Niger - Public Sector Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18382 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF NIGER PUBLIC SECTOR ADJUSTMENT CREDIT (Credit No. 2939-NIR) August 26, 1998 Macroeconomics Group 4 Country Department 13 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 Currency Unit = CFA franc (CFAF) US$1.00 = CFAF 606.3 (August 25, 1998) CFA franc 1 million = US$1,649.4 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS ABATTOIR Abattoir Frigorifique de Niamey (Slaughterhouse) AfDB African Development Bank CDN Credit du Niger (Credit Agency) CNUT Conseil National des Utilisateurs des Transports (Council of Public Transportation Users) CPCT Caisse des Prts aux Collectivit6s Territoriales (Credit Agency) ENA Ecole Nationale d'Administration (National School of Administration) EPA Etablissement Public A Caract&re Administratif ERC Economic Recovery Credit ESAF Enhanced Structural Adjustment Facility FIPMEN Fonds d'Intervention des Petites et Moyennes Entreprises Nig6riennes (Small and Medium-Size Enterprise Promotion Fund) GDP Gross Domestic Product ICR Implementation Completion Report INRAN Institut National de Recherches Agronomiques du Niger (Agricultural Research Institute) LABOCEL Laboratoire Central de l'Elevage (Central Livestock Laboratory) NIGELEC Societ6 Nig6rienne d'Electricit6 (Power Generation and Distribution Company) OFEDES Office des Eaux du Sous-Sol (Well Drilling Company) OLANI Office du Lait du Niger (Dairy Products Company) ONAHA Office National des Am6nagements Hydro-agricoles (National Irrigation Company) ONPE Office Nationale des Postes et de l'Epargne (National Postal and Savings Office) ONPPC Office National des Produits Pharmaceutiques et Chimiques du Niger (National Pharmaceutical Company) ONT Office National du Tourisme (National Tourism Office) OPT Office des Postes et T61ecommunications (Post and Telecoms Office) OPVN Office des Produits Vivriers du Niger (Food Security Stock Agency) ORTN Office de Radiodiffusion et de T616vision du Niger (National Television Company) PEs Public Enterprises PESAP Public Enterprise Sector Adjustment Program PFP Policy Framework Paper PFRC Public Finance Reform Credit FOR OFFICIAL USE ONLY 11 PPF Project Preparation Facility PSAC Public Sector Adjustment Credit RINI Riz du Niger (Rice Company) SAC Structural Adjustment Credit SDR Special Drawing Rights SNC Soci6td Nig6rienne de Cimenterie (Cement Company) SNE Soci6t6 Nationale des Eaux (National Water Company) SNTN Soci6t6 Nationale de Transport du Niger (National Transportation Company) SONHOTEL Socit6 Nig6rienne d'H6tellerie (Hotel Management Company) SONICHAR Soci6t6 Nig6rienne de Charbon d'Anou Araren (Coal Mining Company) SONIDEP Soci6t6 Nig6rienne des Produits P6troliers (Petroleum Import and Distribution Company) SONITEL Soci6t6 Nig6rienne des T616communications (Telecoms Company) SONITEXTIL Soci6t6 Nig6rienne des Textiles (Textile Company) SONUCI Soci&t6 Nig6rienne d'Urbanisme et de Construction Immobiliere (Urban Planning and Real Estate Building Company) SPEHG Soci6t6 Propri6taire et Exploitante de l'Hotel Gawaye (Hotel Gawaye) UEMOA Union Economique et Mon6taire Ouest Africaine (West African Economic and Monetary Union) Vice President Jean-Louis Sarbib Country Director Theodore 0. Ahlers Technical Manager Charles P. Humphreys Task Manager Antonella Bassani 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. 111 CONTENTS PREFA CE IO.N ......... ................................................................................................................... i EVALUATION SUMMARY................................................................................. Introduction ........................................................ ........ i Implementation Experience and Results ................................. .............. i Key Lessons Learned.............................................................. PART 1: PROGRAM EVALUATION ..............................................................................................I A. Background and Objectives .................................................1 B. Achievement of Objectives ........................................ .........2 Macroeconomic Performance ................................................2 Public Finance ..........................................................3 Privatization ............................................................5 C. Major Factors Affecting the Program..........................................6 D. Bank Performance.......................................................7 E. Borrower Performance....................................................8 F. Outcome Assessment and Sustainability of Results.................................8 G. Future Operations........................................................9 H. Key Lessons Learned......................................................9 PART 2. STATISTICAL ANNEXES.............................................12 Table 1: Summary of Assessments..............................................12 Table 2. Related Bank Credits.................................................13 Table 3. Project Timetable ....................................................13 Table 4. Credit Disbursements: Cumulative Estimated and Actual...................................... 13, Table 5. Key Indicators for Project Implementation ........................... .......14 Table 6. Key Indicators for Project Operation ............................................................. 15 Table 7. StudiesTIclAN n eS .................................................................... ........ 15 Table 8A. Project Costs C ............ ....................................15 Table 8B. Project Financing..................................................15 Table 9 Economic Costs and Benefits ...........................................15 Table 10. Status of Legal Covenants ............................................16 Table 11. Compliance with Operational Manual Statements............................17 Table 12 Bank Resources: Staff Inputs..........................................17 Table 13: Bank Resources: Missions...........................................17 APPENDICES Observations of the borrower on the ICR Borrower's contribution to the ICR IMPLEMENTATION COMPLETION REPORT REPUBLIC OF NIGER PUBLIC SECTOR ADJUSTMENT CREDIT (CREDIT NO. 2939-NIR) PREFACE 1. This is the Implementation Completion Report (ICR) for the Public Sector Adjustment Credit in the Republic of Niger, for which Credit No. 2939-NIR in the amount of SDR 21.6 million (US$30 million equivalent) was approved on March 20, 1997 and made effective on March 21, 1997. 2. The credit was closed on March 31, 1998, original closing date. This was a one tranche operation which was filly disbursed in March 1997. 3. This ICR was prepared by Mr. B. Essama-Nssah, Consultant, AFTII, under the supervision of Ms. A. Bassani, Task Manager, AFTM4, and reviewed by Mr. Chevallier, Sector Manager, AFTS3. 4. Preparation of this ICR is based on material in the credit file and other related documents, discussions with World Bank staff and Government officials currently or formerly charged with project implementation. The Borrower contributed to this report by commenting on the draft ICR and by preparing its own evaluation of the credit's preparation and execution, which is attached as an appendix to the ICR. i IMPLEMENTATION COMPLETION REPORT REPUBLIC OF NIGER PUBLIC SECTOR ADJUSTMENT CREDIT (CREDIT NO. 2939-NIR) EVALUATION SUMMARY Introduction 1. For about a decade starting in 1983, the socioeconomic system of Niger has performed poorly due to both external and internal shocks such as: (i) a sharp decline in the international price of and demand for uranium (its main export); (ii) recurrent droughts; (iii) inappropriate budgetary policies; (iv) a loss of competitiveness associated with a real appreciation of the CFA franc; and (v) political instability. These conditions, coupled with rapid population growth, have led to a decline of real GDP of about one half of one percent per annum during 1983-1993 and a significant poverty increase. Niger's per capita income (US$200 in 1997) and development indicators are among the lowest in the world, and over 50 percent of the population live in poverty. 2. Between 1983 and 1993, with the support of the donor community, the government made several attempts at economic reform. These efforts were met with limited success, however, as they failed to address the key factors underlying the imbalances associated with poor performance. These factors related to low revenue mobilization, an unaffordable wage bill and public enterprise mismanagement. 3. The Public Sector Adjustment Credit (PSAC, Cr. 2939-NIR) was designed as a one-tranche operation to seize a window of opportunity opened by a new government seemingly committed to dealing with these fundamental issues. All actions were taken prior to Board presentation and leverage was placed on future operations to induce irreversibility of measures taken and continued implementation of the adjustment program. The main objectives of the credit were to: (i) improve macroeconomic stability through strengthened internal resource mobilization, a contained wage bill and the clearing of domestic arrears; (ii) increase the efficiency and equity of public expenditure; and (iii) extend the scope of private activities by launching a privatization program covering 12 public enterprises. Implementation Experience and Results 4. The operation was appropriately designed to fit the uncertainty associated with the prevailing socio-political instability. The outcome is considered satisfactory. Prior 11 actions were not reversed, as the government maintained its commitment to reforms. In addition, the program was put back on track after some slippages, and a new operation is being finalized for FY99 to support the Government's efforts to consolidate and deepen the adjustment program. 5. Significant achievements were obtained within the public finance component. These include among others: (i) reduction of the wage bill by 11 percent in 1997; (ii) raising revenue collection by 16 percent in 1996 and 15 percent in 1997; and (iii) increasing non-wage current expenditure for the health and education sectors. Within the privatization component, the following was achieved: (i) adoption of the revised public enterprise privatization law and establishment of a privatization agency; (ii) sale of OLANI (dairy products) in March 1998 and SNC (cement) in April 1998; (iii) signing of a protocol to transfer the management of SONIDEP's petroleum storage facilities to the private sector in December 1997 and elimination of SONIDEP's import monopoly for petroleum products; and (iv) hiring of financial and regulatory advisors to complete transactions for the water, electricity and telecoms utilities. 