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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Country Department 8 Africa Region World Bank October 18, 2000 Document of The World Bank FOR OFFICIAL USE ONLY INTERIM SUPPORT STRATEGY FOR THE ISLAMIC FEDERAL REPUBLIC OF COMOROS Report No COM 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 Currency Unit = Comorian Franc (KMF) US$1 = KMF 546 GOVERNMENT FISCAL YEAR January 1 - December 31 ACRONYMS AND ABBREVIATIONS CAS CEM CF CPIA CPPR DCA EU FY GDP GNP IDA IDF IFI IMF ISS NGO OAU OP P.C. UN UNDP US$ Country Assistance Strategy Country Economic Memorandum Comorian Franc Country Performance Institutional Assessment Country Portfolio Performance Review Development Credit Agreement European Union Fiscal Year Gross Domestic Product Gross National Product International Development Association Institutional Development Fund International Financial Institutions International Monetary Fund Interim Support Strategy Non Governmental Organization Organization of African Unity Operational Procedures Per Capita United Nations United Nations Development Program United States Dollar Vice President: Country Director: Sector Manager: Callisto Madavo Hafez Ghanem Cadman Mills

3 FOR OFFICLL USE ONLY INTERIM SUPPORT STRATEGY FOR THE ISLAMIC REPUBLIC OF COMOROS TABLE OF CONTENTS SUMMARY... A. THE POLITICAL SITUATION.1 B. MACROECONOMIC OUTLOOK AND THE GOVERNMENT PROGRAM.2 C. DONOR COORDINATION AND PARTNERSHIPS.6 D. MODALITIES OF BANK SUPPORT.6 ANNEX 1: COMOROS AT A GLANCE ANNEx 2: BANK GROUP PROGRAM SUMMARY ANNEX 3: SUMMARY OF NONLENDING SERVICES ANNEX 4: STATUS OF BANK GROUP OPERATIONS This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 SUMMARY 1. Comoros is in the stages of transition to greater political stability and improved economic management. The country needs foreign financial and technical assistance and has asked the Bank to help provide, mobilize, and coordinate this assistance. This Interim Support Strategy (ISS) reports on recent developments and proposes an interim Bank strategy for the next 12 months. During this interim period, Comoros' performance will be monitored closely and assessed against specific benchmarks. At the end of the period, given satisfactory performance, this ISS will be replaced by a full-fledged country assistance strategy (CAS). 2. The Islamic Federal Republic of Comoros consists of three islands: Grande Comore, Anjouan and Moheli. The country has faced prolonged political instability and weak governance. In 1997, Anjouan seceded from the other islands. Building on intensive efforts by the Organization of African Unity for national reunification, an inter-island conference was held in April 1999 in Madagascar, resulting in an agreement on a new Union and a large measure of autonomy to each island. Only Grande Comore and Moheli signed the agreement; Anjouan's refusal to sign led to unrest and riots culminating in a bloodless army coup in Grand Comore and Moheli on April 30, In August 2000, the de facto Government, headed by Colonel Azali, signed a joint declaration with the Anjouanese separatists calling for reunification. Elections have been promised for the near future and, even though uncertainties remain, there is ground for cautious optimism. 3. Comoros' economy remains depressed: real GNP per capita has been declining since 1995, and poverty is increasing. The government continues to face difficulties in fulfilling its basic public obligations, including paying teachers, health workers and other civil servants in a timely manner, and servicing debt regularly. Government has attempted to address the most immediate budgetary problems: payment arrears to civil servants have been reduced and arrears to IDA have been settled. However, serious cash flow problems remain, preventing the Government from spending adequately in the social sectors, paying civil wages on time, and undermining future public expenditures, such as the reintegration of military personnel into civilian life. 4. Comoros is currently in a base case scenario, and would remain so as long as: (i) the socioeconomic environment is suitable for development work, (ii) satisfactory portfolio performance is maintained, and (iii) progress towards decentralization of the management of World Bank projects is made. Lending would include a US$10 million Infrastructure and Decentralization project; non-lending services would involve assistance to the government to define a development vision for Comoros and preparation of an IDF grant for institutional capacity building. i

