Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA Report No. P 7495 MLI PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT (SAC III) Macroeconomics 4 Africa Region OF SDR 55 MILLION (US$70 MILLION EQUIVALENT) TO THE REPUBLIC OF MALI November 13, 2001 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.

2 CURRENCY EQUIVALENTS (As of November 5, 2001) Currency Unit = CFA franc (CFAF) US$1.00 = CFAF 720 SDR 1.00 = US$1.27 FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS AFD BCEAO BEI BOAD CAS CET CFAA CFAF CIDA CMDT CPAR ESDS EU GDP GOM HIPC HUICOMA ILO IMF I-PRSP LSDP LDP MEF MRSC MTEF OHVN PASAOP PER PRGF PRODEC PRODESS PRSC PRSP SAC III SDR UNDP WAEMU Agence Franvaise de Developpement Banque Centrale des Etats d'afrique de l 'Ouest Banque Europeenne di'nvestissement Banque Ouest Africaine de Developpement Country Assistance Strategy Common External Tariff Country Financial Accountability Assessment CFA Franc Canadian International Development Agency Compagnie Malienne pour le Developpement des Textiles Country Procurement Assessment Report Environmental and Social Data Sheet European Union Gross Domestic Product Government of Mali Heavily Indebted Poor Countries Huilerie Cotonniere du Mali International Labor Organization International Monetary Fund Interim Poverty Reduction Strategy Paper Letter of Sector Development Policy Letter of Development Policy Ministry of Economy and Finance Mission de Restructuration du Secteur Coton Medium Term Expenditure Framework Office de la Haute Vallee du Niger Programme d'appui aux Services Agricoles et aux Organisations de Producteurs Public Expenditure Review Poverty Reduction and Growth Facility Programme D&cennal d'education Programme de Developpement Sanitaire et Social Poverty Reduction Strategy Credit Poverty Reduction Strategy Paper Third Structural Adjustment Credit Special Drawing Rights United Nations Development Program West Africa Economic and Monetary Union Vice President: Callisto Madavo, AFRVP Country Director: A. David Craig, AFC 15 Sector Managers: Emmanuel Akpa, AFTM4 & Joseph Baah-Dwomoh, AFTR2 Task Team Leaders: Christina A. Wood, AFTM4 & Patrick Labaste, AFTR2

3 FOR OFFICIAL USE ONLY THE REPUBLIC OF MALI THIRD STRUCTURAL ADJUSTMENT CREDIT (SAC III) TABLE OF CONTENTS A. BACKGROUND AND POLITICAL DEVELOPMENTS...1 B. RECENT ECONOMIC PERFORMANCE C. POVERTY STATUS... 4 D. NATIONAL RESPONSE PROGRAM... 5 I. THE COTTON SECTOR RECOVERY AND RESTRUCTURING PROGRAM... S l.a. The Long Term Vision... 7 I.b. The Short Term Recovery And Reform Program... 8 II. PUBLIC EXPENDITURE REFORMS FOR POVERTY REDUCTION... 9 II.a. Improving Budget Preparation II.b. Improving Budget Execution II.c. Strengthening Monitoring, Transparency, Accountability E. MACROECONOMIC OUTLOOK AND FINANCING REQUIREMENTS F. BANK RESPONSE AND STRATEGY G. PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT CREDIT DESIGN SAFEGUARDS H. ROLE OF THE IMF AND OTHER DONORS I. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS J. CONDITIONS PRIOR TO NEGOTIATIONS K. CREDIT EFFECTIVENESS L. SECOND AND THIRD TRANCHE CONDITIONS SECOND TRANCHE CONDITIONS THIRD TRANCHE CONDITIONS M. RECOMMENDATION ANNEXES 1. Letter of Development Policy 2. Key Processing Events and Team Members 3. Project Description Summary 4. Matrix of Policy Actions 5. Key Economic Indicators 6. Mali At A Glance 7. Status of Bank Group Operations This document has a restricted distribution and may be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 THE REPUBLIC OF MALI THIRD STRUCTURAL ADJUSTMENT CREDIT (SAC III) CREDIT AND PROGRAM SUMMARY Borrower Amount Terms Implementing Agency Program Objectives Credit Description Benefits The Republic of Mali SDR 55 million (US$70 million equivalent) Standard IDA terms (40-year maturity & 10-year grace period) Ministry of Economy and Finance The credit aims to provide balance of payments support to the government to close the financing gap stemming from the recent crisis in the cotton sector, enabling the government to maintain momentum on its ongoing reform agenda for the cotton sector and for management of public expenditures. By focusing on reforms to liberalize the cotton sector and improve public expenditure management, the SAC III targets the programs most critical to Mali's poverty reduction objectives, as set out in the CAS. The credit supports the government's ongoing reform program to restore the financial position and production levels of the cotton sector, and to further strengthen public expenditure management. This proposed credit is designed as a three tranche operation of US$70 million. The first tranche of US$25 million is to help cover the financing gap for year 2001 and maintain momentum of the reform programs including, in particular, emergency cotton sector recovery actions to restore financial solvency in the sector. The second tranche of US$20 million, and the third tranche of US$25 million, are to be disbursed following completion of key agreed actions in the reform agenda for the cotton sector and for public expenditure management. This would include: for the cotton sector - a refocusing of the cotton parastatal (CMDT) company's operations on core agro-industrial functions, CMDT downsizing including personnel, and implementation of key initial actions in the process of liberalizing the sector and privatizing the company; and, for public expenditure management - the adoption of a budget nomenclature for the local governments compatible with the national nomenclature to enable consolidation of expenditure across all levels of government, improving the effectiveness and efficiency of information flows within MEF, and strengthening the budget execution process. By supporting implementation of the first stage of the cotton sector reform program, the operation will facilitate the full restoration of confidence between farmers and the CMDT, and enable the 2001/02 crop season to proceed without disruption. Preliminary estimates indicate that seed cotton production for 2001/02 could bounce back to pre-crisis levels and above. It is therefore important to consolidate these early signs of recovery which, combined with the increase of the purchase price for seed cotton, would result in 2002 in a surge in rural incomes in the poor cotton-growing areas.

6 The credit will enable the government to achieve a stable financial situation and improve the efficiency and effectiveness of expenditure management. The reform program in the cotton sector, the pillar of the economy, is critical to reviving growth and improving living standards of all Malians, especially the rural poor. Risks The operation faces three risks: (i) the weak institutional capacity could delay implementation. Creation of the Mission Restructuration du Secteur Coton, a delegation reporting to the Prime Minister to handle the cotton sector crisis, has greatly helped maintain momentum on the reforms during the last six months. Nonetheless, capacities remain weak to manage such complex, pressing and politically sensitive issues. Technical assistance has been arranged to assist the government with preparation studies for the reform program. The Bank team will continue its almost daily interaction with the government to provide advice and otherwise assist, where necessary, in moving the program forward. Technical assistance is being provided by various donors, to facilitate progress on the public expenditure reform program; (ii) the preparation of the 2002 elections could detract from the focus on the reforms. Preparation and sequencing of the cotton sector restructuring program has taken this factor into account, with a short-term action plan to be implemented before the electoral campaign process gets underway. The public expenditure management program includes measures that are not sensitive to the electoral cycle; (iii) the persistence of a deterioration in the terms of trade beyond 2001 could delay the cotton sector's return to financial viability. The sector's long-term financial recovery plan will be prepared by March Prospects are for a slow but steady recovery of the international prices for cotton lint. The plan will consider several assumptions and assess the risks and financial impact of a longer than expected depression of cotton export prices. Disbursements Financing Plan Poverty Rating Environment Rating The proposed credit will be disbursed in three tranches: a first tranche of US$25 million upon credit effectiveness; a second tranche of US$20 million and a third tranche of US$25 million, both upon completion of specific reform conditions. 100% IDA financing Not applicable Not applicable ii

7 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT (SAC III) TO THE REPUBLIC OF MALI 1. I submit for your approval the following report and recommendation on a proposed Third Structural Adjustment Credit (SAC III) to the Republic of Mali for SDR 55 million (US$70 million equivalent). This operation will support two pillars of Mali's poverty reduction strategy: cotton sector reforms to promote efficiency and enhance growth; and public expenditure management reforms to improve efficiency and transparency of budgetary operations. The credit would provide balance of payments support to the government to close the financing gap stemming from the recent crisis in the cotton sector, enabling the government to maintain momentum on its ongoing reform agenda for the cotton sector and for management of public expenditures. The credit would be disbursed in three tranches, the first upon credit effectiveness, and the second and third subject to completion of agreed reform actions. A. Background and Political Developments 2. 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 and growing at about 2.3 percent per year, realized on average a real GDP per capita level of US$240 in During the 1990s, the country underwent political, economic and social changes that increased its chances for stronger socio-economic 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. 4. Over the last two years, the Malian authorities have also continued to implement a range of structural and financial policy measures. The common external tariff (CET) by the West African Economic and Monetary Union (WAEMU) member countries was implemented on January 1, 2000, bringing import duties below a ceiling of 20 percent. To modernize the tax system and offset the potential customs revenue loss related to the introduction of the CET, estimated at 1 percent of GDP in 1999/2000, a comprehensive tax reform was implemented in April 1999 consisting of: (i) a single VAT rate at 18 percent, and (ii) a simplified system of direct taxation 1. ' The law introduced a unique tax on industrial and commercial profit of 35 percent, and extended the global tax (imp6t synthetique) to all commercial taxpayers with annual turnover less than CFAF 30 million. The law also introduced a progressive tax on wages and salaries withheld at the source.

8 Mali These fiscal reforms have enabled the authorities to compensate for the shortfall in revenues due to the tariff reforms. 5. 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. 6. The next legislative and presidential elections are scheduled in The government is undertaking a nation-wide electoral census and plans to hold a referendum on a new constitution in December 2001 to bring the country's statutes in line with WAEMU requirements. In addition to a change in the modalities for electing constituent representatives to the National Assembly, the new constitution calls for the reinforcement of the judicial system with the separation of judicial functions into four autonomous bodies (Supreme Court, Commercial Court, Constitutional Court, and a Cour des Comptes). 7. Mali acceded to the Decision Point of the enhanced HIPC with submission of an I-PRSP (II)A/Sec M ) 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 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 The next CAS will be prepared in FY03 (para. 50). B. Recent Economic Performance 8. 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 1 990s. 9. Mali's macroeconomic performance worsened in 2000 reflecting mainly the impact of higher petroleum import prices and lower export receipts from cotton. Total revenues (excluding grants) declined in 2000 (14.9 percent of GDP) relative to 1999 (16.3 percent of GDP), while current expenditures remained close to programmed levels. As a result, the overall fiscal deficit (on a commitment basis, and excluding grants) deteriorated to -9.4 percent of GDP compared with -8.7 percent in In the external sector, the current account deficit (excluding official grants) deteriorated to -9.8 percent of GDP in 2000 from -9.3 percent of GDP in

9 Third Structural Adjustment Credit 10. 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, already among the lowest in the country, and the implications this may have on poverty. 11. In 2000, the authorities made considerable efforts to contain overall expenditures while ensuring the necessary allocations to social sectors. These efforts would be difficult to sustain in 2001 and 2002 while maintaining progress on the implementation of key measures (such as privatization of public enterprises, where the need to finance social plans for workers made redundant arises), unless additional resources are provided to Mali in the very short term. The projected increase in the expenditures/gdp ratio for 2001 in Table 1 reflects, in part, the sharp decline in GDP in addition to an increase in expenditures. Total expenditures rose 20 percent due in large part to transfers to the cotton sector and provision for the election preparations (Table 3b). The increase due to cotton accounted for only 4 percent of the total increase in expenditures. Despite the fall in GDP, investment and savings as shares of GDP are projected to remain largely unchanged, implying that investment and savings levels would actually increase, perhaps an early sign of a response to the economic reform programs aimed at enhancing productivity through private sector growth. 12. 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 ). Table 1. Mali: Evolution of Key Macroeconomic Indicators estimate estimate Real GDP growth Real GDP per capita growth GDPdeflator(change) (as percent of GDP) Gross domestic investment Gross national savings Fiscal revenue and grants Fiscal revenue (excl. grants) Total expenditure (incl. capital) Fiscal balance (excl. grants) Current acct. balance (with transfers) Moneysupplygrowth Source: IMF and World Bank 3

