Documentof The World Bank FOROFFICIAL USEONLY ReportNo. 31609-ML INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDFOURTHSTRUCTURALADJUSTMENT CREDIT (SAC IV) INTHE AMOUNT OF SDR 16.5 MILLION (US$25MILLIONEQUIVALENT) TO THE REPUBLIC OFMALI FEBRUARY22,2005 PovertyReductionandEconomicManagement4 CountryDepartment14 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CurrencyEquivalents (As ofFebruary 17,2005) CurrencyUnit= CFA Franc (CFAF) US$1= CFAF 502.84 FiscalYear January 1-December 31 ACRONYMSAND ABBREVIATIONS ADM Mali's Airports (Adroports du Mali) BCEAO Central Bank o f the West African States (Banque Centrale des Etats d 'Afrique de 1'Ouest) CAS Country Assistance Strategy CFAA Country FinancialAccountability Assessment CGSP General Control o f Public Services (Contrdle Gdndral des Services Publics) CMDT Mali's Companyfor TextileDevelopment (Compagnie Malienne pour le Ddveloppement des Textiles) CRM Mali's Retirement Fund (Caisse de Retraite du Mali) DNTCP National Directorate for Treasury and Public Accounting (Direction Nationale du Trdsor et de la Comptabiliti Publique) EDM Mali's Energy Company (Energie du Mali) ESDS Environmental and Social Data Sheet GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries HUICOMA Mali's Commercial Vegetable Oil Company (Huilerie Commerciale du Mali) IMF Intemational Monetary Fund INTOSAI Intemational Organization o f Supreme Audit Institutions IPES Investment program o f the EducationSector LDPCS Letter o f Development Policy for the Cotton Sector MDGs MillenniumDevelopment Goals MEF MinistryofEconomy andFinance MRSC Organization for the Restructuring o f the Cotton Sector (Mission de Restructuration du Secteur Coton) MTEF Medium-term Expenditure Framework NFCD National Financial Control Directorate NPD National Procurement Directorate NTD National Treasury Directorate ON Niger Office (Office du Niger) PASAOP Assistance Program for the Agricultural Services and the Producer Organizations (Programme d`Appui aux Services Agricoles et aux Organisations des Producteurs) PRGF Poverty Reductionand Growth Facility PRODEC Ten-year Educational Program (Programme Ddcennal d 'Education) PRS Poverty ReductionStrategy PRSP Poverty ReductionStrategy Paper SOTELMA Mali's Telecommunications Company (Sociitd des Tdldcommunications du Mali) WAEMU West Africa Economic and Monetary Union WE0 World Economic Outlook Country Director: A. DavidCraig Sector Director: Paula Donovan Sector Manager: Robert R. Blake 11 FOROF'FICTALUSEONLY THE REPUBLIC OF MALI FOURTHSTRUCTURALADJUSTMENT CREDIT (SAC IV) TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY ..................................................................... VI FOURTHSTRUCTURALADJUSTMENT CREDIT .................................................. 1 IINTRODUCTION . ....................................................................................................... 1 I1 RECENTECONOMICDEVELOPMENTSAND OUTLOOK . ............................ 2 A. RecentEconomic Developments ............................................................................ 2 B. Outlook andFinancingRequirements.................................................................... 5 Growth and Inflation Outlook................................................................................. 5 2005 Budget and Fiscal Risks................................................................................. 8 FinancingRequirements in 2005............................................................................ 8 I11 IMPLEMENTATIONOFTHE 2003 PRSPAND BANKSUPPORT . .............10 A. PRSPImplementationin2003-2004............................................................................ 10 Progress towards the MDGs.,............................................................................... 12 B Bank Support underthe 2003 CAS.............................................................................. . 13 C. Lessonsfrom the SAC I11.............................................................................................. 14 I V THE PROPOSEDFOURTH STRUCTURALADJUSTMENT CREDIT . ......15 A The Context of the SAC IV........................................................................................... . 15 B. Strengtheningthe Fiscal and Financial Sectors.......................................................... 17 Strengthening Expenditure Planning.................................................................... 17 Maintaining Fiscal Discipline .............................................................................. 19 Reinforcing the Financial Sector.......................................................................... 22 C. StrengtheningPublic Expenditure Management, Transparency and Control ........23 ImprovingBudget Execution and Monitoring...................................................... 23 Strengthening the InternaUExternal Audits and Performance Evaluation........... 26 Defining the Supporting Documentationfor Expenditure Requests..................... 27 Improving Transparency....................................................................................... 28 V . CREDIT ADMINISTRATION AND RISKS ...................................................... 28 A Credit Administration .................................................................................................... 28 . Environmental Safeguards .................................................................................... 28 FinancialAssessment............................................................................................ 29 Risks and Mitigating Measures............................................................................. 30 VI CONDITIONS PRIOR TO BOARD PRESENTATION . ................................... 31 VI1 CREDIT EFFECTIVENESS . ................................................................................ 32 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 Bailk authorization . ANNEXES Annex 1: Letter of Development Policy................................................. ........................ 33 Annex 2: Matrix o f Development Policy Actions, Conditionalities for SAC IV and Triggers for SAC V .................................................................................. 58 Annex 3: Key Economic Indicators................................................................................ 