6 5. Comoros would enter a high case scenario with (i) substantial progress in public management on all three islands, (ii) agreement on an integrated budget for the three islands, and (iii) evidence of Government transfers to, and Government expenditures in, Anjouan. This would require tangible and decisive progress towards national reconciliation. Under this scenario, the Bank would proceed with a US$5 million Economic Recovery Credit, in addition to the lending and non-lending services of the base case. A low case scenario would arise from a return to conflict, making implementation of the current program problematic. In that event, preparation of the Infrastructure and Decentralization project would be suspended. Conditions permitting, the Bank would continue to supervise the existing portfolio as long as government continued to meet its debt service obligations to the Bank. ii

7 A. THE POLITICAL SITUATION Background 1. The Islamic Federal Republic of Comoros comprises three islands in the Indian Ocean (Grande Comore, Anjouan and Moheli). It is a small state with a population of about 540,000: of which 55% live in Grand Comore, 40% in Anjouan and 5% in Moheli. A fourth island of the archipelago, Mayotte, has remained under French administration. GNP per capita is estimated at US$350 in 1999, down from about US$520 in the late 1980s. 2. Comorian politics have been characterized by the presence of a large number of political parties and factions, and a lack of consensus. Even at independence in 1974, the archipelago was divided when Grande Comore, Anjouan and Moheli voted 96% for independence while Mayotte voted 64% against. Political instability has haunted Comoros with mercenary-supported governments and a number of military coups. 3. Dissatisfaction with the management of the country and declining living standards led to the secession of Anjouan in An inter-island conference was held under the auspices of the the Organization of African Unity (OAU) in April 1999 in Antananarivo. Agreement was reached between Grande Comore and Moheli on a new Union which would grant a large measure of autonomy to the three islands. 4. Anjouan's refusal to sign the Antananarivo agreement and the country's deteriorating economy led to riots and unrest in Grand Comore and prompted the army to intervene and take power in a bloodless coup on April 30, This coup led to the dissolution of the constitution and all state institutions. The chief of staff, Colonel Azali Assoumane, proclaimed himself president, prime minister, and defense minister. On May 6, 1999, a 'Charte Constitutionelle' (replacing the Constitution) was proclaimed by Colonel Azali. Hopes for reconciliation 5. As the crisis eased, in December 1999, Colonel Azali named a civilian prime minister and a civilian Government was named with the support of 22 out of 30 political parties. Also in December 1999, several governments in the region issued an ultimatum to the Anjouan separatists to sign the Antananarivo Agreement or face sanctions. The secessionist leaders responded by organizing a referendum which rejected the agreement. However, this result was not recognized by any external party, as no one was allowed on the island to explain the agreement. The OAU and regional neighbors responded by imposing an embargo on Anjouan. 6. After intense negotiations during July/August 2000, the government signed a joint declaration with the Anjouanese rebels on August 26. The declaration calls for a reunification of the country with large degree of autonomy for each island. It provides for a transition period during which detailed agreements will be reached on new institutions and a constitution. The agreement also calls for elections on the entire national territory.

8 but uncertainties remain The declaration also asks the OAU to end the embargo. However, the OAU has thus far not accepted the joint declaration, and the embargo is still in place, although difficult to enforce. The opposition led by former Prime Minister Abbas Djousouf is very active and is able to express its views through its newspaper as well as privately-owned television and radio stations. Although they have demanded Colonel Azali's removal, they do not agree themselves on a government to replace the present one. Risks of further instability exist, as demonstrated by a failed coup attempt against Colonel Azali in March Signs of improved economic performance and political dynamics provide window of opportunity 8. In spite of these remaining uncertainties, recent events have created a new dynamic which promises to break the political impasse and provide the basis for a renewed role of the Bretton Woods institutions. There are tangible signs that Government is improving its economic management, although the situation is precarious. Arrears to IDA have been paid and civil servants are being paid on a more regular basis. Poverty reduction is becoming the unifying theme underlying Government's efforts at improving economic management. Worsening health and overall social conditions in Anjouan are placing increasing pressure on the secessionist administration and neighboring countries to compromise on the terrns for national reunification. Colonel Azali's government is well aware that it has a narrow window of opportunity for delivering on the political and social expectations of the Comorian population and on its expressed commitment to a timely return to political normalcy and establishment of democratic institutions. 9. These promising developments are leading key external partners (the UN System, the EU, France) to start a cautious reactivation of their programs in order to be ready to support the country's national reconciliation and economic recovery efforts when developments permit. The IMF and the Bank, are expected to play a leading role in this endeavor. B. MACROECONOMIC OUTLOOK AND THE GOVERNMENT PROGRAM 10. Comoros is a subsistence economy. Foreign exchange earnings stem from exports of cloves, vanilla, perfume essence, private transfers from the Comorian community living abroad, and official transfers. Comoros is part of the French franc zone and the Comorian franc (CF) is pegged to the French Franc. In 1994, the CF devalued by 30% while the other currencies of the franc zone devalued by 50% in foreign currency terms. This devaluation was not accompanied by appropriate macroeconomic and structural policies; as a result, the gains in competitiveness attained in 1994 were eroded and the economy continues to be plagued by high production costs, slow growth and chronic fiscal deficits. The Short-Run: Recession and a Fiscal Crisis 11. Following stagnant economic growth in 1998, real GDP is estimated to have decreased by 1.4% in Tourism was hard hit by political instability and the occupancy rate in major 2