6. Two major factors were responsible for some delays in the implementation of the program in the second half of 1997: (i) weak institutional capacity and poor inter-agency coordination; and (ii) socio-political instability. Thus, for the better part of 1997 the attention and energy of the government were absorbed by security issues and socio- political tensions, notably continued labor unions unrest and repeated incidents with rebel groups in the north of the country. Implementation was further hampered by the lack of coordination and cooperation among various government agencies in charge of economic affairs and weak capacity of the Nigerien administration for privatization activities. Key Lessons Learned 7. Three key lessons can be drawn from the implementation of the PSAC-supported program. First, one-tranche operations are best to address concrete, up-front policy decisions in an environment where the track record of reform is still limited or where the information base on the country is rudimentary. One-tranche operations, however, raise the issue of the irreversibility of those actions. IDA appropriately couched the PSAC within the broader context of its interventions in Niger by linking further adjustment lending and increased investment lending to sustained implementation of the measures supported by the credit. 8. Second, in an environment characterized by government's weak institutional and implementation capacity and an unstable political situation, it is important to keep the reform program design simple, and the objectives and the timetable for their implementation realistic. Based on the lessons from previous adjustment credits, the PSAC was designed to support a few key up-front actions to directly address long- standing and interlinked public finance and public enterprise problems, whose resolution Ill was considered to be a prerequisite for action on the even more difficult medium- and long-term adjustment issues. In addition, except for the privatization components, the overall objectives were set realistically to conform to the country's poor implementation track record and uncertain growth prospects. The operation was also accompanied by intensive IDA supervision and the provision of substantive technical assistance to help implement the reforms. 9. Third, the design of a reform program under conditions of political uncertainty and instability requiring a high degree of consensus building should include provisions for a meaningful and sustained communication effort. This would ensure a greater assimilation and ownership of the reform program within the administration and would promote a better understanding of the need and rationale for reforms by the different political, interest and pressure groups. Although the Nigerien Government made some initial efforts to broaden the support for the reform program and develop the necessary consensus to carry it out, it did not sustain these efforts through time. Realizing the importance of a sound and sustained communication and consensus building campaign, in early 1998 the Nigerien Government developed a communication strategy on economic reform issues as an integral part of its economic reform program with IDA assistance and is currently implementing it. REPUBLIC OF NIGER PUBLIC SECTOR ADJUSTMENT CREDIT (CREDIT NO. 2939-NIR) PART 1: PROGRAM EVALUATION A. Background and objectives 1. Niger is among the poorest countries in the world. About one inhabitant in two lives in poverty with inadequate access to income earning opportunities, education, health and other social services. Life expectancy at birth is about 47 years. It is estimated that 36 percent of children under five suffer chronic malnutrition, while 15 percent are acutely malnourished. Furthermore, the illiteracy rate is high, about 86 percent (93 percent for women), and only 28 percent of school age children are enrolled (21 percent for girls). Per capita income was estimated at US$200 in 1997, and during the 1983-1993 period real GDP declined by about one-half percent on average. 2. The socioeconomic performance of Niger is largely explained by its structural characteristics, the shocks that have hit the economy over time and the policy stance of the government. The economy is dominated by uranium and agriculture. Uranium accounts for about 7 percent of GDP, 50 percent of export earnings and about 5 percent of government revenues. For the 1983-1993 period, the weak performance of the economy was the outcome of: (i) a sharp decline in the international price of and demand for uranium, (ii) two prolonged droughts (in normal years only one percent of the land area receives more than 600 mm of rain) (iii) a loss of competitiveness associated with a real appreciation of the CFA franc, (iv) rapid population growth estimated at 3.3 percent per year, (v) inappropriate budgetary policies, and (vi) political instability. 3. During the same period (1983-1993), several attempts were made by the government to improve macroeconomic management and reform the public enterprise sector. IDA supported this effort with five operations (a Structural Adjustment Credit, a Public Enterprise Sector Adjustment Credit, an Economic Recovery Credit, and two Technical Assistance Projects). Significant progress was made in price and trade liberalization (including the abolition of monopolies in agricultural trade) and some tax reform measures were adopted. However, the major factors underlying the internal and external imbalances were not addressed. In particular, the government lacked the determination to (i) contain the wage bill, (ii) restructure the civil service, (iii) strengthen the tax administration, and (iv) privatize public enterprises. 4. The Public Sector Adjustment Credit (PSAC, Cr.2939-NIR) was designed to deal with the above issues with particular emphasis on the link between public finance and public enterprise problems. Accordingly, the overall objective of the credit was to help sustain the government's stabilization and public sector adjustment effort. The program 2 underlying this effort aimed at restoring macroeconomic balance and confidence in the economy and improving the management of public resources. More specifically, the adjustment operation had three major objectives relating to (1) revenue enhancement, (2) expenditure restructuring, and (3) implementation of the privatization program. 5. Revenue measures included: (i) simplifying the tax system, (ii) strengthening tax administration and (iii) widening the tax base. Expenditure restructuring involved the reduction of the share of the wage bill, subsidies and transfers in current expenditure in favor of non-wage current expenditure for priority sectors such as primary education, basic health care and road maintenance. The privatization program involved 12 public enterprises, including the water, electricity and telecoms utilities. The credit did not aim at resolving Niger's daunting medium-term development problems--poor growth prospects, increasing poverty, underdeveloped human resources and a very limited natural resource base. Rather, it focused on few key actions to directly address public finance and public enterprise problems and helped the Government sustain implementation of its medium-term reform program. 6. These objectives are consistent with both the government's development objectives and those stated in the 1994 Country Assistance Strategy. Indeed, that CAS was built around three strategic elements: (i) the restoration of a stable macroeconomic framework and the removal of structural impediments to economic growth; (ii) human capital formation with a focus on girls' education, maternal and child care; and (iii) rural development and natural resource management. The 1994 CAS had envisioned a multi- tranche SAC in FY96-97 addressing a wide range of reform issues. In 1996, such an operation was no longer judged to be appropriate because of uncertainty surrounding the political situation, Niger's poor implementation track record and the need to re-examine medium-term priorities in light of a more realistic assessment of Niger's growth prospects. Thus, the operation was appropriately scaled down to a single-tranche credit based mostly on actions taken prior to credit approval, while further IDA adjustment support was made conditional upon the irreversibility of such actions and continued implementation of the Government's medium-term reform program. B. Achievement of Objectives Macroeconomic performance 7. The results posted since the reform program began in 1996 have been less favorable than expected. Real GDP increased by 3.4 percent in 1997, as compared with an expected rate of 4.3 percent, owing to the impact of a drought on agricultural production in certain parts of the country. It should be noted, however, that this is the first time since the 1977-80 uranium boom that Niger's GDP growth has been positive for more than five consecutive years. Food price increases remained moderate, as imports of cereals and the distribution of food aid in the drought-affected areas offset the reduction 3 in domestic cereal production. As a result, the average annual increase in the consumer price index for Niamey in 1997 was in line with the program objective of 3 percent. The real effective exchange rate is estimated to have depreciated by 3 percent in 1997. Despite the improved competitiveness in 1997, the current account deficit (excluding official transfers) is estimated to have widened by close to 1 percentage point of GDP to 10 percent, mainly because the drought contributed to a decline in agricultural exports and an increase in imports of foodstuffs. Gross domestic savings (both public and private) increased from 0.4 percent of GDP in 1995 to 3.3 percent in 1997 as a result of the improvement in the Government's financial position, and gross domestic investment increased from 7.5 percent of GDP in 1995 to 10.8 percent in 1997, largely as a result of a resumption of private sector investment. Public Finance 8. In 1997, the fiscal deficit (on a commitment basis, excluding grants) amounted to 7.5 percent of GDP, as compared with the targeted deficit of 8.0 percent. Revenue performance in 1997 was weaker than projected, falling short of the program target by about 1 percentage point of GDP. Current expenditure were maintained within the limits set by the government through strict control of the wage bill. Capital expenditure were lower than projected, owing to shortfalls in external financing. Such shortfalls also explain a net accumulation of external payments arrears of CFAF 1.9 billion in 1997. There was, however, a sharp reduction in domestic payments arrears (CFAF 13.8 billion in 1997 and 11.8 billion in the first half of 1998) through settlement of cross debt between central government and public utilities and with external financial assistance specifically targeted at clearing arrears to suppliers in the health and education sectors. 