Public Disclosure Authorized. Project Name Mali - Third Structural Adjustment Credit (SAC III) Public Disclosure Authorized

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1 Public Disclosure Authorized Report No. PID10817 Project Name Mali - Third Structural Adjustment Credit (SAC III) Region Sector Project ID Africa Multi-sectoral MLPE72785 Borrower Republic of Mali Public Disclosure Authorized Implementing Agency Date Prepared November 15, 2001 Project Board Date December 11, 2001 Ministry of Economy and Finance BoYte Postale 234 Bamako, Mali Contact person: Mr. Bakari Kone, Minister Tel. (223) / Public Disclosure Authorized Public Disclosure Authorized Country Background Mali is one of the ten poorest countries in the world, with limited natural and human resources. It is highly vulnerable to external shocks (with 85 percent of its exports concentrated in two products - cotton, gold - and a further 10 percent concentrated in livestock), and has acute social needs. The population of almost 11 million is growing at about 2.3 percent per year, and the average real GDP per capita level was estimated at US$240 in During the 1990s, the country underwent political, economic and social changes that increased its chances for stronger socioeconomic performance: transition to pluralist democracy ( ); establishment of peace in the North following a period of rebellion (1994); and implementation of sound macroeconomic, structural and institutional reforms to promote private sector development, improve governance, and prepare the economy for integration under the West African Economic and Monetary Union (WAEMU). A program to de-concentrate and decentralize government operations was advanced in 2000, with the completion of municipal elections for the remaining 682 (out of 703) communes. The economy responded positively to these changes, particularly following devaluation of the CFA franc in 1994 which spurred significant growth of the cotton and gold sectors. Since then, real GDP growth has averaged about 4.5 percent per annum, enabling real per capita GDP to rise annually by just under 2 percent. Mali acceded to the Decision Point of the enhanced HIPC with submission of an Interim Poverty Reduction Strategy Paper (I- PRSP) in September A full PRSP emphasizing economic growth, human development, and reduction of human vulnerability, is expected to be issued by early In parallel, the government is progressively implementing measures to strengthen

2 the public expenditure processes, improve the effectiveness of public expenditure programs, and reform and liberalize economic activity in key sectors of the economy (e.g., energy, financial, telecommunications, and cotton). Attainment of the HIPC Completion Point is expected to be in the spring Mali's recent economic performance has been negatively affected by weak performance of the country's cotton sector. Mali's cotton sector, which achieved impressive growth since 1994 and gains in the world export market share, has been facing a severe financial and structural crisis since The crisis was catalyzed by the sharp decline in world prices for cotton lint that deepened as the cotton parastatal company - Compagnie Malienne pour le Developpement des Textiles (CMDT) - proved itself unable to respond effectively to the price shock. By 1998, the CMDT had become a poorly run enterprise, with high internal costs and inadequate governance and financial control mechanisms. Weak performance of the CMDT threatened to reverse the competitiveness gains achieved during the 1990s. In view of the cotton sector's important role, the continued crisis in the sector presages a weakened economic performance this year. Real GDP growth is projected at -1.1 percent due largely to the 50 percent decline in cotton production during the 2000/2001 crop year and also to the 17 percent drop in cereals production due to low rainfall. The drop in cotton production is estimated to lower fiscal and export receipts this year, thereby worsening public finance and balance of payments outcomes compared with The most troubling concern has been the impact on farmer and rural incomes, and the implications this may have on poverty. The current weak economic situation has occurred at a time when the Malian authorities had hoped to move onto a path of more vigorous growth and social progress through implementation of the poverty reduction strategy laid out in their I-PRSP, and which is being worked out in detail in the full PRSP expected to be completed by early To deal with this challenge, the authorities have designed a response program comprising: (i) cotton sector recovery and initial restructuring (paras ), and (ii) public expenditure reforms to facilitate poverty reduction programs(paras ). World Bank Strategy and Donor Support The Bank's strategy of assistance to Mali, as set out in the FY 98 CAS (Report MLI), rests on two pillars: (i) stable economic growth; and (ii) sustainable human development. In line with this, assistance to Mali since FY99 has included lending for two projects aimed at the basis for stable growth (a rural infrastructure project and a financial sector project); and three others focused on human development (a health sector project in support of Mali's long-term Programme de Developpement Sanitaire et Social (PRODESS); an education sector learning and innovation loan; and an education sector project in support of the Programme Decennal d'education (PRODEC). By mid- 2000, Mali had met the conditions for moving into the high case of the proposed lending program. This allowed us, in late 2000, to prepare a supplement to the Economic Management Credit (Credit 2894-MLI) to help Mali deal with the terms-of-trade -2 -