9 tourist hotels dropped to below 50%. However, as a result of higher clove prices, greater export earnings from vanilla and increased private transfers, the current account balance (including official transfers) improved from a deficit of 9.4% of GDP in 1997 to a surplus of 0.1% in The rate of inflation stabilized at around 4%. TABLE 1: ECONOMIC INDICATORS (estim.) 2000 (proj.) Annual % change Real GDP Real GDP p.c Inflation rate In % of GDP Gov. revenue and grants o/w grants Gov. expenditure & net lending Overall fiscal balance, incl. grants Current account deficit (excluding off. transfers) Current account deficit (including off. transfers) External payment arrears (in $ million at end period) Source: Data provided by the government of Comoros; and IMF and Bank staff estimates 12. The economy is not expected to improve in Investment levels are low reflecting continued political uncertainty. Production costs are very high, partly due to high transport costs. Shortages of key commodities such as petroleum occur from time to time. A satisfactory enabling environment for private entrepreneurs does not yet exist. Domestic economic activity is expected to remain depressed. 13. The fiscal situation reflects a history of chronic problems. Budgetary authorizations for domestically financed current expenditures largely surpass available resources. Total government revenue in 1999 was some 10% below 1997 levels mainly due to lagging payments by public enterprises. As a member of the Franc Zone, Comoros faces rigid fiscal constraints and the government's ability to borrow from the banking system to finance the deficit is limited. As a result, Government resorts to the accumulation of arrears to finance its expenditures. At end- 1999, accumulated wage arrears were about twice the annual wage bill and external arrears reached US$58 million. 14. Social conditions are expected to continue to be poor: life expectancy at birth is 60 years, infant mortality rate is 63 per thousand, the fertility rate is 4.5; the net primary school enrollment rate is 50%, and only about 48% of children under the age of one are immunized against prevalent childhood diseases. Although the budget provides a "safety net" covering primary 3