9. Revenue Mobilization. The revenue mobilization effort focused on simplifying the tax system, strengthening tax administration and widening the tax base. This was considered a major challenge by the government as it constituted the centerpiece of the public finance reform and a prerequisite for maintaining essential expenditures. Particular attention was to be paid to individuals and activities evading taxes. 10. The following specific measures were taken prior to credit approval: (i) the merging of the general income tax and the schedular tax on wages and income into a single tax on wages and salaries; (ii) a reform of informal sector taxation through the introduction of a single professional tax (patente synthitique); (iii) the streamlining of taxation on petroleum products and improvements in yield through a change in the price structure; and (iv) a reduction in the maximum length of tax holidays for new investments from 15 to 5 years. In addition, in October 1996 a pre-shipment import inspection firm started providing assistance to customs in its effort to combat fraud. The following measures were planned for 1997-98: (i) a reform of the property tax system; (ii) the introduction of the single taxpayer identification number system; (iii) the use of treasury 4 checks for the payment of import duties in the context of externally and NGO financed government procurement contracts; and (iii) the strengthening of tax collection agencies. 11. Revenue performance in 1996 and 1997 was encouraging as budgetary revenues increased by 16 and 15 percent, respectively. However, revenues in 1997 fell short of the program target (8.4 percent of GDP compared with a 9.8 percent program target). Shortfalls occurred in all categories of tax revenues but were particularly significant in customs. Reasons for the shortfalls in customs revenue are the delays in the implementation of some tax reform measures, the lack of cooperation with the imports verification agency, regional strikes in the transportation sector and petroleum shortages, which slowed trade flows to Niger. Income tax revenue also fell short of projections, mainly because of difficulties encountered in implementing the new tax schedule for wages and salaries, the downward revision of salaries resulting from the application of the new salary scale and the operating deficits posted by the mining companies in 1996. 12. During the period December 1997-June 1998, measures were introduced to recoup some of the revenue shortfall experienced in 1997, including accelerating the collection of tax arrears owed to the Government by major public enterprises and tax defaulters, the publication of a comprehensive list of tax defaulters in the press and their exclusion from participation in Government procurement contracts, and efforts to improve cooperation with the imports verification agency. During this period, the Government has also accelerated the implementation of the next phase of the tax reform program, including measures to reduce the number and scope of tax exonerations and strengthening tax assessment and collection services (a detailed list of these measures is included in the PFP 1998-2000). These efforts have already resulted in an increase in revenue collection from the original target of CFAF 25.3 billion to CFAF 28.3 billion during the first quarter of 1998. 13. Expenditure Restructuring. One important element within this component of the program relates to the wage bill. The 1997 budget envisaged a reduction of the wage bill by 11 percent compared to the 1995 level.' In February 1997, the government adopted a new salary scale eliminating distortions in the remuneration system and reducing base wages and housing allowances with the largest cuts targeted for higher categories and grades. In addition, the Government kept personnel recruitment broadly in line with retirements, with the priority for new hires going to education, health and revenue collection agencies. As a result of these measures, the wage bill for 1997 remained broadly in line with the program target. 14. The salary reform was part of a bigger program involving the rationalization of the civil service and payroll system. Within this context, in 1997 a civil service census 1 The 1996 wage bill was not used as a reference because of a one-time cut of 33 percent in 1996 civil service wages that was agreed to with the labor unions. 5 was completed in September 1997, which led to the dismissal of 319 government employees (less than 1 percent of the civil service) whose status was irregular. In addition, a personnel re-deployment program for the health and the tax collection agencies was launched and the harmonization of the civil service roaster and payroll files has been completed. 15. Current non-salary expenditure for the education and health sectors (on a commitment basis) increased in 1997 by 12 percent, on average, compared with a targeted increase of 14 percent. This increase is in line with the requirements of the basic education and health care programs supported by two ongoing IDA-financed projects. In addition, the domestic budgetary contribution to the public investment program increased from CFAF 3.6 billion in 1996 to CFAF 5.7 billion in 1997 (10.4 percent of total public investment), versus a 1997 program target of CFAF 4.5 billion (or 5.7 percent of total public investment), reflecting the Government's effort to ensure the timely availability of counterpart funds for public investment projects. However, expenditure for the Road Fund did not increase as planned (CFAF 1.1 billion in 1997 versus a program target of CFAF 2.7 billion). 16. Also, scholarships for secondary and higher education were cut from 4.5 billion in 1996 to CFAF 3.2 billion in 1997 (versus a program objective of CFAF 3.8 billion) and new eligibility criteria were adopted to ensure that only the most deserving students received support. Privatization 17. The government strategy for the public enterprise sub-sector involves the privatization of twelve enterprises, the liquidation of three and the restructuring of eight others by the end of 1998. The PSAC supported the launching of the privatization program and its sustained implementation in 1997-98. 18. The privatization program was launched during the period October 1996-April 1997 with the adoption of a legal framework for privatization, the establishment of a privatization agency, the sale of SONITEXTIL (textiles) and preparatory work for the privatization of the remaining PEs. As a result of weak technical and administrative capacities and poor coordination among various government agencies, however, the implementation of the privatization program slowed down during May-October 1997. In November 1997, the Government took a number of measures to accelerate the program. First, a memorandum of understanding was signed with IDA which spelled out the modalities of the next steps of the privatization program, clear guidelines for assuring transparency in the preparation of the privatization transactions, and measures to strengthen government capacity for privatization activities. Next, the requests for bids for the sale of OLANI (dairy products) and SNC (cement) were issued in December 1997, and the sales thereof were concluded in March and April 1998, respectively. The 6 requests for bids for the management of Abattoir (slaughterhouse) were also issued in February 1998, but no private investor came forward (the Government is revising the requests for bids in order to re-issue them in 1998). 19. The protocol relative to the establishment of a new private sector company responsible for managing the storage facilities of SONIDEP (petroleum import) was signed with the private sector, SONIDEP's import monopoly for petroleum products was eliminated and a regulatory framework governing private sector's imports of petroleum products was adopted. In addition, the process of restructuring SONIDEP got under way in December 1997 with the recruitment of a consultant responsible for conducting a study of the planned restructuring. Consortia for the privatization of SNE (water), SONITEL (telecoms) and NIGELEC (electricity) have all been recruited. In addition, the Government has completed an inventory of payments arrears between the Government and PEs, and prepared a plan for their orderly settlement. Measures are also being put in place to avoid the accumulation of new government arrears to public utilities. On the basis of government performance during the last eight months, it can be concluded that the implementation of the privatization program has been accelerated and that privatization transactions are being conducted in full transparency. 20. In addition, three enterprises have been liquidated as planned: FIPMEN (Small and Medium Size Enterprise Promotion Fund), LABOCEL (Livestock Laboratory) and SONHOTEL (Hotel Management Company). Another enterprise, ONT (National Tourism Office), is expected to be liquidated in August 1998. Restructuring efforts for eight other public enterprises continue, including that of ONPPC (Pharmaceutical Company), SNTN (National Transportation Company) and CNUT (Council of Public Transportation Users). C. Major Factors Affecting the Program 21. The major factors affecting the program were: (i) the 1997 drought; (ii) political and social tensions; and (iii) weak institutional capacity. As stated earlier, weather conditions caused a contraction of agricultural output and food shortages in the Northern part of the country. This contributed, via the impact on exports, to the deterioration of external imbalances. Except for the drought, it is reasonable to think that all the other factors depend more or less on government policies. 22. For the better part of 1997, most of the government energy and attention were absorbed by: (i) the security situation created by repeated attacks by the rebels in the North; and (ii) political and social tensions associated with the resistance to reform by various interest groups. Labor unions resisted restrictive wage policy and the privatization program. Other interest groups having contributed to some slippage of the program include such institutions as the University and the National Television. 