10 Mali C. Poverty Status 13. According to the 1998 general household survey, just under two thirds of the population live below the poverty line. Among the poor, a vast majority (88 percent) live in the rural areas where the incidence of poverty is high (75 percent) in contrast with the urban poverty incidence (30 percent) (Table 2). Not surprisingly, vulnerability to poverty in the rural areas is due to the combined effects of uncertain climatic conditions, fluctuating crop prices, and a skewed allocation of resources toward the urban areas. Table 2: Incidence and Depth of poverty in 1998, by region Poverty Incidence (%) Poverty Depth (%) Regions/Areas Very Poor Poor Total Country-wide Mali Urban Rural Regions Mopti Tombouctou Segou Kayes Koulikoro Sikasso Gao Kidal District de Bamako Source: L'Enquete malienne d'6valuation de la pauvrete (EMEP) & Direction nationale de la statistique et de l'informatique. 14. Standard of living indicators suggest inadequate access of the population to educational and health services. Illiteracy and infant mortality rates are high - the 1998 survey indicates that about 16 percent of adults are literate, and a third of school-age children attended school; and according to a preliminary demographic and health survey in 1999 the infant mortality rate was 111 per thousand. Morbidity due to malaria, respiratory infections, and AIDS combined, was estimated to be 67.4 percent in An encouraging development is the observed increase in educational enrollments for both boys and girls in all regions of the country between and There are wide regional disparities, as well as differing vulnerabilities with respect to gender and age. Unemployment is largely an urban phenomenon (14.6 percent versus 5.3 percent in the rural areas), yet under-employment is higher in rural (26.4 percent) than in urban (17.6 percent) areas. The share of regular-position jobs (i.e. with benefits and pension) is low (9.2 percent), suggesting a high degree of vulnerability to poverty of the majority of older Malians. 15. Coverage of the population by basic infrastructure is low. Coverage ratios in 1997 by infrastructure type is as follows: School-age children per primary school 739 Age 15+ population per literacy center 1,060 Age women per midwife 2,550 Number of people per dispensary 11,313 Number of people per community health center 45,970 Number of people per hospital 409,745 Number of people per rural cereal bank 2,320 4

11 Third Structural Adjustment Credit 16. More up-to-date information on poverty incidence will be available in early 2002 from the ongoing 2001 poverty assessment survey, as income data from the first three sampling phases are integrated. For now, some information on living standards is beginning to emerge. The 2001 survey data indicate that an estimated 70 percent of households in 2001 have access to potable water, and 15 percent of households live more than 15 minutes away from a potable water source. Malnutrition levels are high - 50 percent of children under 5 are short for their ages, 40 percent are underweight for their ages, and 19 percent are emaciated. 17. Since the devaluation of 1994 and the rapid growth of cotton production and exports, the increase in poverty experienced over the previous decade was halted. The lack of good recent quantitative data limits the understanding of dynamics of poverty in Mali at a disaggregated level. The authorities plan to conduct an analysis assessing the impact of the cotton crisis on the population. The results are expected to be available by spring Though quantitative data are lacking on the impact on the poor of the recent cotton sector crisis, qualitative information suggests the poor, including cotton producers, have suffered a setback. Stabilization and recovery of the cotton sector is thus a critical outcome for achieving poverty reduction objectives. D. National Response Program 18. The authorities' response to the recent deterioration in economic performance and the attendant threat to progress on reducing the pervasive poverty is to implement a two-part progratn of far reaching reforms to: (i) put the cotton sector back on a sustainable growth path and make it more competitive; and (ii) improve public expenditure management systems for higher impact in public service delivery and poverty reduction. I. The Cotton Sector Recovery and Restructuring Program 19. The extent of the cotton sector crisis was revealed in October 1999 when the CMDT was bearing a heavy cash deficit from 1998 and incurring substantial operational losses in Recognizing the gravity of the situation, the government implemented an action plan in early 2000 for CMDT comprising: replacement of the top management; immediate cost-saving measures and tighter controls on purchases and inventories; a freeze on the by-then unsound investment program; completion of several financial and operational audits to shed light on the company's real situation; and, immediate increase of the selling price of cotton seed delivered to HUICOMA (from 11 to 20 CFAF/Kg). 20. The cotton sector crisis put a spotlight on the fundamental structural weaknesses of the cotton sector, resulting from its monopsonistic, uncompetitive organizational structure. Of critical concern was the low price paid to farmers relative to the world price. CMDT's dominant position in the cotton sector hampered the sector's ability to contain costs or respond flexibly to market signals. In the event, the actions implemented in the 1999/2000 period were not sufficient to deal with the structural deficiencies of the cotton industry. A new program and action plan has now been adopted to address these deficiencies. Box 1 presents the evolution of and response to the crisis. 5

12 Mali Box 1. The Cotton Sector in Mali - Crisis and Response 1970s s 25 years of solid performance of vertically integrated, state dominated cotton sector Devaluation of the CFA franc leads to improved profitability and increased cotton output CMDT management discipline deteriorates resulting in over-investment, increased operating costs, and alleged diversion of funds World cotton prices decline, generating operating losses in CMDT. Oct Government reacts to cotton crisis and prepares aflrst action plan. Feb Government implements initial action plan: CEO of CMDT replaced and prosecuted for corruption; Freeze on investments and increased controls on operating costs; Financial and operational audits launched. Increase in price of cotton seed sold to H1UICOMA. May 2000 CMDT announces 160 CFAF/kg purchase price for farmers (cf. 200 CFAF/kg in neighboring countries) Farmers boycott of cotton, resulting in: 50% fall in cotton production; Significant drop in rural family incomes and increased poverty in cotton zones; Increased losses at CMDT. July 2000 CMDT negotiates new 11-point agreement with farmers but too late for 2000/01 season. Aug Government requests Bank assistance. Oct Government invites Bank to discuss cotton sector reform (identification of SAC-III). Government prepares a second action plan. Dec Bank approves supplement to the Economic Management Credit (US$25m) to mitigate oil price and cotton price shocks. Feb Government begins implementation of second action plan: Cotton Sector Restructuring Mission (MRSC) created with broad powers to lead reforms; Advisor to Prime Minister appointed. April 2001 Three-day national forum (Etats generaux du coton) with stakeholders, notably farmers, to: Build consensus around cotton sector reforms and their sequencing/timing; Restore confidence prior to the 2001/02 cotton season. May 2001 Government announces 200 CFAF/kg cotton purchase price for farmers for the 2001/02 season, and commits to 10 billion CFAF (US$14m equivalent) to support the price paid to farmers, based on world cotton prices at that time. Farmers respond by massive planting, leading to record crop of 600,000 tons (est.) in 2001/02. May 2001 June 2001 Aug Sept Oct During technical meetings with the Bank/IMF, the government prepares a third action plan (in a Letter of sector development policy) for discussion: Short-term actions to mid CMDT financial restructuring & cost-cutting measures; Long-term restructuring from mid-2002 onward -sector liberalization and privatization. Letter of sector development policy approved by the Council of Ministers Major development partners pledge to cover CY2001 balance of payments support stemming in part from the cotton sector crisis. World cotton prices continue to decline, leading to increased financing gap for CMDT. CMDT Emergency Financial Rescue Plan largely implemented; however, Sept. 1 events destabilize world cotton markets leading to further decline in world prices. Financial Consultant submits report: Substantial cost savings in core CMDT operations since second action plan (Feb.2001); Further cost savings outlined for the 2001/2002 crop season. Nov Council of Ministers endorses the updated Letter of sector development policy (LSDP): CMDT financial restructuring, including divestiture of non-core activities and downsizing Studies (by March 2002) to define next steps to liberalize and privatize the cotton sector. Q Second tranche release (est.) based on full implementation of reform program in the LSDP. 6

13 Third Structural Adjustment Credit L.a. The Long Term Vision 21. In its Letter of Development Policy (Annex 1), the government has laid out its program for reforming and liberalizing the cotton sector, including the plan to privatize CMDT's agroindustrial and commercial activities. The long-term vision is of a sector in which private agroindustrial operators engage in the ginning of seed cotton and marketing of cotton lint, product prices are governed by market forces, services and inputs are provided by the private sector, and farmers are free to contract with parties of their choice to obtain the technical support services they need. The new framework would provide the incentive for all parties to operate efficiently and aim at improving sector competitiveness. The government's role would be limited to supplying public goods (e.g. roads), to collecting taxes, and to ensuring that regulations are followed by all parties. 22. Six key structural reforns have been identified: (a) a new price setting mechanism for seed cotton whereby the price negotiated with farmers would be related to the international price for cotton lint and would take into account the price paid in neighboring countries; (b) downsizing the company and divesting it of all non-core operations (e.g. transport and input supply) by outsourcing and contracting out to the private sector or farmer organizations; (c) sub-contracting/outsourcing of extension services, whose delivery and quality would be controlled by farmers and farmer organizations; (d) liberalizing the cotton sector, by opening up ginning to the private sector and privatizing existing CMDT factories; (e) increasing product revenue by liberalizing seed cotton, oil seed, and cotton meal marketing; and. (f) setting up of a professional association comprised of farmer organizations, ginning operators, and other private sector stakeholders to deliberate on sector wide issues. 23. In April 2001, the authorities organized the Etats generaux du coton, a three-day national forum of cotton stakeholders. The forum allowed farmers to voice their concerns, primarily their interest in obtaining a competitive price for their product. The farmers expressed their preference for a gradual approach of the liberalization program, to enable capacity building of farmer organizations to manage such functions as input supply, credit and eventually ginning. One group of farmers, those in the OHVN zone, clearly indicated that they were ready to move away from the existing arrangements with CMDT to a situation in which a private agro-industrial operator takes over CMDT's and OHVN's activities and assets in their area. In response to farmer's state of readiness, the government has adopted a program to liberalization the OHVN area in the short term, while liberalization of the remaining cotton areas of the country is to be achieved in a more gradual manner over the next 2-3 years. 7

14 Mali 24. Further details on the long term reform program are to be identified during the short term recovery and reform phase (see section I.b.). Moving from the present state to a competitive sector structure will take time. 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. 25. Support for the reinforcement of capacities of farmers organizations to play an increasing role in the management of the cotton sector, will be provided through the PASAOP (Programme d'appui aux Services Agricoles et aux Organisations de Producteurs) project. 26. The PASAOP includes a number of activities such as: capacity-building of farmers organizations, training, institutional reinforcement (i.e., creation of an inter-professional organization between farmers organizations, private ginners and input suppliers, a clearing house to manage credit recovery), the promotion of services delivery by private contractors or farmers organizations (e.g., extension and research), the promotion of private input supply mechanisms, and support to the authority in charge of managing the sector reform process. I.b. The Short Term Recovery and Reform Program 27. Following technical discussions held in May 2001 with the Bank and the IMF, an agreement was reached to distinguish the short-term action plan for 2001/02 from the more comprehensive reform program to be implemented during the period 2002/05. This was in order to give absolute priority to responding to the urgency of the situation, to avoiding any further deterioration in sector conditions particularly the social consequences, and to restoring production and farmers incomes during the 2001/02 crop season. The authorities are particularly keen to maintain broad consensus on the reforms given the recent problems with cotton producers and the efforts it has taken to restore confidence between the government, CMDT and the farmers. The reform program adopted by the authorities takes into due consideration the majority opinion of cotton farmers, expressed at the national forum in April 2001, that implementation of the reforms be gradual. 28. The cotton component of LDP thus focuses on a short-term action plan that includes several audits and studies to be completed by mid 2002 that will feed into preparation of the next stage of the reform process. In particular, a detailed study on the options for full liberalization of the sector is planned to enable appropriate design and sequencing of the reforms to be implemented after The short term reform program to be supported by the proposed credit, comprises: (a) an emergency financial rescue plan for CMDT that provides concrete solutions to cover: (i) CMDT's cash deficit of CFAF 56 billion (through sale of assets, shareholders advances, debt rescheduling, etc.); and (ii) the operational loss forecast for the 2001/02 campaign, including a CFAF 10 billion subsidy to support the agreed price of seed cotton (CFAF 200 per kg) to be purchased from farmers. This plan has been endorsed by the key parties involved. A full financial restructuring plan would be prepared during the SAC III program period; (b) completion of several audits of CMDT accounts, and completion of studies to enable definition of the next steps of the longer term liberalization program; 8