10 education and basic health care, required social expenditures were not made due to persistent public finance difficulties. Successive governments have been unable to deliver social services to the population. Only 50% of the budgeted amount for education and health was spent, mostly to pay wages and salaries. The rate of execution of non-wage expenditures in the social sectors was particularly low at around 25-30%. 15. Since taking office in April 1999, the government has worked hard to restore fiscal discipline and improve governance. It has taken measures to strengthen revenue collection, cut non-priority expenditures, and clean-up irregularities in the management of civil service personnel. With these efforts, payments of civil servant salaries have become more regular. In January 2000, the government was able to settle all IDA arrears accumulated from mid This enabled the Bank to lift the suspension of IDA disbursements and resume project activities in key social sectors. 16. The FY2000 budget is proving to be a major challenge. Despite an expected increase in revenue, resulting from recent government efforts to strengthen revenue collection, current spending plans would result in a financing requirement of about US$10-12 million or 5.5% of GDP. The main problem in public finance in Comoros is the high share of revenue that is spent on personnel costs. The civil service now includes 6,200 workers, and the government may need to consider further staff reductions in order to bring the wage bill to a more manageable level. It is also considering more cuts in expenditures on goods and services in low-priority sectors. Government Program: Medium-Term Reconstruction and National Reconciliation 17. The government recognizes the importance of reconstruction and reconciliation. It has developed an 18-month program with an overarching objective of restoring economic, institutional, and political stability. The program is built on one of the country's most valuable assets - strong local community solidarity - by placing emphasis on increased participation of communities in the reconstruction development efforts. The government hopes that the program will attract support from all three islands and thus help advance national reconciliation. The program has three pillars: (i) improvement of social services and living conditions for the poor; (ii) economic growth; and (iii) improvement in governance and decentralization. 18. Improvement of social services and living conditions for the poor. Given widespread poverty in Comoros and difficult living conditions, the government program focuses on poverty reduction and the social sectors. Although no reliable data are available to quantify the increases in poverty, the decline of the economy, shortages of essential commodities and the Anjouan conflict have all had negative effects on the living standards of Comoros' population. In addition, cholera is reported to have spread rapidly in Anjouan (over 2000 cases were reported in Anjouan versus 100 in Grand Comore in 1999). Under these difficult circumstances, the population of Comoros has shown strong community solidarity in providing a traditional social safety net at the community level, in particular on the island of Grand Comore. Officially recorded private transfers from the Comorian community living overseas have also increased by 18% from 1997 to In the framework of its poverty reduction program, the government has developed priority actions and investments in the areas of water supply, health, education, and rural and community development. Its program also includes efforts to develop traditional 4

11 activities such as vanilla, cloves and ylang-ylang, expand sources of income for the poor in the fishing and live-stock sectors, and tackle youth and unemployment issues. 19. Economic growth. Achieving economic growth and expanding opportunities is a key government objective. Hence, the program includes actions to (i) encourage private sector investment in productive activities and in export crops diversification; and (ii) rationalize tax and custom administration. At the same time, the government plans investment in key infrastructure sectors to remove some of the bottlenecks facing the private sector. 20. Improvement in governance and decentralization. The government has undertaken measures to strengthen fiscal discipline, cut current expenditures, and implement public enterprise reforms (some progress is being made in the privatization of air transport and port services). Authorities have consolidated all government revenues collected by various technical ministries in the exercise of their duties. These revenues are now deposited in Treasury accounts, and the transparency of their use is being monitored. One of the government's main priorities is to strengthen judicial capacity to increase the autonomy and enforceability of the legal and judicial system. Priorities and Financing of the Government Program 21. The three pillars of the government program are the basis of the country's development priorities which have been worked out in consultation with civil society and donors. The objectives are to (i) select only high priority projects in social infrastructure and services and present them to donors for financing; and (ii) encourage private sector involvement in financing projects and activities in productive and commercial sectors. The core reconstruction program is shown in Table 2 and amounts to around US$48 million. The EU has pledged some US$16 million under Lome 8. The balance is to be mobilized from donors, particularly France. 22. The Bank would help finance some projects and activities of the government's core priority program in the context of the existing portfolio in health, social funds, education, agriculture services, and small enterprise development. A new Bank project currently under preparation, Infrastructure and Decentralization, would address the country's needs in infrastructure/water and provide support to the country's decentralization process. The government is approaching other donors, both bilateral and multilateral, to help finance its reconstruction and national program. Although some donors have not yet confirmed their pledges, they have expressed interest in providing grant financing in support of a lean and sound national program. TABLE 2: GOVERNMENT'S CORE PRIORITY PROGRAM FOR Objectives US$ Millions Poverty Reduction 34.4 Econ. and Finan. Mngt. 9.3 Governance 2.0 Decentralization 2.4 Total 48.1 Source: Government of Comoros 5