7 23. As far as institutional factors are concerned, implementation was hampered by the lack of coordination and cooperation among various government agencies in charge of economic affairs. The effect of this factor was further compounded by that of weak technical capacity. D. Bank Performance 24. The Bank acted with speed to process the PSAC in a manner consistent with the requirements of providing timely assistance to Niger. It coordinated its work well with the Government and other donors (notably the IMF, the AfDB and the EU) to ensure a coherent and convergent approach for all. 25. The Bank was candid in the assessment of the high risk involved and took sufficient account of this assessment in the design and the supervision of the operation. There were three dimensions to this risk: (i) continued political and social instability which could undermine government commitment to the reform program; (ii) limited government implementation capacity; and (iii) a shortfall in external financing for the period covered by the credit. While the third risk did not materialize, socio-political instability and weak administrative capacity were responsible for some delays in the implementation of the program in the second half of 1997. The credit's design and tight Bank supervision helped to partially mitigate these problems and maintain the program on track. 26. With respect to government commitment, the Bank acknowledged that Niger did not have a good track record on reform implementation. Given that two successive governments with different party affiliations did agree on the proposed reforms, however, the Bank saw this as an opportunity to help initiate meaningful reforms. In the face of the high risk and the associated uncertainty stemming from the volatile political context, the credit was designed appropriately as a one-tranche operation to seize the window of opportunity and to keep it open as long as possible. The relevant CAS had envisaged a multi-tranche SAC for FY96-97, this was replaced by a smaller, highly-focused, single- tranche operation. Given that disbursement was conditional on prior actions, this raised the issue of the irreversibility of those actions. The Bank appropriately couched the operation within the broader context of its interventions in Niger by linking further adjustment lending and increased investment lending to sustained implementation of the measures supported by the credit. By resisting the temptation of a piecemeal approach, the Bank signaled its interest in true partnership. 27. The tight Bank supervision of the operation made it possible to mitigate many problems related to weak government implementation capacity. In hindsight, it appears that the privatization calendar was too optimistic, as shown by the delays encountered in the second half of 1997. The signing of a protocol of agreement between the Bank and the Government in November 1997 to clarify the modalities of the privatization program, 8 and the provision of substantive technical assistance in all the program components (even after the disbursement of the credit) were instrumental in maintaining the program on track. E. Borrower Performance 28. Despite the slippages that occurred, the overall performance of the borrower is considered satisfactory. The government stuck to the reform program in the face of political adversity and bureaucratic constraints. In particular, it withstood initial strong resistance to the reduction of the wage bill and the privatization program. 29. When it became clear that the lack of coordination and cooperation among various government agencies was seriously hampering reforms, the government took steps to regain momentum. A new economic team was appointed in November 1997 with the explicit mandate to put the reform program back on track. This constituted renewed commitment to the full implementation of the program. Since that time, efforts made by the Government to regain momentum and accelerate the implementation of the economic reform program have been sustained. However, continued implementation of the reform program could benefit from additional Government efforts to enhance inter-agency coordination and the effectiveness of the technical committee in charge of program supervision, including through a better definition of each of its members' responsibilities and the provision of adequate working conditions. F. Outcome Assessment and Sustainability of Results 30. As stated earlier, the essence of the credit was to support the implementation of a few key actions taken prior to credit approval to directly address public finance and public enterprise problems and help the Government sustain implementation of the medium-term economic reform program. No prior action has been reversed; despite some delays encountered in the second and third quarter of 1997, in November 1997 the Government took a number of measures to regain momentum and accelerate the implementation of the economic reform program. In this respect, the implementation of the PSAC-supported reforms has in many ways laid or reinforced the foundations for the further deepening and expansion of structural adjustment programs, and has started to build a positive track record for Niger. In addition, several components of the reform program, which were highly controversial at the beginning, notably the privatization of public enterprises, have gained broader support. Significant gains have been made with respect to strengthening national capacity for macroeconomic management and privatization, and a public expenditure review has recently been completed by the Government. Based on these results, the overall outcome of the credit is satisfactory and its achievements are likely to be sustainable. 9 G. Future Operations 31. This operation helped establish a viable institutional framework for the design and implementation of the next phase of the adjustment program. In addition, the quality of our dialogue with the Government on economic reform issues improved and Government monitoring and coordination of the economic program was strengthened. Based on the satisfactory outcome the PSAC and Niger's continued need for quick-disbursing financing, a follow-up Public Finance Reform Credit (PFRC) of US$64 million is currently under preparation. This proposed three-tranche credit would provide budgetary support to fill the financing gap for 1998 and 1999, and would thus permit the Government to sustain implementation of the second phase of the reform program. The main focus of the PFRC is to restore credibility of public finances by ensuring budgetary orthodoxy and the orderly clearing of domestic arrears. In addition, the program supports measures to consolidate and reinforce the tax reform efforts implemented in 1996-97, and to launch a medium-term effort to improve the efficiency and equity of public spending. These actions would build on past achievements in the area of macroeconomic stabilization and public sector adjustment, which were supported by the PSAC. The risk associated with this operation is still assessed as high on the grounds of further political instability and weak implementation capacity. This assessment indicates further need for actions to build and strengthen capacity within the administration, and for broadening dialogue on and support for the reform program within civil society. H. Key Lessons Learned 32. The implementation of the Public Sector Adjustment Credit clearly demonstrates the fundamental importance of the role played by the prevailing political process in economic policy making and implementation. The risk and uncertainty surrounding this operation were essentially political. Even the bureaucratic gridlock was in part political. Many reform slippages observed in this country since 1991 are explained by frequent changes in governments, bureaucratic constraints and the ability of vested interests to successfully oppose reform efforts. These facts illustrate clearly that policy-making is imbedded in a political process which ultimately determines the outcome through the legislation process, the choice or the formation of administrative structures and the subsequent operation of such institutions. These factors must be understood and taken into consideration every step of the way from project identification to ex-post evaluation. This presents a challenge for the Bank to do so while remaining above the political fray. 33. Three key lessons can be drawn from the implementation of the PSAC-supported program. First, one-tranche operations are best to address concrete, up-front policy decisions in an environment where the track record of reform is still limited or where the information base on the country is rudimentary. One-tranche operations, however, raise the issue of the irreversibility of those actions. IDA appropriately couched the PSAC within the broader context of its interventions in Niger by linking further adjustment 10 lending and increased investment lending to sustained implementation of the measures supported by the credit. 34. Second, in an environment characterized by government's weak institutional and implementation capacity and an unstable political situation, it is important to keep the reform program design simple, and the objectives and the timetable for their implementation realistic. Based on the lessons from previous adjustment credits, the PSAC was designed to support a few key up-front actions to directly address long- standing and interlinked public finance and public enterprise problems, whose resolution was considered to be a prerequisite for action on the even more difficult medium- and long-term adjustment issues. In addition, except for the privatization components, the overall objectives were set realistically to conform to the country's poor implementation track record and growth prospects. The operation was accompanied by intensive IDA supervision and the provision of substantive technical assistance and institutional strengthening to help implement the reforms. 35. Third, the design of a reform program under conditions of political uncertainty and instability requiring a high degree of consensus building should include provisions for a meaningful and sustained communication effort. This would ensure a greater assimilation and ownership of the reform program within the administration and would promote a better understanding of the need and benefits of reforms by the different political, interest and pressure groups. In the early phases of the reform program, the Nigerien government made some efforts to broaden the support for reforms through communication initiatives. However, these efforts were limited and not sustained through time. As a result, in 1997 the Government had a particularly difficult time winning public acceptance and "ownership" of programs involving hard social choices, especially the privatization of public enterprises and the reduction of the wage bill. A better-informed and more widespread public dialogue could have facilitated the implementation of these programs considerably. 