15 Third Structural Adjustment Credit (c) preparation of a first package of liberalization measures, namely: (i) the privatization of HUICOMA - the cotton seed subsidiary of CMDT; and (ii) definition of the framework for the installation of a new private agro-industrial company in the OHVN zone; and, (d) restructuring of CMDT to refocus operations on core agro-industrial activities (ginning of seed cotton and marketing of products), a process entailing the sale of non-core assets, subcontracting of non-core services (i.e., transport, input supply) to the private sector and/or farmer organizations and implementing a social plan to meet costs of the staff downsizing exercise. 30. The emergency financial rescue plan of CMDT has been implemented to a large extent as of mid September Due to the continued slump in world prices for lint and the depreciation of the dollar vis-a-vis the Euro, however, CMDT's operations deficit for the 2001/02 campaign is likely to be substantially higher than originally envisaged. This will require a more drastic and rapid effort from the company to reduce its production costs and overheads. The company has identified and has taken actions to achieve cost savings. These have brought costs down the 2000/01 crop year by an estimated CFAF 12 billion (US$16 million equivalent). Further steps will be taken this crop year to lower costs even more. 1I. Public Expenditure Reforms for Poverty Reduction 31. Mali has made significant progress in the last several years to move the public expenditure system closer to the desired level of effectiveness, and the government is steadily implementing measures in its ongoing reform program. Progress notwithstanding, much more remains to be accomplished to achieve the government's objective of linking expenditures to development goals and efficient, effective utilization of public expenditure resources. These reforms have been supported by the donor community including through successive World Bank projects, and the donor community continues to work with the government on the ongoing reform program. Public expenditure reforms by their nature take time to implement, as they incorporate crucial institutional reform measures, changes in procedures, or changes in accepted practices. The objective of the reform program continues to be to make steady progress towards establishing an effective public expenditure management system (Box 2). 32. 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 privatesector-led growth, the government has realized the need to accelerate aspects of the public expenditure reform agenda that support these two key development priorities. 33. The government envisions moving from a system based solely on regulating expenditures to one based on promoting efficiency of expenditures and monitoring of outcomes. Achieving this aim would entail reorienting the approach to budget and planning operations, including strengthening of abilities to translate sectoral objectives into financial terms and better link development objectives to expenditure programs. With the completion of the PRSP by early 2002, the country would have an articulated development and poverty reduction strategy to 9

16 Mali provide an improved framework for budget Box 2. Objectives of Mali's Public Expenditure Reforms allocation. Achieving the government's Mali's reforms aim toward the following four characteristics of an objective would also rest on the availability of effective public expenditure system, which have emerged through good information and the effectiveness of the experience with PE reforms round the world, particularly in Australia and New Zealand. information system. 34. As first step toward achieving the 34. s a irststeptoward aheigthe Prioritization. Clearly defined role of govemment vis-a-vis the private sector. vision, the SAC III program builds on reform. Clearly defined priorities between sectors, and within sectors measures implemented under the recently T priorities between activities. closed Economic Management Credit (Cr. No. * Budget classification that clearly links objectives, outputs and 2894). SAC III program actions focus the budget.. Budget documents that are easily understood. government's efforts in three dimensions: (i). Clearly defined processes and responsibilities. improving budget preparation; (ii) improving Credibility * Predictability of the budget allocation process, allowing for budget execution; and (iii) strengthen changes in the macroeconomic situation, i.e., ministries monitoring, transparency, and accountability. receive funds allocated in the budget and projected for the subsequent two years. Progress in these three areas will enable Mali to. The agreed procedures are adhered to by all parties, e.g. the better link expenditures to poverty reduction budget timetable is followed, and record keeping, financial reporting and financial information flow across the objectives and improve effectiveness of public administration are adequate. resources utilization, particularly as it relates to Incentives and Sanctions.Ministries are given sufficient non-financial incentives to poverty reduction programs li.a. Improving Budget Preparation Process make the most efficient and effective use of resources, through devolving responsibility for expenditure management to ministries and local governments units.. Sanctions are used when institutions or individuals abuse the system. 35. As with all other members of the WVAEMU, Mali is expected to adopt a new basic text and processes for the 2002 budget year comprising: a new organic law, a new public sector accounting plan, and new budgetary nomenclatures. These regional integration imperatives will set the new framework for the changes and improvements in budget formulation that the Malian authorities are to undertake commencing with the 2002 budget cycle through the next 2-4 years. The government expects to finalize and adopt the organic law and the decree on public accounting by December 31, 2001, in addition to the new WAEMU budgetary nomenclatures. 36. Within the context of harmonizing its procedures with the WAEMU requirements, the government will strengthen the links between the current and investment budgets. Weaknesses include: the use of different classification codes on each of the three budgets, hence the inability to determine the links between one budget and the next; and inadequate linkage of the investment program to resource availability or priorities. The authorities are continuing the process of linking the various budgets by attaching with the 2002 budget package, documentation that demonstrates the links between the budget reports. These links will be incorporated into the 2003 budget. 37. With the increased emphasis on the collectivite's territoriales (whose numbers have recently increased to 703), a large portion of poverty expenditures will be implemented at the decentralized levels. Though autonomous statutorily and financially, the collectivit6s territoriales have their accounts managed by the local offices of the national Treasury. At issue is that the accounts are tabulated using a nomenclature that is not compatible with the national budget nomenclature, a situation which prevents consolidation of expenditures as well as effective 10

17 Third Structural Adjustment Credit tracking of the usage of funds. The authorities plan to develop and adopt a new nomenclature text for the collectivites territoriales that is compatible with the national nomenclature. 38. As regards the linkage of the budget process to development objectives, the authorities plan to make further progress toward establishing an initial medium term expenditure framework (MTEF). The existing system comprises preparation and adoption of three budgets - the annual current budget; an investment budget detailing first year expenses of a three-year rolling investment program; and a program budget detailing the activities under implementation or planned. Inadequate linkage of these three budget documents make them ineffective for resultsoriented planning. 39. Progress so far toward an MTEF has Box 3. The Medium Term Economic Framework (MTEF) been in the form of estimating the overall macro Description. The MTEF is a tool for determining the available resource envelope, and the resource envelope resources and allocating these resources in line with government available for the health and education sectors priorities. In most situations, needs and priorities will far exceed available resources and an MTEF can provide a mechanism for The government has completed the first step in assisting decision making in the allocation of limited resources developing the MTEF (Box 3), and will need to between sectors and specific activities within sectors. While the MTEF does not answer the difficult question of the level of progress to complete the next two steps at least resources to allocate to each sector, it is useful for highlighting the for the two named social sectors. Subsequently, opportunity costs (or tradeoffs) of various policies and programs. the entire process would need to be extended to Implementaion Steps. Preparation of an MTEF to integrate other priority sectors of the economy to be information on resource availability with the costs of policies in all sector ministries and their related institutions, involves three main identified in the forthcoming PRSP. steps: ILb. Improving Budget Execution 40. Achieving this objective entails actions framework. to strengthen expenditure execution functions as well as control and audit functions of the budgeting process, including implementing sanctions in cases of non-compliance with the procedures. The authorities plan to tackle the most pressing weaknesses affecting the poverty reduction program, particularly those that can be addressed in the short term, 1. estimating the availability of resources both domestic and foreign over the medium term, a process usually developed through the preparation and updating of the macroeconomic 2. estimating the actual costs of existing government policy and targets in each sector, to allow the government to assess the impact of either reducing or increasing expenditures in particular sectors, and make transprent the tradeoffs of policy measures and operational targets. 3. integrating estimated costs into an expenditure framework as the basis for making decisions on how resources will be allocated to the sector ministries. The framework can be used to show the cost of particular policies and targets (e.g. the cost of reducing the pupil:teacher ratio from 1:60 to 1:45) and the impact of these decisions on costs. 41. The first pressing task is to reduce the processing time of expenditures. Currently the absence of clear, formalized procedures generates long delays in budget execution, both on the part of budget execution staff as well as on the part of suppliers unfamiliar with appropriate procedures to follow or documentation to submit. This weakness retards the flow of needed resources to project activities as well as to decentralized agency levels at which most of the poverty reduction projects are implemented. The consequences have been: long processing times for regularizing a large share of expenditures made before commitment of expenditures; delays in processing payment vouchers; and long delays in making payments on contracts with value higher than CFAF 10 million. The authorities plan to prepare and adopt procedural manuals for expenditure execution, and to educate staff and suppliers on the procedures. 11

18 Mali 42. The second pressing task is to strengthen the flow of information across departments in the Ministry of Economy and Finance. Currently, the department information systems lack interconnectivity since each department's system was developed independently without due attention to connectivity. As such, while the Ministry's operations are fully automated within departments, the transfer of information between departments (for instance between the Financial Control unit and the Budget unit, or between these units and the Treasury unit) must be done manually. This current situation lengthens the budget execution process, and limits the level of security over information within the Ministry. The Ministry's Cellule d'appui Li l'informatisation has proposed to develop a new software application that will enable interconnectivity of systems within the Ministry, and the authorities plan to undertake the work in the coming year to assess how the systems may be integrated. In a subsequent year, the Ministry plans to develop and test the software, then deploy it to all units involved in the budget execution process. Completing this task would help raise the efficiency of record keeping and information flows, and thereby assist in strengthening the budget execution process. II.c. Strengthening Monitoring, Transparency, and Accountability 43. The government intends to strengthen its budget tracking mechanisms to enable more effective monitoring of poverty reduction programs. During the 2001 budget exercise, the government introduced a new budget section (i.e. Chapter 23 of the current budget) to record expenditures for poverty reduction to be financed through HIPC resources. Similarly for the investment budget, a new section (Chapter 38) was introduced. To enable the monitoring of how HIPC resources are utilized, the government has created specific codes for poverty-related expenditures in education, health, rural development and village water supply activities. This would ensure better allocation of, and enable more effective monitoring of, HIPC resources in line with poverty reduction objectives. The itemization of HIPC resources should be effectuated commencing with the 2002 budget, with possibility to identify the sectors in which the HIPC funds are being spent. Furthermore, the authorities are working to identify and track all direct poverty-related expenditures, in addition to those funded by HIPC resources. 44. Currently the internal control system is more complex than is necessary. An assessment of the system notes that further simplification can be achieved, notably at the level of the accounts payable whose activities currently overlap somewhat with those of the financial controller. There is insufficient communication between the various control units (i.e., Contr6le financier, Inspections des services, and Inspection des finances), and the process has in the past lacked a global vision. The government has recently addressed this weakness by conferring on the Inspection des finances the role of coordinator and facilitator charged with defining a global strategy for the internal control process. Under the SAC III the government plans to strengthen the internal control services (namely the Services de contr6le and Services d'inspection) as well as closely monitor their work. 45. As regards the external control system, the authorities have made some improvements to date. The processing time of the public expenditure execution reports (the Lois de reglements) has been reduced as has the backlog of reviews to be prepared and submitted to the national assembly. The expenditure execution reports for the years have been adopted by national assembly. The reports for 1996 through 1999 have been completed and presented to the national assembly for review and adoption, pending assessment of the reports by the government's external 12

19 Third Structural Adjustment Credit audit agency - the Section des comptes of the Supreme Court. The government intends to produce the expenditure execution reports in a more timely manner from now on. The 2000 report preparation is currently underway, with planned completion by June The Section des comptes of the Supreme Court currently suffers from inadequacy of resources to effectively carry out its responsibilities. Inadequate staffing and facilities in addition to concentration of its activities on audit tasks, prevent the Section des comptes from preparing its assessment on the expenditure execution reports in a timely manner. The establishment of the 703 collectivites territoriales and the need to audit their accounts once they have been produced would generate additional work that would overload the current resources of the Section des comptes. 47. The passage of the new constitution in the December referendum would provide the mandate for transforming the Section des comptes into a Cour des comptes independent of the Supreme Court (consistent with WAEMU guidelines), and thus with its own-budgetary resources at its disposal. This would enable more adequate resources of the court's activities and facilitate timely audits of the budget reports. A physical facility for the agency has already been secured and is in the process of being equipped. To ensure that the Cour des comptes doesn't suffer a similar under-funding fate as its predecessor in the Supreme court, the government intends to provision adequate resources for the Cour in the 2002 budget to enable it to conduct its review activities effectively. The authorities plan to strengthen the capabilities of the new court as regards its equipment and personnel. E. Macroeconomic Outlook and Financing Requirements 48. With the prompt action to restore a higher producer price and launch thorough reforms in the cotton sector, rural sector performance is expected to bounce back to the past levels. Together with sustained expansion of gold production and emerging improvements in the services sector in response to recent liberalization efforts, this should allow for real GDP growth rates averaging over 5 percent per annum. Given the continuing conservative demand management policies, the recovery of output (especially in agriculture) should help bring the inflation rate back down from the estimated 4.6 percent in 2001 to about percent during This outlook is supported by an investment/gdp rate which remains about 21 percent as in recent times. The expected recovery of cotton production and exports, combined with rising gold exports, are expected to help reduce the resource gap and bring the external current account balance below 9 percent by 2004 compared with 13 percent in After taking into account expected disbursements on loans and grants and estimated foreign direct investment, the external net financing needs for 2001 stand at about CFAF 60.2 billion excluding IMF support (US$93 million equivalent). This gap is expected to be covered with exceptional assistance from the IMF, the European Union, IDA, and bilateral partners notably France, Netherlands and Sweden. 13