12 C. DONOR COORDINATION AND PARTNERSHIPS 23. Good donor coordination is important to mitigate risks and ensure maximum synergy among different programs. The Commonwealth-World Bank Task Force on Small States identified this as a particularly challenging area for small states in its report of April Accordingly, the Bank is working very closely with the IMF, EU, UNDP, and Comoros' largest bilateral partner, France, in support of government efforts to provide basic social services and lay the basis for sustainable growth and poverty reduction. Together with the Bank, other key donors have expressed strong interest in resuming their assistance to Comoros. The European Union is reactivating the remaining funds under Lome 8. EU projects include the Ports of Moheli and Moheni, sanitation, roads, and election support. France is considering the renewal of its assistance in various social programs and other key economic sectors. UNDP and other UN agencies continue their assistance in humanitarian and social activities. After two years of interruption due to political instability and disruptions in the civil service, the IMF resumed Article IV consultations in March Overview: High Risk Callingfor an ISS D. MODALITIES OF BANK SUPPORT 24. There are four reasons to support Bank resumption of activities in Comoros despite the existing political uncertainties and high risk: (1) the government has demonstrated commitment to improving economic management and governance. Recognizing improved tax collections, the recent IMF Article IV mission nevertheless recommended fiscal reforms and implementation of a structural adjustment program once the political environment stabilizes; (2) poverty and inadequate social services in Comoros are major problems and the Bank is in a position to support local communities who are mobilizing to improve their standards of living; (3) the Bank's involvement in Comoros could help support the process of national reconciliation; and (4) the government has settled IDA arrears despite its cash flow problems. 25. Comoros has a de facto government as defined in OP As the government is in effective control of two of the three islands which constitute the Comoros Republic, existing operations can be implemented as long as the government meets its debt service obligations to the Bank. Furthermore, new loans would not expose the Bank to additional political risks as current conditions permit project implementation on the two islands. Other countries and international organizations have informally recognized or dealt with the current de facto government. 26. The volatile political situation and continued conflict do not make it feasible to develop a three-year Country Assistance Strategy (CAS). Therefore, as an alternative, an exceptional interim strategy covering the next 12 months is proposed. The Bank's involvement would take the form of a graduated response to government progress in implementing economic reforms, improving governance and resolving the political impasse which divides the nation. During this period, the Bank would focus on: 6

13 . portfolio management to support projects in the social sectors (health care, HIV/AIDS, family planning, and primary education) and community development; * modification of the infrastructure project already under preparation to emphasize rapid rehabilitation of social facilities and decentralization; * capacity building, decentralization, and general improvements in governance; and * in the event of political reconciliation, and improved budgetary management a quick disbursing Emergency Recovery Credit (ERC) could be considered to finance institutional development and the budgetary requirements of reconciliation. Portfolio Implementation: The Bank's Initial Response to Improved Conditions in Comoros 27. The Bank currently has five projects in its portfolio for a total commitment of US$33.6 million equivalent and undisbursed balances of US$26.4 million, supporting social sectors, private sector development, and agriculture services. Two of these projects (Pilot Agricultural Services and Small Enterprise Development) are in their final implementation stages and are expected to close by end-december 2000 and end-june 2001 respectively. Two of the remaining three were approved during FY98 and were waiting for the respective conditions of effectiveness to be fulfilled when a general suspension of disbursements was declared on August 15, 1998 due to failure by the country to meet its debt service obligations to IDA. One, Health, was declared effective on June 6, The Social Fund has been effective since the end of 1997 and is now expected to be implemented without further delay. Education III was also declared effective on June 23, TABLE 3: IDA PORTFOLIO IN COMOROS (as of October 10, 2000, in US$ million) Project Date of Current Original Undisb. Name Approval Closing Date Amount Amount Small Enterprise Development 06/21/94 06/30/ Pilot Agricultural Services 12/23/96 12/31/ Education III 06/30/97 12/31/ Social Fund 12/04/97 12/31/ Health 02/26/98 12/31/ TOTAL Source: World Bank 28. The World Bank suspension of disbursements was lifted effective January 6, 2000 following settlement by the government of payment arrears. Although this two-year suspension has adversely affected the actual performance and performance ratings of the Comoros portfolio, it should be noted that the country has shown a good track record of implementation of Bankfinanced projects, with high levels of ownership and contribution by beneficiaries and communities offsetting chronic problems associated with delayed or insufficient provision of counterpart funds by the government. The most recent projects were designed taking these factors into account and have shown a remarkable degree of resilience during this extended period of disbursement suspension, although some project teams will have to be reconstituted. 7