36. Lack of communication concerned several levels: * intra-governmental communications. A major problem was the non-circulation of information, and lack of regular dialogue between government agencies, even over issues (such as privatization) requiring the close coordination of different Ministries. Communication was equally lacking between government agencies and the Parliament. * Government and civil society. Dialogue between government and civil society over development issues has been limited. The political opposition in Niger has been largely unwilling to cooperate in achieving national economic priorities, and a major reason (in their own words) has been a lack of communication from the government. Unions and businesses alike complain that they are not receiving even basic 11 information, much less being involved in dialogue on issues that concern them directly. 37. Realizing the importance of a sound and sustained public communication effort, in early 1998 the Government developed, with IDA assistance, a communication strategy that aims to build national consensus on the key economic reform issues via more systematic dialogue involving government, unions, NGOs, the private sector, municipal leaders, and others. 12 PART 2. STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macro Policies / Sector Policies / Financial Objectives / Institutional Development / Physical Objectives / Poverty Reduction / Gender Issues / Other Social Objectives / Environmental Objectives / Public Sector Management / Private Sector Development / Other 0f B. Project Sustainability Likely Unlikely Uncertain C. Bank Performance Highly Satisfactory Deficient Satisfactory Identification / Preparation Assistance / Appraisal / Supervision / D. Borrower Performance Preparation / Implementation i Covenant Compliance / Operation i E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory 13 Table 2. Related Bank Credits Credit title Purpose Year of Status approval Preceding Operations 1. SAC I To introduce reforms aimed at improving 1986 Closed basic macro-economic management 2. PESAP To restructure the public enterprise 1987 Closed sector 3. ERC To support the post- CFAF devaluation 1994 Closed reform program and mitigate its negative social impact Following Operations 1. Public Finance To restore budgetary orthodoxy, N.A. Under Reform Credit reinforce tax reform efforts implemented preparation in 1996-97 and improve efficiency of public spending Table 3. Project Timetable Steps in project cycle Date planned Date actual/latest estimate Identification (Executive Project Oct. 1-5, 1996 Oct. 1-5, 1996 Summary) Preparation Oct. 31-Nov. 13, 1996 Oct. 31-Nov. 13, 1996 Appraisal Feb. 6-12, 1997 Feb. 6-12, 1997 Negotiations Feb. 12-13, 1997 Feb. 12-13, 1997 Letter of Development Policy Feb. 14, 1997 Feb. 14, 1997 Board Presentation March 20, 1997 March 20, 1997 Signing March 20, 1997 March 20, 1997 Effectiveness March 21, 1997 March 21, 1997 Single Tranche Release March 21, 1997 March 21, 1997 Loan Closing March 31, 1998 March 31, 1998 Table 4. Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY97 Appraisal estimate 30,000 Actual 29,725 Actual as % of estimate 99 Date of final disbursement March 21, 1997 14 Table 5. Key Indicators for Project Implementation Key implementation indicators Objective for 1997 Actual/Estimate in President's Report 1. Macroeconomic data GDP real growth (%) 4.3% 3.4% Consumer price index (%, 3.0% 2.9% annual average) External current account balance -12.1% -10.1% (% of GDP, excl. off. transfers) 2. Public Finance Overall balance (excl. grants, % -8.0% -7.5% of GDP) Budgetary revenues (% of GDP) 9.8% 8.4% Current expenditure (% of GDP) 9.9% 10.4% Wage bill Reduce the wage bill from CFAF 49.7 CFAF 44.2 billion billion in 1995 to CFAF 44.1 billion in 1997 through a reduction in base salaries and benefits Current non-salary expenditure 14% increase for each sector 12% increase on average for health and education sectors Expenditure for the Road Fund CFAF 2.7 billion CFAF 1.1 billion Strength of civil service and No new net recruitments and new hires Objective met sectoral distribution of new hires going to social sectors and tax collection agencies University scholarships CFAF 3.8 billion CFAF 3.2 billion Domestically-financed capital CFAF 4.5 billion CFAF 5.7 billion expenditure Domestic arrears Reduction of domestic arrears (CFAF CFAF 13.8 billion cleared in 1997 and CFAF 11.8 billion 19.2 billion in 1997) and adoption of in first half of 1998; measures adopted to avoid measures to avoid the accumulation of accumulation of new arrears new arrears 3. Privatization OLANI, SNC and Abattoir Bring to the point of sale OLANI and SNC completed. Bids were issued for management of Abattoir, but no investor came forward; bids will be re-issued in 1998 SONITEXTIL Bring to the point of sale Completed SNE Request bids for lease contract for Under preparation (financial advisors for preparation of SNE bids documents have been recruited in August 1998) SONITEL Bring to the point of sale majority of Under preparation (financial and regulatory advisors for shares of SONITEL preparation of bids documents have been recruited in August 1998). SONIDEP Adoption of regulatory framework for Regulatory framework adopted; protocol for creation of private imports of petroleum products private company signed with private operations; and creation of private company to company to be created in February 1999 manage SONIDEP storage facilities NIGELEC Request bids for concession contract Under preparation (financial and regulatory advisors for for NIGELEC preparation of bids documents have been recruited in August 1998). SPEHG, RINI, ONAHA and Bring to the point of sale Ongoing OFEDES 15 Table 6. Key Indicators for Project Operation Not Applicable Table 7. Studies Included in Project Not Applicable Table 8A. Project Costs Not Applicable Table 8B. Project Financing Not Applicable Table 9. Economic Costs and Benefits Not Applicable 16 Table 10. Status of Legal Covenants Niger Public Sector Adjustment Credit Credit Covenant Present Original Revised Description of covenant Comments Agreement type status fulfillment fulfillment Section date date 3.01 Monitoring, C (a) The Borrower and the Association shall from time to time, at the review and request of either party, exchange views on the progress achieved in reporting carrying out the Program; (b) Prior to each such exchange of views, the Borrower shall furnish to the Association for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Association shall reasonably request; (c) Without limitation upon the provisions of paragraph (a) of this Section, the Borrower shall exchange views with the Association on any proposed action to be taken after the disbursement of the Credit which would have the effect of materially reversing the objectives of the Program, or any action taken under the Program. 3.02 Accounts/ NA Upon the Association's request, the Borrower shall: audits (a) have the Deposit Account audited in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (b) furnish to the Association as soon as available, but in any case not later than six months after the date of the Association's request for such audit, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (c) furnish to the Association such other information concerning the Deposit Account and the audit thereof as the Association shall have reasonably requested. 17 Table 11. Compliance with Operational Manual Statements Not Applicable Table 12 Bank Resources: Staff Inputs Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ Preparation to appraisal 56.0 157.8 56.0 157.8 62.9 160.0 Appraisal 11.6 25.3 11.6 25.3 7.7 21.7 Negotiations through Board 7.1 17.7 7.1 17.7 8.0 18.7 approval Supervision 34.5 97.7 34.5 97.7 20.6 57.1 Completion 3.0 4.1 3.0 4.1 4.6 7.4 TOTAL 112.2 302.6 112.2 302.6 103.8 264.9 Table 13: Bank Resources: Missions Stage of Month/ Number Days Specialized Performance rating Types of project cycle year of in staff skills problems persons field represented Implemen Develop * tation ment ob status jectives Through 11/96 6 12 macroecon, S S none appraisal privatization Appraisal 02/97 8 10 macroecon, S S none through privatization Board approval Supervision 05/97 8 8 macro, priv. S S See ICR 10/97 6 2 macro, priv. S S 02/98 5 6 macro, priv. S S * Excluding consultants. APPENDICES REPUBLIQUE DU NIGER MINISTERE DES FINANCES, DES REFORMES Niamey, AU ECONOMIUE-S ET DE LA PRIVATISATION DIRECTION GENERALE DE L'ECONOMIE ET DES REFORMES DIRECTION DES ETUDES FINANCIERES ET DES REFORMES LE SECRETAIRE GENERA L. N°............../MFREP/DGEkCDEFR à Madame Antonnella BASSANI Région Afrique Banque MondWae Washington D,C Obiet : Observations sur le projet d'exécution du Crédit d'Ajustement du Secteur Public (Crédit 2939-NIR) Madame, J'ai l'honneur de porter à votre haute attention les observations de la partie Nigérienne sur l'exécution du crédit cité en objet: - 1°. Sur le projet du rapport de fin d'exécution du crédit élaboré par la Banque Mondiale, la partie Nigérienne n'a aucune observation de fond. Les observations de forme portent sur la feuille de garde où le numéro du crédit est 2939-NIR au lieu de 29390-NIR d'une part et d'autre part, il s'agit du «Crédit d'Ajustement du Secteur Public » au lieu de « Crédit à l'Ajustement du Secteur Public ». 2°. En ce qui concerne le rapport d'achèvement élaboré par le Gouvernement du Niger, il me plaît de vous informer que la dernière mission du Fonds Monétaire International a permis d'actualiser certains chiffres. Par conséquent, les paragraphes suivants devraient être modifiés: Paragraphe 9 : « Accroître les recettes internes de 7,8 % du PIB en 1996 à 10,3 % en 1999 et les dépenses courantes de 8,7 % du PIB en 1996 à 9,3 % en 1999 ». Paragraphe 29 : « Les dépenses d'investissements publics se sont élevées à 54,7 milliards de FCFA en 1997, le taux de consommation des crédits étant de 64,4 % en progression sensible par rapport à 1996 (51 %). Veuillez agréer, Madame, l'expression de ma parfaite considération. TOTAL PAGECS) 03 IMPLEMENTATION COMPLETION REPORT PUBLIC SECTOR ADJUSTMENT CREDIT (CREDIT 2939-NIR) Borrower's Evaluation 1. The Public Sector Adjustment Credit (PSAC), Credit No. 2939-NIR in the amount of SDR 21.6 million, was closed on March 31, 1998. The objective of the credit was to support the Government's stabilization and public sector adjustment efforts. This single-tranche operation was fully disbursed in March 1997 on the basis of actions taken prior to Board presentation of the credit. Sustainable implementation of the program supported by the credit was made a precondition for receiving any further IDA adjustment lending. 