20 Mali Table 3a. Mali - External Financing Requirements (CFAF billion) Requirements Current Account Gap Amortization (incl. IMF) 1/ Increase in Reserves Resources Grants Loan Disbursements Debt Relief Private Net Exceptional Assistance o/w: IMF (16.6) (12.3) (5.6) IDA (18.0) (32.4) (0.0) EU (11.2) (15.3) Netherlands (6.0) France (6.0) Sweden (2.4) (2.4) Sources: IMF and World Bank Table 3b. Mali - Central Government Financial Operations (CFAF billion) Revenues and Grants Revenues Grants Total Expenditure and Net Lending Current Expenditures o/w: cotton elections Capital Expenditures Net Lending Current Surplus Overall Deficit (incl. Grants) Financing External Financing (net) Domestic Financing (net) Exceptional Assistance o/w: IMF (16.6) (12.3) IDA (18.0) (32.4) EU (11.2) (15.3) Netherlands (6.0) France (6.0) Sweden (2.4) (2.4) Sources: IMF and World Bank F. Bank Response and Strategy 50. The current CAS on Mali (Report No. IDA/R/98-64, IFC/R98-84) was discussed by the Board on May 26, The preparation of its successor has been delayed because the PRSP on which it would be based will not be available by early Another factor of expected additional 14

21 Third Structural Adjustment Credit delay is an impending change of government following legislative and Presidential elections scheduled for mid The new CAS is therefore planned for FY Progress on FY98 CAS. The Bank's strategy of assistance to Mali, as set out in the FY 98 CAS, 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 long-term health sector project - PRODESS; an education sector LIL; and a long-term education sector project - 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 (Cr MLI) to help Mali deal with the terms-of-trade shock caused by the combined effects of an oil price hike and a fall in cotton prices. 52. Other projects in the (high-case) lending program and under preparation include an Agricultural Services Project, FY02; a Household Energy and Universal Access Project, FY02; an Institutional Development Project, FY03; and a Telecommunications Sector Project, FY03. The assistance program delivered thus far also includes non-lending analytical services with the same strategic orientation. These comprise an irrigation strategy; a poverty and household survey and a poverty profile update; and technical assistance for PER. 53. Performance of the Project Portfolio. There are fifteen projects in the active portfolio - five in rural development; four in infrastructure and energy; four in health and education; and one each in private sector development and the financial sector. The performance of the portfolio is fully satisfactory both in terms of development objectives and implementation progress. 54. Preparations towards a new CAS. While preparations continue towards a new CAS, 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 Malian authorities completed and submitted an interim PRSP (I- PRSP) to the Boards of the Bank and the IMF in mid They expect to complete a fully participatory PRSP by early As laid out in the I-PRSP, the Malian poverty strategy rests on eight axes which map into the three core areas of fighting poverty: growth and income generation (axes 2, 3 and 4); human development (axes 5 and 6); and good governance for individual empowerment (axes 1 and 8) Strategic Context of SAC III. 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 fit well with those of the FY98 CAS and pave the 2The axes are: (1) improve the economic, political, legal social and cultural environment to benefit the poor; (2) promote income-generating activities and self employment for the poor; (3) improve access of the poor to financial services and other factors of production; (4) promote the development and improve the performance of the food sectors in which the poor are concentrated; (5) improve access of the poor to training; (6) promote access of the poor to basic health care, nutrition, drinking water, and sanitation; (7) improve housing conditions for the poor; and (8) ensure effective coordination of the poverty reduction strategy. 15

22 Mali way for a new CAS to be prepared in FY03. In addition to the SAC III, interim support to Mali will include one non-lending activity to assess the scope for enhancing competitiveness (FY03); and two non-lending activities to improve macroeconomic analytical ability and the management of public expenditures (Modeling for Poverty Analysis and PER/MTEF, both in FY02). 56. The program supported by SAC III also fits well with axes 2-6 of the I-PRSP and form a sensible bridge with the assistance program to be proposed in the proposed FY03 CAS. In the cotton sector, the program supported by SAC III resolves the financial crisis of 2001 and enables the 2001/02 crop year to proceed; begins the restructuring of the cotton parastatal, CMDT, and achieves a first round of efficiency gains; introduces private participation in the industrial segment of the cotton sector; and defines the path of deeper liberalization reforms. In the public expenditure reforms segment, among others, the SAC III program achieves an integration of the local government budget with that at the national level by harmonization nomenclatures; initiates an MTEF with the medium-term envelope defined and the social sectors planned within it; and begins regular and prompt production of the Treasury balance sheet. With this agenda, the SAC III program lays a good foundation for future IDA-supported programs based on the goals of the PRSP. 57. Lending Envelope. The lending allocation for Mali for the period FY02-04 is SDR 275 million (US$367 million equivalent). An amount of US$43.5 million is proposed for the Agricultural Services Project and an amount of US$59 million has been allotted to the Household Energy and Universal Access Project. Thus, the proposed envelope of US$70 million fits easily within the overall lending allocation for Mali for the period FY A major element of our interim support to Mali will be to assist the authorities to strengthen governance and improve accountability in the use public resources. In this context, we have begun work with the Malian authorities on capacity building for managing public financial accountability (CPAR and CFAA during FY02-03). These efforts also extend to encouraging greater openness in the Malian administration, of which an important step will be the willingness to share the contents of the next CAS with the population and interested donors. The strengthening of the knowledge base and the support for building capacity to handle fiduciary imperatives should position Mali for assistance through a PRSC early in the new CAS period. 59. Decentralization/Field Presence. Our efforts to strengthen the country office will continue in the period ahead, with the newly appointed Country Manager taking on a much larger role in strategy formulation, and the transition to greater use of programmatic lending. The supervision of the health sector program has been decentralized completely to the Bamako office. Finally, to strengthen the economic dialogue, a full-time economist is to be added to the staff of the country office. 60. Donor Coordination. Donor coordination will continue to be a strong point in our assistance to Mali. The coordination of donor support has been critical in moving the dialogue on the cotton sector to the point where a reform program is falling into place and to which several donors have pledged their support in parallel with the Bank and the IMF. The same active collaboration with other donors will be sustained through the finalization of the PRSP and beyond. 16

23 Third Structural Adjustment Credit G. Proposed Third Structural Adjustment Credit 61. 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. 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. Credit Design 62. The first tranche of the proposed SAC III would cover about a third of the balance of payments shortfall for the current fiscal year (ending December 2001). The remainder of the shortfall has been covered by pledges from the bilateral donor community (EU, the Netherlands, France, and Sweden) and the IMF. There are no conditions of effectiveness of the Credit, except for ratification in Mali as required by Malian law (para. 80). 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 actions of the reform program (refer Section L). Use of Lessons from previous adjustment operations 63. This operation draws on the lessons from SAC I and SAC II (also known as the Economic Recovery Credit) as laid out in OED Report No of May 20, 1996 and Report No of June 25, The main lessons identified were: (i) government commitment should be strong and sustained; (ii) institutional and implementation capacity required to implement the reforms should be programmed over a sufficiently long period; and (iii) upfront conditionalities prior to tranche release are appropriate for an adjustment operation. 64. Government commitment is high for both components of the Credit. Sustained dialogue with the authorities over several missions has yielded a shared understanding of the problems and reform actions and a buy-in by the authorities of the reform program. With respect to the cotton sector, the SAC III tackles the initial set of measures in the agreed sector strategy aimed at managing the immediate crisis and laying the groundwork for more fundamental sector reforms. With respect to management of public expenditures, the SAC III provides continued support to the next phase of an agreed ongoing reform supported by the Bank under previous successive operations. The importance of consensus-building with the civil society is an important element of developing government commitment, and with the SAC III this has been achieved through government's 11-point agreement with cotton farmers in 2000, and the national farmer consultation forum (the Etats generaux du coton) held in April Attention has been paid to institutional capacity for preparation and implementation of the reforms, ensuring that the required studies or technical assistance needs are programmed in the action plan. The decision to include the targeted support to cotton farmers under the PASAOP project rather than under the SAC III reflects past experience that a separate targeted operation is a better instrument for institutional development than a TA component accompanying a SAC. 66. Disbursement of the second and third tranches of the SAC III is conditional on completion of specific up-front actions. An array of measures have been completed prior to appraisal and 17

24 Mali negotiations of the project, prior to disbursement of the first tranche. This ensures that reforms measures are fully implemented as planned before the credit proceeds can be accessed by the authorities. Safeguards Environmental assessment 67. 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. An assessment of the likely environmental impact shows, however, that the magnitude of environmental risks strictly associated with the SAC III cotton sector program is very limited, as no major expansion of cotton cultivated areas is expected. Specific measures that will address the minimal potential environmental impact of the cotton recovery program are included in the ESDS of the Agricultural Services Project (PASAOP; FY02). 68. As described in the ESDS and mitigation plan of the PASAOP, emphasis has been placed on the promotion and monitoring of environmentally responsible agriculture. Environmental issues have been integrated in the PASAOP project design (in particular, through: the rehabilitation and equipping of the MDR/IER Pesticides Residues Laboratory; the Integrated Pest Management Initiative; the Soil Fertility Initiative; and the Livestock Initiative). 69. The SAC III includes the preparation of a first package of liberalization measures that covers, among other things, the privatization of HUICOMA and the cotton oil processing industry, the definition of a framework for entry of a new private agro-industrial company in the OHVN area, and the privatization of the ginning industry. To deal with the possible environmental and social impact of this divesture program, the following actions will be carried out as part of the preparatory studies supported by SAC III and prior to any transaction: (i) completion of environmental audits of HUICOMA and the ginning plants that are to be privatized; (ii) integration of the audit results (i.e., environmental restoration cost, environmental and human safety, and liability issues) into the bidding documents; (iii) environmental assessment introducing a private sector agro-industrial operator in the OHVN area; and (iv) assessment of the readiness of existing national environmental legislations to deal with the above issues. Social assessment 70. The reform and restructuring of the cotton parastatal company CMDT, including measures to improve operational efficiency and divest non-core activities from the company, will likely entail reductions in the number of personnel. Mindful of the disruption this will cause to staff and the increased vulnerabilities they would face, the government is preparing a Social Action Plan to fund the anticipated layoffs and facilitate the transition of those losing their jobs. Financial assessment 71. The government is engaged in an ongoing dialogue with IDA regarding implementation of initiatives to improve accountability. There is continuing work on review of processes in 18