14 Reactivating this portfolio and restructuring it to adapt to the realities of a country emerging from a protracted conflict are key aspects of the Bank's response to Comoros' current needs. Effective implementation of existing projects is crucial to reach the objective of improving the economic and social welfare of the Comorian people. 29. To this end, a Country Portfolio Performance Review (CPPR) was held in March 2000, which also served as a backdrop to initial discussions with the Comorian authorities on their national reconciliation and reconstruction strategies. The CPPR, which was well prepared and attended (representatives of the civil society and donor community participated), confirmed that the objectives of the existing projects are still broadly valid and in line with current priorities. The need for fine-tuning these objectives, further simplification of programs and implementation arrangements, and improved coordination among agencies with overlapping responsibilities was recognized in a number of cases. A detailed plan of action for the next 12 months for each project was agreed upon and follow up actions were implemented, with Bank concurrence and support in May and July These included specific actions to: (i) accelerate disbursement of operating projects; (ii) restructure projects that are not performing well, re-design activities in line with the current country situation, and reallocate funds where necessary; (iii) reconstitute and strengthen project management teams; and (iv) strengthen financial management and overall fiduciary aspects. 30. The political uncertainties that are likely to prevail in Comoros call for flexible approaches to project implementation and rapid responses to changing circumstances. Our dialogue with Comoros over portfolio implementation issues will be guided by these considerations. Enhanced supervision will be provided over the next 12 months and the Implementation Team in the Bank's Madagascar office will play a leading role in these stepped-up supervision and implementation assistance efforts. A supporting training program has been initiated and will be amplified. The Bank has agreed to extend its cost sharing arrangements agreed under the Social Fund project to other projects in the portfolio. 31. A sizable share (about 30-40%) of activities provided under the existing portfolio is intended to support poverty reduction community-based activities in Anjouan. The government agrees that these community-oriented activities should proceed to the extent possible. NGOs have been able to keep some high-priority assistance programs running. Steps have been undertaken in each project to decentralize project management to the three islands with a central coordinating body to channel project funds down to the regional project implementation units. Where implementation cannot proceed, the government has proposed, and the Bank has agreed, that existing provisions for activities in Anjouan be kept and the situation reconsidered as part of the periodic reviews to be carried out between the government and the Bank under the ISS. Base Case in the ISS: Meeting Comoros' Highest Priorities Lending 32. Under the base case, the current scenario in the country, IDA would also support the government's program through a new investment loan to fund key infrastructure and support decentralization. This new credit of US$10 million would be a modified version of the 8

15 infrastructure, water, and environment project that was already under preparation. This project would be an integral part of a multi donor-financed program in the Comoros, supporting the development objectives of the larger program. The main program objective is to improve living conditions and stimulate economic growth, while preserving the environment and public investments in basic infrastructure. Focusing on three sectors (transport, water, and urban), the specific objectives of the project are to: (i) maintain road infrastructure and open up isolated villages; (ii) improve the safety of roads; (iii) establish sustainable water use guidelines and significantly increase water coverage rates for populations of the three islands by 2002; and (iv) improve decentralized management of transport, water, and municipal infrastructure through public awareness campaigns, stakeholder participation, cost-recovery measures, and targeted support to public sector institutions. The project would seek to decentralize project management and promote increased community and private sector participation in the implementation of the various components of the project and in the management of road maintenance and water supply. 33. In order to deal with the situation in Anjouan and subject to the outcome of negotiations with Comoros, the Development Credit Agreement (DCA) of the Infrastructure and Decentralization Project would include (i) a separate disbursement category for Anjouan in the disbursement table, (ii) a disbursement condition under which no disbursement would be made under the Anjouan disbursement category unless the project could be supervised in Anjouan, and (iii) a provision under which IDA would be able to cancel the amount under the Anjouan disbursement category if one year after project effectiveness, no project activity has been initiated in Anjouan. Non-Lending Services: Helping Develop a Vision for the Future 34. The government has requested Bank collaboration in preparing a Country Economic Memorandum (CEM) which would help develop a vision for the country's long-term development, key constraints to achieving this vision, and the necessary policy reforms and investment. This exercise would provide the analytical underpinnings for future reform programs in Comoros. It would identify key sources of growth, the constraints to growth and policies to deal with those constraints. The Bank would also initiate technical assistance in public sector management at the central government level, the decentralized administrations, and in the key social sectors. 35. Following consultations with the government on its most pressing needs, the country team has requested an Institutional Development Fund (IDF) Grant as a mechanism to provide technical assistance to support the Government in: (i) public expenditure management (including needs assessment, collecting and analyzing statistical data); (ii) assistance on its national development strategy; and (iii) coordinating donor aid. Specifically, the IDF Grant would finance support in strengthening of its national development strategy, improving donor coordination and designing its public investment program. High Case in the ISS: Budgetary Support - Emergency Recovery Credit (ERC) 36. During an initial period, reconciliation will imply increased budgetary cost. There will be costs associated with the demobilization of military personnel and their reinsertion into civilian 9