2. This report presents the borrower's perspective regarding implementation of the program supported by the credit. I. INTRODUCTION 3. About 63 percent of Niger's population (9.3 million) live below the poverty line under conditions that include severe nutritional deficits and poor access to social services, particularly health and education. Per capita income (US$200 in 1997) and development indicators are among the lowest in the world. According to the UNDP human development index, Niger is among the poorest countries in the world. 4. Weak economic performance since the end of the uranium boom in the early 1980s was reflected in a decline in GDP of about 0.5 percent per year on average between 1983 and 1993. This weakness was the result of: (i) external shocks (severe and repeated droughts, the decline in uranium earnings, the drop in net transfers of foreign capital and the debt crisis); (ii) weak management of public resources, both with regard to revenue mobilization and expenditure efficiency; (iii) a large and inefficient parastatal sector; (iv) badly distorted economic incentives for the private sector to produce, save and invest; and (v) a loss of competitiveness due to the real appreciation of the CFA franc until 1994. In addition, economic growth in the country was further limited by a weak agricultural base, underdeveloped human resources and continued political instability. These conditions, combined with rapid population growth, led to a significant increase in poverty since the early 1980s. 5. This situation resulted in rapid growth of the informal sector, a shrinking of the modern economy and increasing tax evasion. Budgetary revenues fell from 11 percent of GDP in 1987 to 6 percent in 1994, while the overall budget deficit (excluding grants) reached 12.5 percent of GDP the same year. 2 6. At the beginning of 1995, a series of corrective measures were taken to stabilize the economic and financial situation: (i) simplification of the tax system and widening of the tax base; (ii) more effective control of expenditures; and (iii) improved administration of the tax system and of health and education services. These measures translated into an increase in budgetary revenues (7.2 percent of GDP), a decrease in the wage bill (73.2 percent of budgetary revenues, versus 91 percent in 1994) and stabilization of expenditures and the overall budget deficit. The results achieved in 1995 were the beginning of the stabilization process which was pursued in 1996. 7. In 1996, these efforts produced an increase in budgetary revenues which reached 7.8 percent of GDP, a reduction in current expenditures on the order of 16 percent, a wage bill that dropped to 42.2 percent of budgetary revenue, a net reduction of internal arrears of CFAF 18 billion and an overall deficit (excluding grants) that fell to 5.4 percent of GDP. 8. These results were achieved despite unfavorable circumstances, particularly an unstable political environment, an almost total halt of external aid in 1995 and aid disbursements that ran under 60 percent of projections in 1996, due to the fact that the agreement on the Enhanced Structural Adjustment Facility for the period 1996-98 was not finalized until June 1996. 9. The objectives of this program were to: (i) attain a viable financial situation; and (ii) achieve sustainable economic growth in the medium term, a prerequisite for reducing poverty. II. OBJECTIVES AND MEASURES OF THE PUBLIC SECTOR ADJUSTMENT PROGRAM 10. The objective of the medium-term adjustment strategy for 1997-99, detailed in the Letter of Development Policy of February 14, 1997, was to further reduce the financial imbalances, establish conditions conducive to sustainable growth and significantly reduce poverty. The economic and financial policies identified within this framework were expected to produce real GDP growth on the order of 4.3 percent during 1997-99, while reducing inflation to 3 percent and limiting the external current account deficit (excluding official transfers) to 11 percent of GDP beginning in 1998. An increase in domestic savings, based on an improvement in the Government's financial position, was expected to support this growth. 11. The Government expected to increase budgetary revenues from 7.8 percent of GDP in 1996 to 11 percent in 1999 and current expenditures from 9 percent of GDP in 1996 to 10 percent in 1999. Expenditures related to personnel were expected to decrease from CFAF 49.7 billion in 1995 to CFAF 44.1 billion in 1997.' In 1996, the wage bill declined sharply as a result of a one-time agreement between the Government and the trade unions concerning wage payments every 42 days. 3 12. The specific measures supported by the PSAC were to: (i) simplify the tax system, strengthen tax administration and widen the tax base; (ii) reduce the share of the wage bill, transfers and subsidies in current expenditure in favor of non-wage current expenditure for priority sectors such as primary education, basic health care and road maintenance; and (iii) launch the public enterprise privatization program. A. Revenue mobilization 13. Revenue mobilization efforts in 1997 were to focus on simplifying the tax system, strengthening tax administration and widening the tax base. The effectiveness of tax collection was to receive special attention. 14. The specific components of the revenue mobilization effort were: (i) the streamlining of taxation on petroleum products through a change in the price structure; (ii) the merging of the general income tax (IGR) and the schedular tax on wages and income (ICTS) into a single tax on wages and salaries (IUTS); (iii) a reduction in the maximum length of tax holidays for new investments to 5 years and a decrease in the number of activities eligible for tax exonerations based on the Investment Code; (iv) a reform of informal sector taxation through the introduction of a single professional tax (patente synthitique); and (v) the setting up of an import pre- inspection system. In addition, the Government was to reform the real estate taxation system and introduce a single taxpayer identification number system. These measures were to be supported by a substantial strengthening and decentralization of tax collection agencies. Finally, efforts to harmonize customs and investment incentives within the UEMOA were to be pursued. B. Expenditure restructuring 15. Expenditure restructuring focused on: (i) reducing the wage bill to CFAF 44.1 billion by adopting a new salary scale and keeping civil service recruitment in line with retirements, while giving priority to the education and health sectors for the employment of new hires; (ii) reducing scholarships from CFAF 4.5 billion to CFAF 3.8 billion and adopting new eligibility criteria to ensure that only the most deserving students receive support; (iii) rationalizing the management of the civil service; (iv) increasing 1997 budgetary allocations for education and health sector non-wage current expenditures by 14 percent (from CFAF 4.6 billion for education and CFAF 7.2 billion for health in 1996 to CFAF 5.3 billion and CFAF 8.2 billion respectively in 1997) and increasing allocations for materials and equipment for the tax collection agencies by 74 percent in 1997 (from CFAF 459 million to CFAF 798 million); and (v) increasing the allocation for road maintenance from CFAF 2.6 billion to CFAF 3.1 billion. In addition, with IDA assistance the Government was to undertake a review of public expenditures in order to: (i) identify the needs of priority sectors; (ii) strengthen expenditure programming; and (iii) improve budget implementation procedures. 16. A reduction of CFAF 19.4 billion in domestic payment arrears was programmed for 1997, along with a thorough inventory of domestic arrears and implementation of a plan for their orderly settlement prepared with IDA assistance. Measures were also to be taken in order to prevent the build-up of new arrears. 4 C. Reform of the public enterprise sector 17. The Government decided to make a renewed start on the reform of the public enterprise sector to improve the sector's financial situation and widen the scope for private activity. For 1997-98, the Government's program aimed at: (i) privatizing twelve enterprises, liquidating three and restructuring eight others;' (ii) clearing cross-debts and payment arrears between different public enterprises and between the enterprises and the Government; and (iii) establishing an independent unit to coordinate privatization efforts. The goals of the program were to: (i) mobilize private investment financing to expand and increase the efficiency of service delivery; (ii) promote private sector development by the reduction in factor costs that privatization would bring about, particularly in the areas of energy, transport and telecommunications; and (iii) reduce the role of the State in productive activities, which would be left to the private sector. III. PROGRAM RESULTS A. Macroeconomic performance 18. Overall economic growth in 1997 was less favorable than projected (3.4 percent versus 4.3 percent) because of a drought, which caused a reduction in agricultural output and roughly a 10 percent shortfall in cereal production. This shortfall had no effect on prices because of the distribution of food aid in the affected areas. Inflation, as measured by the average consumer price index in Niamey, continued to decline, dropping to 3 percent in 1997 as compared to 5 percent in 1996. Based on the consumer price index, the real effective exchange rate depreciated by 3 percent as of November 30, 1997. Despite Niger's improved competitiveness, it is estimated that the external current account deficit (excluding official transfers) increased by nearly one percentage point of GDP to 10 percent, primarily due to the fact that the drought contributed to a decline in agricultural exports and an increase in imports of foodstuffs. B. Budgetary revenue 19. Budgetary revenues were estimated at CFAF 90.8 billion in 1997, compared to the target of CFAF 102.1 billion (-11.1 percent). Nevertheless, this represented a significant increase (+14.9 percent) over 1996 (CFAF 79 billion). Tax revenues amounted to CFAF 78.1 billion, compared to the programmed amount of CFAF 92.5 billion, but again this represents a significant increase over 1996, when the amount was CFAF 68.5 billion (+14 percent). 20. Customs revenue amounted to CFAF 43.3 billion, compared to the projected amount of CFAF 50.7 billion, for a 17.3 percent increase over 1996 (CFAF 36.9 billion). Internal tax 2 Privatization: NIGELEC, SNE, SONITEL, SONIDEP, SNC, SPEHG, SONITEXTIL, OLANI, ABATTOIR, RINI, ONAHA, OFEDES Liquidation: ONT, SONHOTEL, LABOCEL Restructuring: ORTN, CPCT, CDN, SONICHAR, SONUCI, ONPPC, SNTN, CNUT 5 revenue came to CFAF 34.8 billion, compared to the projected amount of CFAF 41.8 billion, for a CFAF 3.2 billion increase over 1996 (+10.1 percent). 