25 Third Structural Adjustment Credit budgetary management and preparation of a financial management report and action plan, and a CFAA is planned for FY02/03 (para. 58). H. Role of the IMF and Other Donors 72. Donors are supporting the Mali reform program along with IDA, through balance of payments support as well as through complementary programs and technical assistance. 73. In April 2001, the IMF conducted a second review of the three-year Poverty Reduction and Growth Facility (PRGF), including a review of the PRGF's second annual program. Concurrently with the IMF, the Bank held technical discussions with the government in May 2001 which were concluded in June 2001 following preparation by the authorities of an action plan to reform the cotton sector and restructure the CMDT. In view of the links between the cotton sector's performance and macroeconomic stability in Mali, the PRGF 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. In the third review of the PRGF (currently underway), the Fund intends to include measures to further improve management of public expenditures based on assessments undertaken by Bank and Fund missions. 74. In June, an informal meeting was held with Mali's main multilateral and bilateral donors to discuss donor support for the financing gap. Other donors (including the IMF) pledged about 70 percent of the gap (Table 3), and the Bank pledged to cover the remaining portion through the SAC III. The bilateral and other multilateral donors are also supporting Mali's reform program directly through projects or technical assistance. Donor support includes (inter alia): financing of preparation studies for the second phase reform program (France and EU); TA and financing to support the PRSP preparation and participation process (EU, France and ILO); financing of a study to review functioning of MEF operations (CIDA); a governance project under preparation by the African Development Bank; capacity building assistance for MEF planning staff (UNDP); and capacity building to produce budget projections (France). I. Institutional and Implementation Arrangements 75. The Borrower will be the Republic of Mali, represented by the Ministry of Economy and Finance. Upon effectiveness of the Credit, the Borrower will open a deposit account at BCEAO. IDA will deposit the proceeds of the Credit in this account at the request of the Borrower. The proposed credit is expected to be released in three tranches, and will follow the simplified IDA procedures for adjustment operations (February 8, 1996). IDA disbursements will not be linked to specific purchases and hence, there will be no procurement requirements. In case the proceeds of the Credit are used for ineligible purposes, IDA will require the Borrower to either: (i) return that amount to the account for use for eligible purposes; or (ii) refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursed amount of the Credit. Although an audit of the deposit account will not be required, IDA reserves the right to require audits at any time. 76. A Technical Committee will manage the program supported by the SAC III and monitor implementation and impact of the project. The Technical Committee will be chaired by an 19

26 Mali Adviser overseeing the SAC III program, and comprises representatives of the Inspection des Finances of the Ministry of Economy and Finance, and the Mission du Restructuration du Secteur Coton (MRSC) in the Prime Minister's office. Quarterly implementation reports prepared by the Technical Committee will be submitted to an Inter-Ministerial Committee chaired by the Prime Minister for analysis and decision before being sent to the Bank. These reports will cover: (i) progress on the jointly agreed key performance indicators (Annex 3); (ii) macroeconomic developments, particularly budgetary outcomes; and (iii) status of the deposit account. On a monthly basis, budget revenues and expenditures, reconciled bank accounts and statements of the SAC III's deposit account will be submitted to the IDA. Regular IDA supervision missions will also monitor SAC III implementation, and coordinate with the IMF and other major donors. 77. The Borrower is committed to monitor the impact of its reform program, particularly those elements supported by the SAC III. In this context, periodic information will be submitted to IDA. J. Conditions Prior to Negotiations 78. In addition to measures already taken (Annex 4), the following conditions were met prior to negotiations: (a) Submission of a Letter of Development Policy for the SAC III comprising: (i) the updated cotton sector recovery and reform program and action plan; and (ii) the public expenditure reform program and action plan. Cotton sector component: (b) Submission of an independent financial report acceptable to the Bank containing: (i) an update of the projected operational account and cash-flow of CMDT for the 2001/02 cropping season; (ii) an opinion on the effectiveness of implementation of cost-saving measures by the company during the crop season, as identified in the previous cost reduction plan; (iii) identification of additional cost-saving measures that could be realized in the near term by CMDT and the other actors, in view of the continued decline in the world price for cotton lint; and (iv) a set of indicators to monitor implementation of the additional cost-saving measures; (c) Submission to the Bank of the minutes of consultations to be held by MRSC with producer organizations on the evolution of world prices for lint and the necessity to anticipate a downward revision of the price of seed cotton for the 2002/03 cropping season. Public expenditure management component: (d) Submission of: (i) the monthly consolidated Treasury balance statement for the period ending June 30, 2001; (ii) a detailed consolidated budget statement of expenditures by functional Ministry (rather than by budget chapter); and (iii) a detailed budget statement of expenditures of HIPC resources; 20

27 Third Structural Adjustment Credit (e) Submission of documentation showing the links between the current and investment budgets for the year 2002, comprising: (i) a synthesis document presenting for each program the amounts to be executed by each Ministry or concerned public agency and the total amounts for each program; and (ii) a detailed statement showing for each program the associated budget lines, program amounts and program totals; (f) Submission of a synthesis document showing the distribution of the 2002 budget allocation by function (i.e., education, health, etc.); (g) Submission of a document that identifies all budget lines (in addition to the HIPC expenditure lines) that are attributable to the government's overall poverty alleviation program. 79. There are no specific conditions for Board. K. Credit Effectiveness 80. The first tranche in the amount of US$25 million will be disbursed upon credit effectiveness. The credit will become effective upon due authorization or ratification by all necessary governmental action and IDA's receipt of a legal opinion of the Attorney General confirming that the Development Credit Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, the Borrower and is legally binding upon the Borrower in accordance with its terms. Specially for Mali, the credit agreement would need to be promulgated as a law by the National Assembly, ratified by the President, and published in the Journal Officiel. L. Second and Third Tranche Conditions 81. The second and third tranches will be disbursed when the following conditions are in place: (i) macro-economic perforrnance is satisfactory; (ii) implementation of the Program outlined in the Letter of Development Policy is on track; and (iii) the key actions listed as specific conditions of tranche release have been completed. These conditions are as follows: Second tranche conditions Cotton sector recovery and reform component (a) Bring to the point of sale not less than 84 percent of HUICOMA's shares. (b) Bring to the point of sale the ginning mills and all other assets belonging to the CMDT and OHVN in the OHVN zone. Public expenditure management component (c) Adopt a nomenclature for the Collectivites Territoriales compatible with the Nomenclature Comptable de l'etat. 21

28 Mali (d) Produce the monthly Consolidated Treasury Balance Statement within a 1.5 month processing time period following the end of the concerned month and, for two consecutive months, submit the Statement to the Bank immediately thereafter. Third tranche conditions Cotton sector recovery and reform component (e) Divest to the private sector state ownership and management control of HUICOMA and refrain from holding any direct or indirect interest of more than 12 percent in HUICOMA or any other domestic company involved in the production and marketing of cotton oil and cotton meal. (f) Divest to the private sector state ownership and management control of the collection and ginning of seed cotton in at least the OHVN zone. Public expenditure management component (g) Produce a report of the medium term expenditure framework for the fiscal years , that integrates the expenditures forecasted for the education and health sectors under PRODEC and PRODESS, respectively, within the medium term macroeconomic framework in force. M. Recommendation 82. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. and I recommend that the Executive Directors approve it. Washington. DC November 13, 2001 Janes D. Wolfensohn President by Shengman Zhang zz'

29 Unofficial Translation Annex 1 Page 1 of 11 LETTER OF DEVELOPMENT POLICY MINISTRY OF ECONOMY AND FINANCE General Secretariat No. 3106/MEF-SG REPUBLIC OF MALI One People - One Goal - One Faith Bamako, November 7, 2001 [seal] Minister of Economy and Finance Mr. James D. Wolfensohn President World Bank Washington, DC Dear Mr. Wolfensohn, It is my great honor to submit this Letter of Development Policy to support the request by the Government of Mali for the World Bank's assistance under a Third Structural Adjustment Credit. The resources of this Credit will enable us to implement a reform program that has two main components: (a) reforms of the cotton sector, and (b) improvement in the management of public expenditures. The objectives of the cotton sector reforms are to safeguard the main source of growth and income generation of our economy. In fact, the weaknesses of the sector were highlighted by the shocks caused, among other things, by the continued decrease of cotton prices on the international markets. The objective of improving the management of public expenditures is to reach a high level of efficiency in the provision of basic public services, an achievement that is important for the well being of the population. Together, these reforms will enable us to undertake sustainable actions toward poverty reduction, as described in the interim Poverty Reduction Strategy Paper (I-PRSP). These efforts will be explained in the supporting detailed action plans of the final PRSP.

30 Annex I Page 2 of 11 Coordination of the SAC III program will be provided by the Ministry of Economy and Finance through a commission headed by the Program Advisor and comprising, among others, representatives of the Mission de restructuration du secteur coton (the cotton sector restructuring mission in the Prime Minister's office) and the Inspection des finances (the Government financial control department). The pages below, which are part of this development policy letter, describe specific objectives, strategies and action plans pertaining to each of the program component which the government intends to implement, as well as the implementation schedule. Sincerely yours, TfIE MINISTER, BACARI KONE Chevalier de l'ordre National [seal] Attachments: (1)

31 Annex 1 Page 3 of 11 I. COTTON SECTOR REFORM A. Objectives 1. For this component, the objectives include: (i) the containment and reduction of production costs, in order to bring the cost price in line with the price of fiber on the world market; (ii) improvement in crop yields through strengthening extension services to cotton producers, implementation of soil fertility restoration techniques and observance of the different technical schedules; (iii) promotion of grassroots organizations, most notably through the creation of cotton producer associations; (iv) strengthening of the role of the private sector, producers and decentralized communities in achieving the objectives of the cotton sector; (v) an increase in the sector's contribution to the national economy; (vi) a contribution to the fight against poverty and the improvement of revenues and the population's quality of life; and (vii) price determinations in the sector based on free negotiation among actors. B. The Strategies 2. The approved strategies are grouped in the following three points: a. Redefining of CMDT's role in core cotton producing activities. This strategy will focus especially on the progressive withdrawal of the CMDT from: (i) public service programs; (ii) agricultural extension; (iii) supply of inputs and equipment; as well as (iv) progressive withdrawal of the CMDT from transportation functions; and (v) the rationalization of the use of human resources. b. An increasedparticipation ofproducers and the private sector in managing the cotton sector This strategy, which demonstrates the Government's willingness to pursue a policy of the economic liberalization and promote a broader involvement of producers and the private sector in managing this sector includes: (i) opening up CMDT's share ownership to producers and workers; and (ii) the

32 Annex 1 Page 4 of 11 increased mastery by producers of the provision of services they need, such as rural advisory services, input supply, rural equipment and transportation. c. Liberalization of cotton and oil-seed sectors This strategy includes: (i) the Government's commitment to liberalize the two sectors, cotton and oilseed, and to open them to competition in order to increase their competitiveness, their profitability and to increase the value of these products and their by-products; (ii) the creation of a competitive framework for those functions from which CMDT is going to withdraw; (iii) the privatization of HUICOMA; and (iv) the liberalization of the marketing of by-products. C. The Action Plan a. Institutional reforms of the Cotton Sector 3. The willingness of the Government to pull out of productive, industrial and commercial activities has led it to design, for the cotton sector, a reform strategy which has the following targets: (i) the improvement of the flexibility and responsiveness of the institutional structure of the cotton sector; (ii) the reduction of the risks associated with having only one operator; and (iii) the establishment of a higher visibility (transparency and capacity to anticipate) in the management of the sector. In the period , the actions are to: 4. Develop and implement a financial improvement plan for the CMDT including among others: (i) (ii) (iii) preparation and validation of CMDT's provisional operating budget: end of October 2001; establishment of year 2000 financial statements and their approval by the Board of the company: September 2001; closing of year 2000 accounts: April 30 at the latest;

33 (iv) (v) audit of the year 2001 accounts: August at the latest. Annex 1 Page 5 of 11 This audit should allow the lifting of the reservations expressed by the Commissioner of Accounts (government auditor) in the review of the year 2000 accounts. development of an emergency plan to recover from the crisis: mid-june2001 (vi) development of a financial restructuring plan; end March 2002; (vii) repayment of the regular credit of 30 billion CFAF: 18 billion CFAF by June 30, 2001, 12 billion CFAF by September 30, Launch the CMDT's restructuring program to focus on core cotton sector activities, including: (i) approval of the divestment plan and the social plan related to the reduction of staffing levels to the actual needs of the restructured company (survey of the company's actual needs excluding public service and transportation programs; evaluation of the related social costs): end of February 2002; (ii) Implementation of the social plan and the staffing level reductions identified by (i) above: April 30, 2002; (iii) drafting of specifications of the non-core activities to be transferred to the private sector, paying attention to promoting a competitive sector environment: before end of March 2002; (iv) completion of transfer of non-core activities: end of June 2002; (v) conduct a study of financing mechanisms and the input credit mechanism for producers: before December 31, 2001 (vi) agreement between CMDT/private operator/banks/farmer organizations on the terms of the input credit provision and recovery mechanism in an OHVN zone: June 2002; (vii) CMDT's withdrawal from transport activities (30% of the transport of cotton seed to be handled by private operators during the campaign; Cotton seed transport outsourcing study to be completed: before end of January Implement identified measures for reinforcing the managerial and organizational capacities of producers: program to be developed by end of December Complete the following actions in order to liberalize the marketing and ginning operations in an OHVN area:

34 (i) (ii) Annex I Page 6 of 11 Conduct a study to define a new OHVN area and establish parameters for installation of a private company in this area: January 2002; Offer for sale the shares of the CMDT and the OHVN corresponding to operations in the new OHVN area: February 2002; (iii) Sell the shares, and transfer them to the new owners: June At the end of this stage of the liberalization process, the minimum results will be that all the cottonseed produced in the existing OHVN area will be collected and ginned by the private sector; this production has been estimated at approximately 10% of the total production of cotton-seed in the country. 8. Conduct a study to determine the necessary steps and options for the complete liberalization of the cotton sector in Mali, including: (i) development of the terms of reference of the study: end of July 2001; (ii) completion of the study: end of March Adopt and implement a producer price mechanism for cottonseed that links to the world market price and takes into consideration prices in the sub-region in order to guarantee the viability of the sector in the long run; establish related institutions: before end of December Conduct a study on the future organization of the agricultural council in the cotton areas: December I. Implementation by the CMDT of a competitive mechanism for exporting cotton fiber that maximizes revenues. From 2003 onward. 12. The Government will (i) approve the conclusions and recommendations of the study mentioned in paragraph 8 above, (ii) adopt an action plan for liberalizing the sector, and (iii) implement this action plan over the period identified by the study, in order to achieve complete

35 Annex I Page 7 of 11 liberalization of the sector by opening it to competition and to new operators, and by privatizing the agro-industrial activities of the CMDT (the Governments' share of sector activities will not exceed 20%). This objective shall be achieved before end of year b. Institutional Reform of the Oil-seed Sector 13. The action plan will be implemented according to the decisions already made by the Government on the following: (i) (ii) (iii) In June 2001, liberalization of the price and marketing of cotton seed, cottonseed oil and cotton meal; Before end of March 2002, launching of bids for the privatization of HUICOMA; Before June 2002, privatization of HUICOMA, the Government's ownership of the shares not to exceed 12%. At the end of the process, i.e. during the 2002/03 campaign, the Government anticipates that at least two thirds of the cottonseed production will be bought and processed by private industrial operators. c. Promotion of the Manufacturing Sector 14. In conformity with prevailing legislation (the Code des Investissements), support will be provided to existing industrial entities (COMATEX and ITEMA) or to those that will be established, and new uses will be promoted in order to increase the amount of local transformation, and reduce the vulnerability of Mali's cotton sector to world cotton price fluctuation. 15. Effective June 2001, cotton fiber will be sold to local industries at the export price minus any amounts representing the support to the industries. d. Implementation of an Information Campaign 16. Given the importance of the planned reforms, the Government will undertake an information and education campaign to gain the support of all concerned parties, especially the producers. The information campaign will be intensive and sustained throughout the reform process.

36 Annex I Page 8 of 11 II. REFORM OF PUBLIC EXPENDITURE MANAGEMENT A. Objectives 17. The objectives for this component are: (i) (ii) (iii) improving the budget preparation process in order to progressively reach a system that establishes solid links between the allocation of public resources and the poverty reduction objectives of the development programs; improving the efficiency and effectiveness of public expenditure execution; improving financial transparency and managerial accountability in the use of budget resources, through an effective expenditures monitoring and control system and information reports on budget execution. B. The Strategies 18. In budget preparation, the strategy aims to achieve the following: (i) (ii) (iii) Application of harmonized regional procedures, in accordance with public finance rules and regulations prevailing in the framework of the West African Economic and Monetary Union (WAEMU). Achieving a better integration of various national budget components; Improving the classification of expenditure items to ensure conformity with development objectives and actions aimed at poverty reduction. 19. As regards improving efficiency and effectiveness of public expenditure execution, the strategy aims to: (i) pursue automation of the budgetary process, by integrating the information systems of the Government's budgetary processes (treasury, budget, financial control), as well as reinforcing capacities for its proper use.;

37 Annex 1 Page 9 of 11 (ii) improve the process at each step of the expenditure execution process, particularly in the areas of procurement and the provision of goods and services. 20. As regards improving financial transparency and managerial accountabilities, the strategy seeks to reinforce: (i) (ii) (iii) (iv) the role and the capacities of the Treasury to produce consolidated Government accounts; the functions and capacities of various audit and regulatory agencies; the role and monitoring capacities of the government; the capacity of budget directors. C. The Action Plan a. Budget planning 21. Regarding the improvement of the budget preparation process, resources coming from donations, grants, and loans to Mali by bilateral and multilateral partners were integrated into the Government's operational budget and its investment budget. In addition, a bridging table was prepared to facilitate transcription of the 2001 budget in accordance with the economic and functional classifications of the WAEMU. Concurrently, a draft medium term expenditure framework was prepared to serve as the basis for the planning of successive triennial budgets. 22. For the period , the action plan focuses on the following points: (i) (ii) preparation and approval of a nomenclature text for the accounts of the local communities that is compatible with the national accounts nomenclature, and its implementation made effective for fiscal year 2003; development of a medium term expenditure framework for the period 2001 to 2003 that integrates education and health sector expenditures as defined under the PRODEC and the PRODESS, respectively, and that is compatible with the macro-economic framework: September 2002;

38 Annex 1 Page 10 of II (iii) preparation of a medium term expenditure framework that integrates expenditures of the other priority sectors as will be defined in the forthcoming PRSP: September 2003 b. Budget execution 23. The most important improvement to budget execution is to be expected from the computerization of the budget execution process in all sector ministries, at the Ministry of Economy and Finance and in all the regions. 24. During the period , actions will be taken to improve budget execution in the following areas: (i) drafting of a manual of procedures related to budget execution that covers the various levels of the administration: December 2002; (ii) completion of a functional and technical study which will facilitate the drafting of specifications for the integration of the various computer systems of administrative units responsible for budget execution (treasury, budget, financial audit): April 2002; (iii) development and testing of a computer software corresponding to the above specifications: April (iv) launching and deployment of the system: April 2004 c. Budget monitoring, financial transparency and managerial accountability 25. During the period , the public expenditure accounts were prepared through fiscal year 2000 and submitted for auditing to the Accounts Section of the Supreme Court. Concurrently, preparation of the public expenditure execution report was commenced. The Accounts Section of the Supreme Court will be transformed into an independent Court of Accounts as soon as the constitutional amendment is approved (2002). Budgetary codes have been identified and approved to enable the accounting and monitoring of expenditures financed by HIPC resources as well as the allocations made to priority sectors for poverty reduction. 26. In order to pursue progress in the area of good governance and transparency in the management of public finances, the action plan will include:

39 Annex 1 Page 11 of 11 (i) the strengthening of Government control and inspection services and the monitoring of their work; (ii) a reduction in the processing time of the consolidated monthly Treasury statement, to a maximum of 45 days past the end of the concerned month; effective April 2002; (iii) strengthening of the capabilities of the Court of Accounts: during year 2002.

40 MINISTERE DE I'ECONOMIE ET DES FINANCES Secretariat Ge'n6ral REPUBLIQUE DU MALI Un Peuple - Un But - Une Foi 0t a-& 07 NOV N,3 /MEF-SGt".de 1aee de e ow& et dea 94we AMadarne le Representant Resident Banque mondiale S ' N -- l Bamako Objet: Credit d'ajustement structurel III Madame le Representant Resident, J'ai l'honneur de vous transmettre la lettre de politique de developpement a l'appui du Credit en objet. Je vous prie de croire, Madamne le Representant Resident, a I'assurance de ma consideration distinguee. P.J: (02) BP: /25 0/27Chevalier de l'ordre National BP: Tel.: / / / Fax: Bamako

41 MINISTERE DE I'ECONOMIE ET DES FINANCES Secretariat Ge'neral 6N 0 N M MEF-SGe REPUBLIQUE DU MALI Un Peuple - Un But - Une Foi 07 NOV *,<sts St~-e NW 6de Ce tscce et dw 576 A Monsieur James D. Wolfensohn President Banque mondiale Washington, D.C Monsieur le President, J'ai l'honneur de vous soumettre cette Lettre de Politique de Developpement en appui a la requ&e du Gouvemement du Mali sollicitant I'assistance de la Banque mondiale pour un Troisieme Credit d'ajustement Structurel. Les ressources de ce Credit vont nous permettre de mettre en ceuvre un programme de reformes ayant deux composantes principales: (a) les reformes du secteur coton, et (b) l'amelioration de la gestion des depenses publiques. L'assainissement du secteur coton a pour objectifs de securiser la principale source de croissance et de generation de revenus dans notre economie. En effet, les faiblesses du secteur ont ete accentuees par des chocs engendres, entre autres, par la baisse continue des cours internationaux du coton. L'amnlioration de la gestion des depenses publiques a pour objectif l'atteinte d'une plus grande efficacite dans la fourniture de services publics de base; ce qui est important pour le bien-&tre de la population. Prises ensemble, ces reformes vont nous permettre de conduire de fa9on durable les efforts entrepris pour reduire la pauvrete, tels que decrits dans le BP: Te1.: / / / Fax: Bamako

42 document interimaire du Cadre Strategique de Lutte contre la Pauvrete (CSLP-I) et qui seront explicites avec l'appui de plans d'actions ddtailles, dans le CSLP final. La coordination du PAS III sera assuree par le Ministere de l'economie et des Finances A travers une commission presidee par le Conseiller charge des programmes et comprenant, entre autres, des representants de la Mission de restructuration du secteur coton (MRSC) et de l'inspection des Finances. Les pages ci-dessous, qui font partie integrante de la presente lettre de politique de developpement, decrivent les objectifs specifiques, les strategies et les plans d'actions relatifs A chacune des composantes du programme que le Gouvernement compte mettre en ceuvre, ainsi que leur calendrier d'execution. Veuillez agrder, Monsieur le President, I'assurance de ma haute consideration. p.j. (01) LE MINISTRE, BACARIKONE / Chevalier de l'ordre Nationa

43 I. REFORME DU SECTEUR COTON A. Les Objectifs 1. Les objectifs vises dans ce domaine comprennent: (i) la maitrise et la reduction des cofits de production, afin de rendre le prix de revient de la fibre compatible avec les evolutions du niveau des cours du marche mondial de la fibre; (ii) I'amelioration des rendements au champ a travers un renforcement des capacites de 1'encadrement des producteurs, la mise en meuvre par ceux-ci des techniques de restauration de la fertilite des sols et le respect des differents itineraires techniques; (iii) la dynamisation des organisations paysannes, notamment par la creation des associations de producteurs de coton ; (iv) le renforcement du r6le du secteur prive, des producteurs et des collectivites decentralisees dans l'atteinte des objectifs de la filiere coton; (v) I'accroissement de la contribution du secteur dans 1'economie nationale ; (vi) la contribution a la lutte contre la pauvrete par l'amelioration des revenus et de la qualite de vie des populations ; et (vii) la determination des prix dans le secteur bases sur la libre negociation entre les acteurs. B. Les Strategies 2. Les strategies retenues s'articulent autour des trois axes suivants: a. Le recentrage de la CMDT autour des activites liees au systeme coton. Cette strategie portera notamment sur le desengagement progressif de la CMDT: (i) des missions de service public; (ii) de l'encadrement agricole ; (iii) des fonctions d'approvisionnement en intrants et equipements; ainsi que (iv) la poursuite du desengagement de la CMDT de la fonction transport; et (v) la rationalisation de l'utilisation des ressources humaines. b. Une participation accrue des producteurs et du secteur prive dans la gestion de lafiliere coton Cette strategie, qui traduit la volonte du Gouvernement de poursuivre une politique de liberalisation de 1'economie et de favoriser une plus grande implication des producteurs et du secteur prive dans la gestion de la filiere comprend: (i) l'ouverture du capital de la CMDT aux