3 shock caused by the combined effects of an oil price hike and a fall in cotton prices. While preparations continue towards a new CAS (in FY03), the current CAS remains broadly adequate as a framework for continuing Bank assistance to the country to the extent that stable economic growth and sustainable human development remain the twin strategic priorities. The objectives of SAC III are two-fold: (i) to help Mali restore the basis for stable economic growth by restructuring the all-important cotton sector to make it more efficient and capable of adjusting smoothly to changing international economic conditions; and (ii) to improve the tools for planning and managing public expenditures for more effective poverty reduction. These objectives of the SAC III fit well with those of the FY98 CAS and pave the way for a new CAS to be prepared in FY03. Donors are supporting the Mali reform program along with IDA, through balance of payments support as well as through complementary programs and technical assistance. In view of the links between the cotton sector's performance and macroeconomic stability in Mali, the IMF's Poverty Reduction and Growth Facility emphasizes the need to maintain momentum on the cotton sector reform program particularly actions to increase operational efficiency and reduce government ownership in the sector. The PRGF also emphasizes measures to improve public expenditure management, based on assessments undertaken by Bank and Fund missions. SAC III Design and Description The proposed US$70 million credit will provide balance of payments support to Mali during 2001/2002, and support the government's ongoing reform agenda. The credit would be disbursed in three tranches. As there are no conditions of effectiveness of the Credit (except for ratification in Mali as required by Malian law), the first tranche of the credit (US$25 million) would be available immediately upon credit effectiveness. The second and third tranches (US$20 million and US$25 million, respectively) would be tied to satisfactory performance and program implementation, and completion of key specified actions of the reform program. This credit focuses on the following priority reform areas: (i) recovery and restructuring of the cotton sector to restore positive economic growth; and (ii) public expenditure reforms aimed specifically at advancing the government's poverty reduction objectives. The cotton sector recovery and restructuring program The government has laid out its policy for reforming and liberalizing the cotton sector, including a plan to privatize CMDT's agro-industrial and commercial activities. During the first phase over the next year, initial divestment of activities are scheduled and the full sector liberalization program will be designed. The restructuring program will necessarily span several years, and will require making the effort to create an appropriate framework to attract private capital and know-how and build the capacities of the key participants, namely the farmers organizations. Support for the reinforcement of capacities of farmers organizations to play an increasing role -3 -

4 in the management of the cotton sector, will be provided through the separate Agricultural Services and Producer Organizations Project. Under the SAC III program the authorities expect to implement the first phase of the reform program, comprising: (i) restoration of the CMDT's financial stability so as to allow it to secure the financing of the forthcoming crop season; (ii) achievement of efficiency gains in the CMDT through restructuring and divestment of non-core activities (e.g., transport, input supply); (iii) divestment to the private sector the cotton collection and marketing activities in one cotton growing area of the country (OHVN); (iv) privatize the cottonseed oil company HUICOMA; (v) the assurance of a high producer price of seed cotton for 2001/02 crop year output to maintain confidence of the farmers, compensate for the heavy losses in rural incomes suffered in 2000/01 crop year, and redress the impact on rural poverty; and (vi) define and prepare the final phase of the sector liberalization program. Public expenditure reform program Mali's system of public expenditure management, contains elaborate procedures for budget preparation, implementation, and controls both in and outside the Ministry of Economy and Finance. On paper it appears reasonably adequate; in practice, however, weaknesses are apparent that hamper the government's ability to achieve desired results. With the renewed dedication of the government to poverty reduction under the HIPC program, and the commitment to private-sector-led growth, the government has realized the need to accelerate aspects of the public expenditure reform agenda that support these two key development priorities. As a first step toward achieving the vision of moving from a system based solely on regulating expenditures to one based on promoting efficiency of expenditures and monitoring of outcomes, the SAC III program builds on reform measures implemented under the recently closed Economic Management Credit (Credit No. 2894). With the completion of the PRSP by early 2002, the country would have an articulated development and poverty reduction strategy to provide an improved framework for budget allocation. Achieving the government's objective would also rest on the availability of good information and the effectiveness of the information system. SAC III program actions focus government's efforts in three dimensions: (i) improving budget preparation; (ii) improving budget execution; and (iii) strengthen monitoring, transparency, and accountability. Progress in these three areas will enable Mali to better link expenditures to poverty reduction objectives and improve effectiveness of public resources utilization, particularly as it relates to poverty reduction programs. Environmental Aspects The implementation of the public sector reform program is not expected to have any negative environmental impact. Implementation of the cotton sector reforms may have environmental implications due to the potential increase in cotton production and attendant increase fertilizer/pesticide use, though the magnitude of environmental risks strictly - 4 -

5 associated with the SAC III cotton sector program is very limited as no major expansion of cotton cultivated areas is expected. Environmental issues integrated into the design of the Agricultural Services and Producer Organizations Project (PASAOP), which emphasizes the promotion and monitoring of environmentally responsible agriculture, addresses the potential environmental implications of the SAC III program. To deal with the possible environmental and social impact of the cotton sector privatization program, environmental audits will be undertaken of the entities to be privatized and the results integrated into the bidding documents. An assessment of the readiness of existing national environmental legislations to deal with the above issues will also be undertaken. Benefits and Risks By supporting implementation of the first stage of the cotton sector reform program, the operation will facilitate maintaining the confidence of farmers in the CMDT, and enable the 2001/02 crop to purchased at a favorable price for producers. Preliminary estimates indicate that seed cotton production for 2001/02 could bounced back to record levels, enabling rural incomes to recover. The credit will enable the government to stabilize its financial position and improve public expenditure management. The operation faces three risks: the weak institutional capacity could delay implementation. Creation of the Mission Restructuration du Secteur Coton has greatly helped maintain momentum on the reforms during the last six months. Technical assistance has been arranged by the Bank and other donors to assist the government with preparation studies for the both the cotton and public expenditure reform programs; the preparation of the 2002 elections could detract from the focus on the reforms. The short-term action plan will be implemented before the electoral campaign process gets underway, and the public expenditure management program measures are not sensitive to the electoral cycle; the persistence of a deterioration in the terms of trade beyond 2001 could delay the cotton sector's return to financial viability. Prospects are for a slow but steady recovery of the international prices for cotton lint. The reform program takes into account several the risks and financial impact of a longer than expected depression of the export price. Contact point: Team Leaders Christina A. Wood Sr. Economist Mali Tel: (202) Fax: (202) cwood@worldbank.org Patrick Labaste Sr. Rural Development Specialist Tel: (202)

6 Fax: (202) For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending December 14,

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