21. Key reasons for the shortfall in revenue mobilization were: (i) delays in adopting and implementing some measures (see para. 22); (ii) underestimation of the timeframe involved in preparing and adopting these measures and achieving the desired effects; (iii) delayed and partial use of credits allocated to strengthen tax collection agencies; (iv) insufficient control of tax exonerations; and (v) a persistently gloomy economic situation. 22. Certain important measures envisioned by the program were only belatedly adopted, specifically: (i) the introduction and use of a single taxpayer identification number system; (ii) a change in the price structure for petroleum products; and (iii) the introduction of a system of treasury checks for the payment of import duties in the context of externally financed Government contracts. Reasons for the shortfall in customs revenue included inadequate cooperation between customs and the imports verification agency, as well as strikes and petroleum shortages in the transportation sector, which slowed trade flows to Niger from the coastal countries. 23. During the period from December 1997 to March 1998, the Government introduced measures to recoup some of the revenue shortfall experienced in 1997, including strengthening property tax collection procedures, accelerating the collection of tax debt, the publication of a comprehensive list of tax defaulters in the press and their exclusion from participation in Government procurement contracts. During the first quarter of 1998, the Government also accelerated implementation of additional revenue mobilization measures as described in the Letter of Development Policy prepared by the Government in August 1998 (see para. 32). C. Wage bill 24. For fiscal year 1997, the wage bill came to CFAF 44.2 billion, which represents a decrease of CFAF 5.5 billion in comparison to fiscal year 1995 and which is in line with the program objectives. This result was mainly achieved by adopting a new salary scale that reduced base wages and eliminated distortions in the system of remuneration and by strictly limiting new recruitment to departures other than voluntary departures. In addition, a thorough civil service census was carried out in 1997, albeit with some delay; this resulted in the dismissal of 319 civil servants whose status was found to be irregular and led to the integration of the civil service database and payroll files. D. Other budgetary expenditures 25. With respect to execution of non-wage expenditures, the results were mixed. The amount of the 1996 wage bill cannot serve as the basis for comparison for 1997 (see Footnote 1 on the one-time agreement between the Government and the trade unions concerning wage payments every 42 days). 6 26. Expenditures for subsidies and transfers came to CFAF 12.8 billion, whereas the objective was CFAF 9.3 billion. This overrun can be attributed to inadequate control over the expenditures of certain entities capable of exerting strong socio-political pressure (ORTN, University, ENA, etc.). However, expenditures for university scholarships were reduced to CFAF 3.2 billion, while the objective was CFAF 3.8 billion. 27. Equipment expenditures came to CFAF 34.7 billion, compared to the projected amount of CFAF 33.2 billion. 28. Non-wage expenditures for the education and health sectors (payment orders basis) increased by about 12 percent on average in 1997. 29. Road maintenance expenditures came to CFAF 1.1 billion, compared to the programmed amount of CFAF 2.7 billion. 30. Public investment expenditures totaled CFAF 54.7 billion in 1997 and their execution rate was 64 percent, an increase over 1996 (51 percent). 31. Clearing of domestic arrears identified and validated by the Treasury was projected to reach CFAF 19.4 billion. In fact, the Government cleared CFAF 13.8 billion in 1997 and CFAF 11.8 billion during the first half of 1998, mainly through settlement of cross-debts and with external financial assistance specifically targeted at clearing arrears in the social sectors. In 1997, the Government made substantial progress in preparing a thorough inventory of domestic arrears and a plan for their settlement (these were finalized in July 1998), and in identifying measures to prevent any new build-up of domestic arrears (these are now being implemented). A reduction of CFAF 40.8 billion in external arrears was programmed in 1997 but, as a result of severe cash flow problems, there was instead a net increase of CFAF 1.9 billion (a reduction of CFAF 8.7 billion was more than offset by CFAF 10.6 billion in new arrears). The programmed reduction was based on the assumption that rescheduling arrangements would be concluded and implemented with certain multilateral donors (specifically BADEA, BOAD and the OPEC Special Fund) and other bilateral donors who are non-members of the Club de Paris. There were difficulties in negotiating most of these arrangements, and the cash flow problems hampered implementation of the arrangements that were reached. 32. In 1998, the Government pursued its efforts efforts to maintain strict control over public expenditures and restore its financial credibility. These efforts include strict compliance with expenditure procedures, a program to rehabilitate the Treasury, adoption of a regulatory mechanism to keep expenditure commitments in line with actual budgetary receipts and the adoption of measures to contain and better control expenditures that are sources of domestic arrears. This reform program could be supported by an IDA adjustment credit currently under preparation (see the Letter of Development Policy of August 1998 for details). Finally, the Government has launched a participatory process to conduct a review of public expenditures which, in 1997-98, has focused on the education and health sectors, as well as budgetary programming and execution procedures. The Government has begun to implement the 7 recommendations identified during this review. E. Privatization program 33. In October 1996, the Government adopted a privatization program targeting twelve public enterprises. In general, delays in carrying out certain actions occurred during the second and third quarters of 1997, primarily due to the weakness of the Government's technical and financial capacities and insufficient coordination among the principal entities responsible for implementing the reforms, but also due to the limited financial resources available for conducting the necessary preliminary studies. 34. In late 1997, the Government attempted to make up for the delays in implementing the privatization program. In November 1997, the Government signed a memorandum of understanding with the World Bank which spelled out the modalities of the privatization program, and a strict new timetable was prepared. In addition, a PPF was set up on December 31, 1997 to finance certain studies and technical assistance, and a privatization support project was prepared. This memorandum reflected the Government's commitment to complete the process and make up for lost time. Simultaneously, an institutional reorganization was carried out and the entities responsible for the program were strengthened in order to adhere to the new privatization timetable. 35. In terms of the legal framework, significant progress was made in resolving preconditions for implementing the privatization process through the following actions: Ordinance 97-24 detailing the modalities for the legal disposition of enterprises to be privatized; Decree 97- 429/PRN/MF/RE/P appointing managing directors; the development of a general approach for addressing retrenchment issues and for settling land issues. 36. By July 31, 1998, the privatization process had achieved the following results: * OLANI (dairy products company): Opening and analysis of bids and awarding of sale contract during the first quarter of 1998. The sale was completed on May 31, 1998. * SNC (cement company): Opening and analysis of bids and awarding of sale contract in April 1998. The sale took effect in July 1998. * Abattoir (slaughterhouse): Since the request for proposals elicited no interest, the operation is being reconsidered on terms more favorable to investors. * SONIDEP (petroleum products import and distribution company): A memorandum of understanding was signed on December 19, 1997 by the Government and representatives of four private distributors to establish a new private sector company responsible for managing all petroleum storage facilities. The National Assembly adopted the law on the import, storage, export, distribution and marketing of petroleum products. In addition, the process of restructuring SONIDEP got under way in December 1997 with the recruitment of a consultant responsible for conducting a study of the planned restructuring and the completion of the study in April 1998. * SNE (water company): The pre-qualification procedure for compiling a limited list of potential strategic partners capable of participating in the capital of the private company was 8 successfully carried out, and two bidders were selected to participate in the final request for proposals. Also, in November 1997 external financing for financial studies related to implementation of the reform was confirmed. During the first quarter of 1998, the following actions were taken: (i) issuance of a limited request for proposals for the recruitment of a consortium to implement the subsector reform; (ii) issuance of a limited request for proposals for the recruitment of a consultant to study the willingness and capacity of residents to pay and the elasticity of demand; and (iii) the start of the audit of 1996 and 1997 accounts. A memorandum of understanding on the State's net arrears vis-A-vis SNE was finalized in January 1998. * NIGELEC (power generation and distribution company): The privatization option was adopted by the Government and a limited request for proposals was issued for the recruitment of: (i) a consortium to implement privatization of the enterprise and (ii) a consultant to develop a new regulatory framework for the electric power subsector in Niger. A memorandum of understanding on the State's net arrears vis-A-vis NIGELEC was finalized in September 1997. * SONITEL (telecommunications company): Discussions of the strategy for privatizing the telecommunications sector have highlighted the need to restructure the sector prior to any privatization. In this context, a draft regulatory and institutional framework for the telecommunications sector and terms of reference for preparing specifications for the telecommunications field have been developed. Bids have already been examined for selecting the investment bank and the consortium that will be responsible for the regulatory framework and the market study. Lastly, the letter of sector policy for the telecommunications field is now being finalized. F. Liquidation and restructuring program 37. SONHOTEL was dissolved by Ordinance 97-013 and liquidated by Decree 97-162. In this context, the following actions were carried out: indemnification of personnel, divestiture of the Grand Hotel and the Hotel du Sahel based on competitive bidding, debt recovery. LABOCEL was also dissolved; the veterinary research component was transferred to INRAN while the veterinary products and equipment supply and distribution component was liquidated. A draft law to dissolve ONT was prepared in July 1998 for adoption by the National Assembly. 