44 producteurs ainsi qu'aux travailleurs; et (ii) la maitrise accrue par les producteurs de la fourniture des services dont ils ont besoin, tels que le conseil rural, les approvisionnements en intrants, 1'equipement rural et le transport. c. La liberalisation des secteurs coton et oleagineux Cette strategie comprend: (i) 1'engagement du Gouvernement a liberaliser les deux secteurs coton et oleagineux et A les ouvrir A la concurrence afin d'ameliorer leur competitivite, leur rentabilite et de mieux valoriser les produits et leurs derives; (ii) la creation d'un cadre concurrentiel, pour les fonctions qui font l'objet de desengagement de la part de la CMDT ; (iii) la privatisation de HUICOMA; et (iv) la liberalisation de la commercialisation des produits d6riv6s. C. Le Plan d'action a. Reformes Institutionnelles du Secteur Coton 3. La volonte de letat de se desengager des activites productives, industrielles et commerciales, a conduit le Gouvernement a retenir pour la filiere coton une strategie de reformes visant notamment A : (i) I'amelioration de la souplesse et de la reactivite du dispositif institutionnel de la filiere ; (ii) la reduction des risques lies A l'existence d'un op6rateur unique; et (iii) I'instauration d'une meilleure visibifite (transparence et capacite d'anticipation) dans la gestion de la filiere. Pendant la periode , il s 'agira de: 4. Conduire l'elaboration et la mise en ceuvre d'un plan de redressement financier de la CMDT, comprenant entre autres: (i) I'dlaboration et la validation du compte d'exploitation previsionnel de la CMDT : fin octobre 2001; (ii) I'6tablissement des etats financiers 2000 et leur approbation par le Conseil d'administration de la societe: septembre 2001; (iii) I'arret des comptes de 1'exercice 2001: au plus tard le 30 avril 2002;

45 (iv) I'audit des comptes 2001: au plus tard le 31 aofit Cet audit devant permettre la levde des reserves emises par le Commissaire aux comptes lors de la revision des comptes 2000; (v) 1'elaboration d'un plan d'urgence de sortie de crise: mi juin 2001 (vi) 1'elaboration d'un plan de restructuration financiere: fin mars 2002; (vii) le remboursement du cr6dit ordinaire de 30 milliards de FCFA: 18 milliards de FCFA au 30 juin 2001, 12 milliards de FCFA au 30 septembre Demarrer l'execution du programme de recentrage de la CMDT autour du systeme coton, comprenant entre autres: (i) I'adoption du plan de desengagement et du plan social lie au reajustement des effectifs du personnel aux besoins reels de la socidte recentree (etude des besoins reels de la societe en dehors des missions de service public et du transport; evaluation du cout social y afferent): fin fevrier 2002; (ii) la mise en auvre du plan social et le reajustement des effectifs vises au (i) cidessus : 30 avril 2002; (iii) la redaction de cahiers de charges par fonction a transferer, respectant les conditions d'une saine concurrence: avant fin mars 2002; (iv) I'achevement des transferts de fonction : fin juin 2002; (v) 1'etude sur les mecanismes de financement et de securisation des crddits aux producteurs A realiser : avant 31 decembre 2001; (vi) I'accord entre CMDT/Operateur prive/banques/organisations Paysannes sur les modalites de mise en place et de recouvrement du credit dans une zone OHVN: juin 2002; (vii) la poursuite du desengagement de la CMDT de la fonction transport (30% du transport de coton graine A realiser par les privds pendant la campagne ); Etude pour 1'externalisation de la fonction transport de coton-graine A realiser: avant fin janvier 2002; 6. Mettre en ceuvre les mesures identifiees pour le renforcement des capacitds des producteurs en gestion et organisation : programme A elaborer d'ici fin decembre

46 7. Mener les actions suivantes dans le but de liberaliser les operations de commercialisation et d'egrenage dans une zone OHVN: (i) Conduire l'etude d'une zone OHVN et la redaction d'un cahiers des charges en vue de creer les conditions d'installation d'une societe privee dans cette zone: janvier 2002; (ii) Mettre en vente les actifs correspondants par la CMDT et l'ohvn: fevrier 2002; (iii) Ceder ces actifs: juin Au terme de cette etape du processus de liberalisation au minimum, la totalite du coton-graine produit dans la zone OHVN sera collectee et egrenee par le secteur prive, cette production 6tant estimee sur les bases actuelles a environ 10% de la production totale de coton-graine du pays. 8. Conduire l'etude sur les etapes necessaires et les options pour la liberalisation totale a terme du secteur coton au Mali, comprenant entre autres: (i) Elaboration des termes de reference de 1'6tude: fin juillet 2001; (ii) Achevement de I'etude: fin mars Adopter et mettre en =uvre un mecanisme de determination du prix aux producteurs du coton graine qui se r6fere au cours mondial de la fibre et qui tienne compte des prix pratiques dans la sous region, avec pour objectif de garantir la viabilite a long terme du secteur; mettre en place les institutions y afferentes: avant fin decembre Conduire 1'etude sur l'organisation future du conseil agricole en zone cotonniere: decembre Mettre en place par la CMDT un mecanisme concurrentiel de vente de coton fibre a 1'exportation qui maximise les recettes. A partir de V 'ann&e L'Etat procedera (i) a la validation des conclusions et recommandations de l'etude vis6e au paragraphe 8 ci-dessus, (ii) a l'adoption d'un plan d'actions pour la liberalisation de la filitre,

47 et (iii) a la mise en oeuvre de ce plan d'actions, sur la p6riode definie par l'etude, afin de realiser la liberalisation totale de la filiere par l'ouverture a la concurrence et a de nouveaux operateurs et la privatisation des activites agro-industrielles de la CMDT ( la part de l'etat ne depassera pas 20%). Ceci sera realise, en tout etat de cause, avant la fin de l'annee b. Reforme Institutionnelle du Secteur Oleagineux 13. Le plan d'action sera mis en oeuvre conformement aux decisions deja prises par le Gouvernement et qui portent sur: (i) En juin 2001, la liberalisation du prix et de la commercialisation de la graine de coton, de 1'huile et des tourteaux, (ii) Avant fin Mars 2002, le lancement de I'appel d'offres pour la privatisation de HUICOMA; (iii) Avant juin 2002, la privatisation de HUICOMA, la part de l'etat dans le capital ne depassant pas 12%. Au terme de ce processus, c'est-a-dire a partir de la campagne 2002/03, le Gouvernement a pr6vu qu'au moins les deux tiers de la production de graine de coton du pays sera achetee et transform6e par des industriels prives. c. Promotion du Secteur Manufacturier 14. En conformite avec la legislation en vigueur (Code des Investissements), un appui sera apporte aux unites industrielles existantes (COMATEX et ITEMA) ou a celles qui viendraient a s'installer, et de nouvelles filatures seront promues en vue d'augmenter le taux de transformation locale et de reduire la vulnerabilite de la filiere coton du Mali aux fluctuations du cours mondial du coton. 15. Des juin 2001, le coton fibre sera cede aux industries locales au prix export moins les frais non exposes.

48 d. Mise en (Euvre d'une Campagne d'information 16. Compte tenu des enjeux des reformes envisagees, le Gouvernement entreprendra des actions d'information et de sensibilisation afin d'obtenir l'adh6sion de toutes les parties concemres, notamment celle des producteurs. La campagne d'information sera intense et continue tout au long du processus de reforme. II. REFORME DE LA GESTION DES DEPENSES PUBLIQUES A. Les Objectifs 17. Les objectifs vis6s dans ce domaine comprennent: (i) I'amelioration du processus de preparation du budget, afin de parvenir progressivement a un systeme de liens solides entre I'allocation des ressources publiques et les objectifs de reduction de la pauvrete des programmes de developpement; (ii) I'amelioration de l'efficience et de I'efficacite de 1'execution des d6penses publiques; (iii) I'amelioration de la transparence financiere, et la responsabilisation accrue des gestionnaires dans l'utilisation des ressources budgetaires, au moyen d'un systeme efficace de suivi et de controle des depenses et de rapports d'information sur l'execution du budget B. Les Strategies 18. En matiere de preparation du budget, la strategie vise: (i) I'application de procedures regionales harmonisees, telles que le prevoient les directives et reglements sur les finances publiques en vigueur dans le cadre de l'uemoa; (ii) la realisation d'une meilleure int6gration des differentes composantes du budget national;

49 (iii) I'amelioration de la classification des depenses, afin d'en assurer la conformite avec les objectifs de developpement et les actions de lutte contre la pauvrete. 19. En matiere d'amelioration de 1'efficience et de l'efficacite de 1'execution des depenses publiques, la strategie vise: (i) la poursuite de l'informatisation du processus budgetaire, notamment par l'integration des systemes informatiques de traitement du processus budgetaire au niveau de l'administration (tresor, budget, contr6le financier), ainsi que le renforcement des capacites pour leur utilisation rationnelle; (ii) la poursuite de I'amelioration du processus au niveau de chaque maillon de la chaine d'execution des depenses, particulierement en ce qui concerne la passation des marches et la fourniture des biens et services. 20. En matiere d'amelioration de la transparence financiere et de la responsabilite de gestion, la strategie vise le renforcement: (i) du role et des capacites du Tresor a produire les comptes consolides de l'etat; (ii) des fonctions et des capacites des differents organismes d'audit et de controle; (iii) du role et des capacites de surveillance des autorites; (iv) des capacite des ordonnateurs budgetaires. C. Le Plan d'action a Preparation du budget 21. En matiere d'amelioration de la preparation du budget les ressources provenant de dons, subventions et prets accordes au Mali par les partenaires bilateraux et multilat6raux, ont et integrees dans le budget de fonctionnement et dans le budget d'investissement de l'etat. Par ailleurs, les travaux d'elaboration du tableau de passage ont ete entrepris pour permettre la presentation du budget 2001 selon la classification economique et fonctionnelle de l'uemoa. De meme, un projet de cadre de depenses a moyen terme a ete prepare pour servir de base d'e1aboration des budgets triennaux glissants.

50 22. Pour la periode , le plan d'action porte sur les points suivants: (i) la confection et l'adoption d'une nomenclature comptable des collectivites territoriales compatible avec le nomenclature comptable de l'etat, et son application A partir de l'exercice budgetaire 2003; (ii) la preparation d'un cadre de depenses A moyen terme pour la periode 2001 A 2003, integrant les depenses de l'education et celles de la sante, telles que definies dans le PRODEC et le PRODESS respectivement et compatible avec le cadrage macroeconomique : septembre 2002; (iii) la preparation d'un cadre des d6penses A moyen terme integrant les depenses des autres secteurs prioritaires tels que definis dans le CSLP : septembre b. Execution du budget 23. L'amelioration la plus importante dans l'execution du budget est attendue de l'informatisation du processus d'execution du budget dans tous les ministeres sectoriels, au Ministere de l'economie et des finances et dans les regions. 24. Au cours de la periode , des actions seront men6es afin d'ameliorer l'exdcution budgetaire dans les domaines suivants: (i) redaction d'un manuel de procedures relatif a l'ex6cution budgetaire couvrant les differents niveaux de l'administration: decembre 2002; (ii) realisation d'une etude fonctionnelle et technique aboutissant A la redaction d'un cahiers des charges permettant d'assurer l'intdgration des differents systemes informatiques des administrations chargdes de l'execution des depenses budgetaires (tr6sor, budget, contr6le financier): avril 2002; (iii) ddveloppement et test des applications informatiques correspondant au cahiers des charges ci-dessus : avril (iv) mise en ceuvre et deploiement du systeme : avril I

51 c. Suivi du budget, transparence financiere et responsabilite de gestion 25. Au cours de la periode , les comptes de gestion sur pieces des comptables publics de l'etat ont ete etablis jusqu'a la gestion 2000 et pris en charge pour examen par la Section des Comptes de la Cour Supreme. De meme, les travaux de preparation du projet de loi de reglement du budget 2000 ont commence. La Section des Comptes sera transformee en une Cour des Comptes, des que la revision constitutionnelle sera approuvee (2002). Des codes budgetaires ont ete identifies et adoptes afin de permettre la comptabilisation et le suivi des depenses financees sur les ressources PPTE ainsi que le respect des allocations aux secteurs prioritaires en matiere de lutte contre la pauvrete. 26. Afin de poursuivre les progres dans le domaine de la bonne gouvernance et de la transparence de la gestion des finances publiques, le plan d'actions comportera: (i) le renforcement des services de controle et d'inspection de l'etat et le suivi de leurs travaux; (ii) la reduction du dmlai de production de la balance mensuelle consolidee du Tresor, en le ramenant a un maximum de 45 jours apres la fin du mois concerne: a partir d'avril 2002; (iii) le renforcement des capacites de la Cour des Comptes: courant I