16 life. Bringing social services in Anjouan to the standard of the other islands will also entail additional budgetary costs. Given Comoros' very difficult budgetary situation, a strong case could be made for flexible IDA resources to permit the recovery and reconciliation effort to be financed during the interim period. With appropriate burden sharing, an Emergency Recovery Credit (ERC) of around US$5 million with additional resources from France and the EU could be put in place to assist the authorities in bringing about reconciliation and financing the associated costs. Risks 37. There can be no sustainable growth and poverty reduction in Comoros without a solution to the separatist crisis and a move to a broadly accepted government. Hence the greatest risk to the proposed strategy is political. The risk is compounded by the fact that the Bank's engagement in Comoros at this time could be viewed as a support to the status quo - separatism and lack of a broadly accepted government. Bank staff has been addressing this problem in two ways. First, the ISS is being discussed very widely in Comoros including with opposition leaders, private entrepreneurs, labor leaders and representatives of Anjouan. Second, Bank staff have made it clear to the government and civil society that a resolution of the present political crisis, including measures towards better governance and greater participation, are prerequisites for a continued high level of Bank support beyond the transition period. 38. A second risk is that government will lack the commitment or capacity to sustain the economic recovery effort. This risk will be mitigated by systematic monitoring by both Bretton Woods institutions and a careful phasing of assistance to correspond with demonstrated progress by the government towards economic reform and improved management. 39. Finally, the Infrastructure and Decentralization project would constitute an important contribution to economic recovery and the provision of vital social services. It provides substantial incentives for reconciliation as an appropriate share will be allocated to Anjouan should it rejoin the other two islands. This project is supported by a unified donor community including France, the EU, the UNDP, and other International Financial Institutions (IFI). 40. The direction, nature, and extent of Bank support during the interim period will depend on the political and security situation countrywide and on Comoros' economic performance. The triggers for moving between scenarios are laid out in Table 4. The implementation of the ISS would be reviewed approximately every six months. 10

17 TABLE 4: BANK's ASSISTANCE AND TRIGGERS Scenario Triggers Bank Lending Assistance * Base case triggers; and Emergency Recovery HIGH CASE * Preparation of an agreed integrated budget with better fiscal Credit and lending management and equitable distribution of resources for the three program of base case. islands, including evidence of transfers to Anjouan. This assumes an end to the separatist conflict and progress on national reconciliation. * The socioeconomic environment is suitable for development Infrastructure and BASE CASE work; and Decentralization (CURRENT * Satisfactory portfolio performance as determined by supervision project. SCENARIO) reports, periodic country reviews, and implementation of the CPPR recommendations; and. Explicit progress towards implementing decentralization steps in the management of all Bank projects as verified by project supervision reports. = Retum to conflict or an increase in conflict renders Preparation of all new Low CASE implementation of a coherent program problematic. Focus of operations ceases. Bank work would be on supervising the existing portfolio with emphasis on poverty reduction as long as govemment continued to meet its debt service obligations to the Bank. 41. The proposed strategy addresses the root economic causes of the conflict, namely inequitable availability of resources, and seeks to prevent a recurrence of the conflict by assuring greater participatory decision-making and more balanced resource use. Furthermore, the benefits in terms of improved services and support for economic recovery will increase the prospects for political stability. James D. Wolfensohn President By Shengman Zhang Washington, D.C. October 18, 2000 Annexes 11

