Sustainability Likely Unlikely Uncertain C. Bank Performance Highly Satisfactory Deficient satisfactory Identification Preparation Appraisal Supervision ____i D. Performance of Government Highly Satisfactory Deficient of Senegal satisfactory Preparation _ Implementation Covenant compliance Operation i E. Assessment of Outcome Highly Satisfactory Unsatis- Highly satisfactory factory unsatisfactory -9  Table 2: Project Timetable STEPS Projected date Effective date Identification January 15-26, 1994 Preparation January 15-26, 1994 Appraisal January 15-26, 1994 Negotiations February 28, 1994 Development Policy Letter _ February 23, 1994 Approval by the Board March 17, 1994 Signature March 18, 1994 STEPS Projected date Effective date Effectiveness March 24, 1994 Disbursement, Tranche I March 29, 1994 Project Completion December 30, 1995 Closing of Credit June 30, 1995 December 27, 1995 Table 3: Credit Disbursements: Cumulative Estimated and Actual (US$10 ) |_______________________ |Cr. 2582-SE Supplement (Cr. 2582-1-SE) Appraisal estimate 25 3.2 Actual 25 3.2 Actual as % of estimate 100 100 Date of final disbursement March 29, 1994 January 13, 1995 Table 4: Social Safety Net (CFAF billions) __________________________ Estimated 1994 Actual 1994 Rice 8.0 8.5 Wheat 2.5 2.0 Health 2.5 2.1 Education 2.0 2.0 Total 15.0 14.6 - 10-  Table 5: Matrix of Policy and Structural Measures MEASURES TIMETABLE REMARKS 1. MACROECONOMIC MEASURES Realignment of exchange parity. Set at CFAF 100 = FF I. Jan. 12, 1994 Implemented. 11. GOVERNMENT FINANCES Increase in civil service salaries, returning them to their 1993 Retroactive to Implemented. level. Jan. 1, 1994 Ceiling of 10% on salary increases. After March 31, Implemented. 1994 Ceiling of CFAF 149 billion on civil service payroll. 1994 Implemented. Containment of number of civil servants at 67,100, therefore 1994 Achieved: 'I'he number of civil servants was exactly net recruitment of 0. 66,696 as of December 31, 1994. In view of Senegal's agreements with its development partners, only 40% of those leaving civil service employment were rep!aced. Settlement of external payment arrears (CFAF 174.2 billion). End 1994 Not achieved because of a new accumulation of arrears. As of December 31, 1994, a total of CFAF 45.5 billion remained unpaid, for the following reasons: reduced public revenue flows; and reduced external financing. Reduction of domestic payment arrears by at least CFAF 32 End 1994 Implemented. billion. Increase of CFAF 1 12 billion in central Government capital 1994 Not fully achieved. Final total of investment spending. expenditure was CFAF 100.2 billion. Adoption of a revised three-year public investment program 1994 Implemented. The revised PTIP was passed by the (1994-1996). National Assembly on August 5, 1994.  111. MONETARY AND FINANCIAL POLICY MEASURES Increase in Central Bantk discount rate, from 10.5% to 14.5%o Jan. 18, 1994 Implemented. Recapitalization of CNCAS (Agricultural Credit Banik) 1994 Not implemented. the Governmient paid CFAF 600 million of its capital subscriptioni arrears. IV. CUSTOMS TARIFFS AND OTHER CHARGES Simplificationiofltarifllstructure: reductionofceilingrateto Feb. 15,1994 Implemented. 45% and threshold rate to 10%; fixing of stamp duty at 5%. Flimination of all exemptions except in cases of projects and Feb. 15,1994 Implemented. diplomatic privilege. Replacement of system of rive VAr rates (0%, 7%. 15%, 20% Feb. 15, 1994 Implemented. & 30%) on non-petroleum products with system of three rates ) (0%,1 0% & 20%). Extension of VAT to transportation of'certain products (rice, Feb. 15.1994 Implemented. petroleum products, cement). Replacement of three-rate petroleum product tarift'(0%, 25% Feb. 15,1994 Implemented & 45%) with two-rate tariff (25% & 35%); and replacement of four-rate VAT system (0%. 7%. 20% & 34%) by a single rate (20%). V. PRICING MEASURES Increases in producer prices (cotton, 30%