52 Annex 2 Page 1 of 1 Key Processing Events and Team Members Timetable Prepared by: Government/World Bank Decision Meeting August 16, 2001 Appraisal September 17, 2001 ROC Review October 10, 2001 Negotiations October 29, 2001 Board Presentation December 11, 2001 Effectiveness December 2001 Project Completion june 2003 Task Team Members Chriistina A. Wood C o-tf ask team leader, AFTM4 Patrick Labaste Co-Task team leader, AFTR2 D. Youssouf Thiam Ecoonomist, AFTPS Robert Cauneau Public expenditure specialist, AFTM4 Yeyande Sangho Operations officer, Agriculture, AFTR2 Jean-Paul Chausse Agriculture sector advisor, AFTR2 Gerarld Meyerman Private sector development specialist, PSASP Siaka Bakayoko Financial management specialist, AFTQK Simplice Zouhon-Bi Fconomist, AFTM4 Steve Wan Yan Lun Program Assistant, AFTM4 Joan Schopmeyer-Medina Program Assistant, AFTM4 Glaucia Reis Ferreira Program Assistant, AFTM4 Hans W. Wabnitz Wolfgang Chadab Peter Fallon Ousmane Badiane Emmanuel Akpa Joseph Baah-Dwomoh Miquel J. Saponara IlaAyer. LEGAF DisbuLrsement officer, LOAAF Pccr Reviewer, PRMPA Peer Reviewer, AFTR2 Sector Manager, Macroeconomics, AFTM4 Acting Sector Manager, Rural Development, AFTR2 C(luster Leader, AFTM4 A. David Craig Country Director, AFC15 Judith Press (Country Office Manager, AFC15 Grace Yabrudy \dvisor - Country Operations, AFC15

53 Annex 3 Page I of 2 MALI - Third Structural Adjustment Credit Annex 3. Project Description Summary Narrative Summary Key Performance Indicators Monitoring & Evaluation Assumption/Risks Development Objectives Cotton sector revitalized and 1. Cotton output trend/path restored MRSC monitoring reports. Technical and financial assistance public resource management to pre-2000 level. delivered. improved Outputs 2. Farmer incomes improve relative MRSC monitoring reports. Electoral campaign and voting in midto their pre-2000 level proceed smoothly. 3. Public expenditures at central and Annual Budget report. Technical and financial assistance decentralized levels planned and delivered. monitored through integrated system of classification (functional, administrative, economic). 4. Priority expenditures protected. Annual Budget report. 5. Monthly Treasury balances Consolidated Treasury balance statement. available within 45 days after month in question. Resolution of short-term financial 1. Banking system crop credit for Survey of creditors by MRSC. crisis (2001) 1999/2000 paid. 2. Inputs procured for the 2001/02 crop year.

54 Annex 3 Page 2 of 2 MALI - Third Structural Adjustment Credit Annex 3. Project Description Summary (cont.) Narrative Summary Key Performance Indicators Monitoring & Evaluation Assumption/Risks Outputs (cont.) Initial cost-cutting measures in 3. CMDT deficit narrows and cotton CMDT quarterly financial report from CMDT to reduce sector deficit output is purchased. MRSC. Program of deeper cotton sector 4. Initiation of plan to restructure MRSC quarterly report on the reforms in place CMDT. implementation of CMDT restructuring. The following three risks or assumptions apply to all the outputs: Donors deliver technical and financial assistance promised. 5. Introduction of a private operator Report of the transfer of shares (Rapport Studies for reform plans deliver good in the OHVN area. de cession des actifs) of OHVN and results in timely manner. CMDT, provided by MRSC. 6. Initiation of new seed cotton Indicators of the international market Electoral campaign and voting in midproducer pricing policy. price and of the price in neighboring 2002 proceed smoothly. countries. Integration of local government 7. Development and adoption of expenditures into national system harmonized classification unifying of classification (nomenclatures) the commune and national level expenditure systems of classification. Treasury Balance Sheet Produced 8. Treasury balances. with no more than 45 days delay Annual Budget report, and Judicial notice. Consolidated Treasury balance sheet. Priority expenditures (i.e. health 9. Level of expenditures in health Annual Budget (Budget de l 'Etat). and and education) executed in line and education. Report of expenditurexecution (Rapport with the macroeconomic and d'dxecution du Budget) budget framework. as well as with the PRSP objectives

55 Annex 4 Page ] of5 MALI - Third Structural Adjustment Credit Annex 4. Matrix of Policy Actions Reform Areas/Objectives Measures Already Taken Planned Measures Timetable 1. Revitalization of the cotton sector la. Resolution of short-term financial (i) Replacement of CMDT's top management crisis (2001) (ii) Preparation of emergency financial rescue plan June 2001 in CMDT and settlement of outstanding 99/00 crop credit. (iii) Rescheduling of payments due to BOAD, 2001 AFD and BEI. (iv) Sale of selected CMDT assets lb. Cost minimization in CMDT. and (i) Initial cost reduction measures implemented, achieving greater within the cotton reducing costs by CFAF 12 billion (US$16 sector million). (i) Identification of cost saving measures for November 2001 immediate implementation in view of the continuing decline in the world price for cotton lint. Ic. Preparation of sector reform (i) Convening of consultation meeting with April 2001 program stakeholders on the future of the sector. (ii) Preparation of a statement of development June 2001 policy for the sector based on the outcome of the consultation stakeholders. (iii) Initiation of studies to plan reforms on: Sept 2001 * Liberalization of the sector; * Refocusing of the CMDT on core activities; * New producer pricing policy;. Restructuring of CMDT.

56 Annex 4 Page 2 of 5 MALI - Third Structural Adjustment Credit Annex 4. Matrix of Policy Actions (cont.) Reform Areas/Objectives Measures Already Taken Planned Measures Timetable Ic. (cont.) Preparation of sector (i) Consultations with producer By March 2002 reform program organizations on the evolution of the world market conditions for cotton lint. and the need for all parties to play their part in adjusting to the evolving situation in the upcoming 2002/03 crop season. (ii) Adoption and implementation of a full By April 2002 financial plan for CMDT including the social plan. to enable a refocusing of activities on core agro-industrial functions. (iii) Bring to the point of sale not less Second tranche than 84 percent of HUICOMA's shares. (iv) Bring to the point of sale the ginning Second tranche mills and all other assets belonging to the CMDT and OHVN in the OHVN zone. (v) Divest to the private sector state ownership and management control of Third tranche HIUICOMA and refrain from holding any direct or indirect interest of more than 12 percent in HUICOMA or any other domestic company involved in the production and marketing of cotton oil and cotton meal. (vi) Divest to the private sector state ownership and management control of the collection and ginning of seed cotton Third tranche in at least the OHVN zone. (vii) Adoption of a plan outlining the content of the next stages of the cotton sector liberalization program and privatization of CMDT's agro-industrial and commercial activities.

57 MALI - Third Structural Adjustment Credit Annex 4. Matrix of Policy Actions (cont.) Reform Areas/Objectives Measures Already Taken Planned Measures Timetable 2. Improvement of Public expenditure management Annex 4 Page 3 of 5 2a. Strengthening the budget (i) Integration into the current and investment 2001 formulation process, with view to budgets loans and grants received from the multiarrive gradually at a system linking the lateral donor agencies. expenditures to medium term (ii) Adoption of a bridging table (tableau de 1999 development objectives passage) to allow transcription of the 2001 budget in line with the WAEMU economic and functional classifications to which Mali is to accede from January 2002 nomenclature budgetaire. (iii) Preparation of procedural manuals for the 2000 decentralized government levels to established the links between their codes. (iv) Estimated the macro-economic resource 2000 envelope over the medium term, as well as the medium term resource envelope for the education and health sectors. (v) Documentation of the links between the current Mid October and investment budgets for the year by 2001 preparing a budget statement showing for each program: (a) the amounts to be executed by each ministry or concerned public agency. including the total amounts for each program; and (b) the associated budget lines. program amounts and program totals. (vi) Completion of external review (by the Centre d'analyse de I 'Etat) of the functioning of the budget process.

58 MALI - Third Structural Adjustment Credit Annex 4. Matrix of Policy Acti ns (cont.) Reform Areas/Objectives Measures Already Taken Planned Measures Timetable Annex 4 Page 4 of 5 2a. (cont.). Strengthening the budget (i) Adoption of a nomenclature for the Second tranche formulation process, with view to decentralized level governments (i.e. arrive gradually at a system linking the collectivit4s territoriales) that is expenditures to medium term compatible with Nomenclature comptable development objectives de l'etat. (ii) Produce a report of the medium term Third tranche expenditure framework for the fiscal years that integrates the expenditures forecasted for the education and health sectors under PRODEC and PRODESS, respectively, within the medium term macroeconomic framework in force. (iii) Augmentation of the initial medium By Sept 2003 term expenditure framework. to integrate the other priority sectors that are identified in the forthcoming PRSP. 2b. Strengthening the budget (i) Automation of budget execution functions in all execution process sector ministries and the Ministry of economy and finance. (i) Preparation of a procedural manual for December 2002 the budget execution process, and educating staff on the procedures. (ii) Completion of a functional and By April 2002 technical study to define an information system that integrates the various units of the Ministry of Economy and Finance.

59 MALI - Third Structural Adjustment Credit Annex 4. Matrix of Policy Actions (cont.) Reform Areas/Objectives Measures Already Taken Planned Measures Timetable Annex 4 Page 5 of 5 2c. Improving the transparency, (i) Adoption of detailed budget codes for recording 2001 accountability, and monitoring of of HIPC resource usage in the priority povertyexpenditures particularly of priority related sectors identified in the I-PRSP. poverty-related sectors (i.e. health, (ii) Production of annual public expenditure education) reviews. (iii) Completion of expenditure execution reports 2000/2001 (loi de reglements) up to 1999, and their transmission to the Section des comptes for auditing; and commencement of the year 2000 report. (iv) Prepare a detailed budget statement of HIPC Mid October resource expenditures (v) Prepare a detailed consolidated budget statement of 2001 expenditures by functional ministry instead of by budget chapter. (vi) Preparation of a synthesis document identifying all budget lines of the 2002 budget (in addition to the HIPC expenditure lines) that are directly related to the poverty reduction objectives. (vii) Preparation of a synthesis document showing the distribution of the 2002 budget allocation by function (i.e. education, health, etc.). (i) Produce the monthly consolidated Second tranche treasury balance statement within a 1.5 month processing time period following the end of the concerned month and, for two consecutive months, submit the Statement to the Bank immediately thereafter. (ii) Strengthening the internal control 2002 mechanisms in les services de controle et d'inspection de l 'Etat. (iii) Transformation of the Supreme Court's 2002 Section des comptes into an independent Cour des comptes.

60 Annex 5 Page 1 of 2 Mali - Key Economic Indicators National accounts (as % of GDP) Crossdoniesticproduct' Agriculture Industry Services Total Consumption Gross domestic fixed investment Government investment Private investment E,ports (GNFS)b Imports (GNFS) Gross domestic savings Gross national savingse Memorandum items Grossdomesticproduct (USS million at current prices) GNP per capita (US$, Atlas method) Real annual growth rates ( /O, calculated from 1987 prices) Grossdomesticproductatmarketprices GrossDomesticIncome Real annual per capita growth rates (%, calculated from 1987 prices) Gross domestic product at market prices rotal consumption Private consumption Balance of Payments (USS millions) Exports (GNFS)b Merchandise FOB Imports(GNFS)b Merchandise FOB Resource balance Netcurrenttransfers C'urrent account balance Net private foreign direct investment Long-term loans (net) Official Private Other capital (net, incl. ators & onnimssions) C'hange in reservesd Memorandum items Resource balance (%ofgdp) Real annual growth rates ( YR87 prices) Merchandiseexports(FOB) Primary Manufactures Merchandise imports (CIM) (Continued)

61 Annex 5 Page 2 of 2 Public finace (as% of GDP at nmrket pricesf Clurentrevenues(excl.grants) Current expenditures Crrentaccountsuiplus(+)ordeficit(-) Capital expenditure Foreign finandng Monetary indicators M2/GDP GrowthofM2(%) Privatesectorcreditgrowth/ total credit growth (%) Price indices( YRB7 =100) Merchandise exportprice index Merchandiseimportpriceindex Merchandisetenmsoftradeindex Real exchangerate (US9LC) t ' Real interest rates Consumerpriceindex (%change) GDP deflator (% change) a. GDP at factor cost b. "GNFS" denotes "goods and nonfictor services." c. Includes net wequited transfers exduding official capital grants. d. Includes use of IMF resources. e. Consolidated central govermnent f "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.