38. The objective of the restructuring program was to rectify the enterprises' financial imbalance by introducing measures to improve resource mobilization and reduce costs. In certain cases, an institutional and/or structural reform was required to bring a particular enterprise's activity more in line with the current economic context. 39. The principal restructuring measures taken to date are as follows: * SNTN (national transportation company): The enterprise's urban transport activities have been transferred to a company with private participation. The transfer of inter-urban transport activities and the refocusing of industrial activities are in progress. * ONPPC (national pharmaceutical company): Liberalization of the pharmaceutical sector took effect in early 1997. The process of dividing the company into three entities is under 9 way: the laboratory entity was created by Ordinance 96-77 of December 11, 1996; for the production entity, a private company was selected for a partnership contract based on a request for partnership proposals; for the supply and distribution entity, a rehabilitation program is under way, as well as studies to determine the legal framework most appropriate to the national environment. * OPVN (food security stock agency): Restructuring is being carried out by: (i) replenishing the level of security inventories; (ii) transferring warehouses unused by OPVN to the State; (iii) upgrading the information system; and (iv) reducing costs (in particular, reducing the wage bill by 15 percent). * CPCT (credit agency): The principal actions carried out to date concern: (i) preparation of draft statutes to transform CPCT into a company with private participation; (ii) negotiations with collectivities to reach debt settlement agreements; and (iii) intensified recovery of unpaid debt. * SONUCI (urban planning and real estate building company): The principal actions carried out to date are as follows: (i) a search for shareholders to increase capital; (ii) the development of a project to construct 50 housing units; (iii) reorganization of lease agreements; and (iv) reduction of operating costs. * CREDIT DU NIGER (credit agency): The restructuring plan has produced the following results: (i) revision of the organizational structure; (ii) suspension of transportation allowances and promotions during the period of the restructuring plan; and (iii) compulsory domiciliation of the salaries of CDN borrowers before any credit is extended. In addition, the process of reducing costs is under way, specifically through staff reductions. * ORTN (national television): The objectives of the restructuring effort are to reduce costs (by making the organizational structure less cumbersome and by halting new recruitment) and increase revenue (by charging the Government and its offshoots for services rendered and by setting up a collection team). * ONPE (national postal and savings office): In restructuring the postal and telecommunications sector, three entities have been created: SONITEL, the Postal and Telecommunications Direction (Direction de la Riglementation des Postes et de la Tilicommunication) and the National Postal and Savings Office (Office National des Postes et de l'Epargne: ONPE), comprising the postal branch of the former OPT and the former CNE. For ONPE, a rehabilitation plan was developed with the objective of (i) improving ONPE financial situation, and (ii) making ONPE profitable over time. In October 1997, the Board of Directors adopted this plan and a new salary scale that translates into a 7 percent cut in the wage bill. IV. EVALUATION OF RESULTS AND ASSESSMENT OF CONSTRAINTS 40. The results achieved by the public finance component of the program are satisfactory. Substantial progress was made in mobilizing budgetary revenues (a 14.9 percent increase over 1996) although they remained below the targeted amount (by 11.1 percent). In addition, significant progress was made in reducing the wage bill by about 11 percent and increasing current non-wage expenditures for priority sectors, particularly education and health. However, 10 expenditures for subsidies and transfers exceeded projections, reflecting inadequate control over these socially sensitive expenditures. Spending for road maintenance did not match the priority assigned to this sector. Considerable progress was achieved in reducing domestic arrears validated by the Treasury and in preparing a thorough inventory of payment arrears, as well as an overall plan for their settlement. The Government carried out a review of public expenditures with support from the World Bank and other donors; the recommendations identified during this review will be implemented in 1998-99. 41. After a vigorous start in late 1996 and early 1997, the privatization program ran into delays in mid-1997 as a result of the Government's weak technical and financial capacities but also due to organizational shortcomings. Poor communication was also a major factor in delaying program implementation. Notwithstanding these obstacles, the Government accelerated implementation of the privatization program in late 1997 and early 1998 and completed the first sales of public enterprises. A communication program was also developed with Bank assistance and its implementation is now under way. 42. Three major constraints impeded program implementation. First, it was a mediocre crop year, resulting in slower growth of real GDP and an increase in public expenditures to supply areas experiencing food shortages. Second, public investment has been slow to recover because the resumption of multilateral and bilateral cooperation has remained timid and the preparation of a project pipeline has proven to be a lengthy process. Third, the low level of disbursements of external budgetary support has significantly hindered program implementation, exerting constant pressure on cash flow, impeding efforts to put public finances in good order and deferring resolution of the problem of domestic arrears. 43. However, the relatively modest nature of the results described above should not obscure three significant positive elements. First, the developments that took place during the second half of 1997 indicate that the program is gradually reaching full speed and that program objectives will be met, albeit with some delay. Second, faced with apparent shortcomings, the Government adopted the necessary corrective measures and gave a very clear signal of its determination to intensify and complete the adjustment process. Third, the two elements cited above suggest that agencies and officials are gradually internalizing the program, which is a very positive development for the continued implementation of the program. V. RESPECTIVE RESPONSIBILITIES AND LESSONS TO BE DRAWN FROM THE IMPLEMENTATION OF THE PROGRAM A. Borrower performance 44. Clearly, the issue of responsibility for the weak impact of the structural adjustment program should not be ignored. Yet any assessment of responsibility should be viewed in relative terms, given the severe impediments faced by Niger, as explained above in para. 40. 11 45. Shortcomings in coordinating preparation and implementation of the reforms are one of the factors underlying the delays that have occurred. Corrections were made, and clear progress has been achieved ever since. However, coordination of the economic reform program could benefit from further strengthening. 46. Based on the lessons learned during PSAC implementation and the need to consolidate and deepen the adjustment efforts, the Government intends to emphasize the following areas in 1998-99: (i) ensuring the irreversibility of the adjustment program and rigorous monitoring of the actions undertaken; (ii) continuing efforts to combat tax evasion and reduce tax exonerations; (iii) restoring budgetary orthodoxy; (iv) improving the efficiency of public expenditures; and (v) strengthening communication efforts. 47. Delays and shortfalls in mobilizing external budgetary support that was initially projected had a significant impact on program implementation, as mentioned above in para. 40. 48. Strong and diversified support from Niger's development partners will be necessary for public investment to recover. This support should not be limited to projects, but should also encompass assistance for project preparation and implementation. Within the framework of the Economic Recovery Program, efforts should be made to accelerate the recovery of public investment and to make projects more effective in terms of their impact on the economy, the living conditions of the population, the availability of and accessibility to basic social services, and the maintenance and extension of infrastructure. 49. Consultation with all social and economic partners and effective communication are of critical importance in defining and implementing reforms in all areas, particularly with respect to public finance and the privatization program. To ensure effective communication, support from development partners, most particularly the World Bank, is indispensable. B. World Bank performance 50. Overall, the performance of the World Bank was satisfactory during the stages of program identification, preparation, evaluation and supervision. In particular, the Bank very quickly detected problems in coordinating program implementation and delays in the privatization program. The Bank provided support to the Government in assessing the status of public finances and responded very rapidly to the need for assistance in this area. VI. PROGRAM SUSTAINABILITY 51. The results achieved should be considered sustainable insofar as the Government has not reversed the measures taken prior to credit approval, has strived to carry out the program of reforms in 1997-98 and remains determined to consolidate the progress achieved to date.