18 ANNEX I Page 1 of 2 Comoros at a glance 9/10/00 Sub- POVERTY and SOCIAL Saharan Low- Comoros Africa income Development diamond 1999 Population, mid-year (millions) ,417 Life expectancy GNPpercapita (Atlasmethod, US$) GNP (Atlas method, USS billions) Average annual growth, Population (%) Labor force (f%) GNP Gross Most recent estimate (latest year available, ) per capita >. - enrollment prmary Poverty (% of population below national poverty line) Urban population (/ of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to safe water Access to improved water source (%6 of population) Illiteracy (% of population age 15+) Gross primary enrollment (% of school-age population) Comoros Male Low-income group Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS Economic ratlos* GDP (US$ billions) Gross domestic investment/gdp Exports of goods and services/gdp Trade Gross domestic savings/gdp Gross national savings/gdp Current account balancelgdp Domsti Interest paymentslgdp Investment Total debtwgdp Savings Total debt service/exports Present value of debt/gdp Present value of debtlexports.n..e.. Indebtedness (average annual growth)l GOP , I Comoros GNP per capita * Low-income group Exports of goods and services STRUCTURE of the ECONOMY Growth of Investment and GDP (%) (%6 of GDP) 5 Agriculture v Industry Manufacturing Services Private consumption General government consumption GDI C GDP Imports of goods and services Growth of exports and Imports (%) (average annual growth) Agriculture Industry ' Manufacturing Services Private consumption General government consumption Gross domestic investment Imports of goods and services Exports *Imports Gross national product Note: 1999 data are preliminary estimates. The diamond show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

19 Comoros ANNEX I Page 2 of 2 PRICES and GOVERNMENT FINANCE Domestic prices Inflation (%o (% change) 25 Consumer prices Implicit GDP deflator Government finance 15 (% of GDP, includes current grants) o. Current revenue S Current budget balance GDP deflator : CP? Overall surplus/deficit TRADE _ (US$ millions) Export and import levels (USS mill.) Total exports (fob) Other food Otherfood * Manufactures s* Total imports (cif) Food Fuel and energy Capital goods Export price index (1995=100) Import price index (1995=100) F2Exports Imports Terms of trade (1995=100) BALANCE of PAYMENTS Current account balance to GDP (-) (US$ millions) Exports of goods and services Imports of goods and services Retsonurce balance X [, 8 9 Net income _ Net current transfers (priv. & offl.) _6 Current account balance i.11 Financing items (net) Changes in net reserves Memo: Reserves including gold (US$ millions) Conversion rate (DEC, /ocal/us$) EXTERNAL DEBT and RESOURCE FLOWS K (US$ millions) Composition of 1999 debt (US$ mill.) Total debt outstanding and disbursed IBRD IDA Total debt service IBRD IDA Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity World Bank program Commitments A - IBRD E - Bilateral Disbursements B - IDA D - Other multilateral F - Private Principal repayments C - IMF G - Short-term Net flows Interest payments Net transfers Development Economics 9/10/00

20 ANNEX 2 Page 1 of 1 Proposed IBRDIIDA Base-Case Lending Program a Bank Group Program Summary Comoros As Of Date 09/10/2000 Fiscal year Proj ID US$(M) Strategic Rewards b Implementation b F (HIMIL) y P Risks (HIMIL) 2001 Infrastructure & Decentralization 10.0 H M Total 10.0 a. This table presents the proposed program for the next three fiscal years. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L). Template created on 10/19/00.

21 ANNEX 3 Page 1 of 1 Summary of Nonlending Services - As Of Date 09110/2000 Product Completion FY Cost (US$000) Audiencea Objective b Recent completions Interim Support Strategy FY01 50,000 Bank Strategy Planned Country Economic Memorandum FY02 50,000 Government Knowledge a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving.

22 ANNEX 4 Page 1 of 1 Comoros Status of Bank Group Operations (Operations Portfolio) As Of Date Closed Projects 11 Active Projects Last PSR Difference Between Expected and Actual Supervision Rating b/ Original Amount in USS Millions Disbursements"' Project ID Project Name Development ImpLemenation Fiscal Year IBRD IDA GE Cancel. Undisb. Orig. Frm Rev'd Obiectives Progress P AG SERVICES PILOT S S P EDUCATION IlIl S S P HEALTH S S P SMALL ENTERPRISE DEV S S P SOCIAL FUND S S Total Active Projects Closed Projects Total Total Disbursed (IBRD and IDA) (in US$ millions): of which has been repaid: Total now held by IBRD and IDA: Amount sold of which has been repaid: Total Undisbursed a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.