67 Annex 4: Status of Bank Broup Operations (all IDA).................................................... 68 Annex 5: Mali at a Glance.............................................................................................. 69 Annex 6: Key Processing Events and TeamMembers .,,.......... .... .,,,...,,.,,..,......,............71 Annex 7: Relations with the World Bank Group and the IMF....................................... 72 Annex 8: The Impact on Poverty o f Alternative Cotton Producer Prices ...................... 71 Annex 9: Estimated Impact on the 2006 CMDT FinancialPosition Under Alternative International Prices ........ ..,..,,,,,........................,...,...........80 Map IBRD 33443 .............................................................................................................. 82 LISTOF TABLES Table 1: Selected Economic and Financial Indicators, 2002-07 ..................................... 7 Table 2: Central Government Finances and Financing Requirements..................... .......9 LISTOF FIGURES Figure 1: Real GDP Growth and Inflation Rates 1999-2003 ...............................,,..........3 Figure 2: Fiscal and Current Account Balances 1999-2003............................................. 3 The World Bank team for this operation was led by Zeljko Bogetic and included: Abdoulaye Konate, Francesco Scaduto-Mendola, Patrick Labaste, Yeyande Sangho, Ilhem Bagdhadli, Bakary Kante, Noel Tschiani, Andre Ryba, Robert Caunau, Kevin Lumbila, Jacques Bernard Christien, Nestor Coffi, Sidi Boubacar, Renee Desclaux, Aline Cabal, Eavan O'halloran, Judite Fernandes, and Aoua Toure Sow. Advisers included Robert Blake, David A. Craig, Christina Wood, Quentin Wodon, Jan Walliser, LiliLiu, and Judith Press. The SAC IV team worked closely with the IMF teams headed by Cyrille Briancon and Christopher Lane and the UNDP and the group of bilateral development partners in Mali, especially on cotton sector issues. iv THE REPUBICOF MALI FOURTHSTRUCTURALADJUSTMENT CREDIT (SAC IV) CREDIT AND PROGRAMSUMMARY Borrower: The Republic o fMali Amount: SDR 16.5 (US$25 million equivalent) Terms: Standard IDA terms (40-year maturity & 10-year grace period) ImplementingAgency: Ministryo fEconomy andFinance Programobjectives: The proposed Credit supports the authorities' objectives and policies elaborated inthe Poverty Reduction Strategy Paper (PRSP) (2002) and the Bank's CAS (2003). The PRSP was endorsed by the Bank and the Fundboards and is supported by the donors. Its strategy rests on: (i) accelerating shared, private-sector led growth; (ii)strengthening institutions, governance and participation; (iii)developing human resources and access to basic services; and (iv) strengthening basic infrastructure and productive economic activities. The proposed project expounds mainly on the first two pillars o f the PRSP.Also, by helping promote growth and strengthen expenditure execution, it supports poverty reduction and social objectives. Specifically, the SAC IV insupport o f the authorities' reforms aims at: (i)contributing to broad-based growth and poverty reduction by strengthening fiscal policy and financial sector underpinnings o f stable, long-run growth. Fiscal policy will be strengthened, inter alia, by developing medium-term expenditure policy consistent with poverty reduction objectives; strengthening the link between the PRSP and the budget; and limiting budget transfers to parastatal enterprises (e.g., cotton company). Financial sector reform will be advanced by taking steps towards strengthening o f the financial system (e.g., preparing the ground for the clean up o f bad loans) and limiting the risk o f bank insolvency. This i s expected to result in greater access to credit and broader financing alternatives to Malian entrepreneurs and farmers thereby promoting financial deepening and economic growth. (ii) improving efficiency, accountability, and transparency in public expenditure management. This will be achieved by strengthening budget preparation, execution, and controls, increasing transparency and disclosure including at decentralized levels, and helping ensure better monitoring o f and access to basic services by the poor. V Benefits: Mali SAC IV will support sustainable fiscal policy and stronger financial sector as cornerstones o f the favorable investment climate and business environment conducive to long-run growth. Inthefiscal area, the Credit will help enforce hard budget constraint on public enterprises and protect scarce budgetary resources for priority poverty- reducing objectives. Moreover, by helping improve alignment among key planning instruments with the PRSP objectives, it will also tighten the linkbetweenmediumtermpoverty reduction andbudgetarypolicy. Also, by helping improve coordination between key planning ministries and monitoring and evaluation o f expenditure programs, PRSPimplementationshould be strengthened. Inthefinancial sector area, the Credit will lay the groundwork for a fundamental reform which will contribute to a stronger financial system and regulatory framework allowing greater access to small- scale Malian farmers and entrepreneurs, which i s key to private sector- led growth. For example, the completion o f audits o f bad loans i s the first step towards cleaning up the portfolios o f commercial banks, reducing spreads and ensuring greater access to credit, which has been identified as a key constraint on private sector development. Also, by initiating a study o f tax regime and exemptions, with particular attention to leasing company taxation, and by enforcing the domiciliation o f insurance business, a basis will be laid for improved access to longer term resources. These and other measures, although o f short-term nature, are expected to help gradually move the financial sector towards a wider array o f financing sources for entrepreneurs large and small. These steps are expected to be followed in the medium term by the completion o f privatization o f banks, and the restructuring o f the insurance sector and o f the micro-finance industry. This will result in the lower risk o f bank insolvency, greater access to credit, and stronger financial system, consistent with more robust, medium-term growth. Finally, in the area o f strengtheningpublic expenditure management, transparency and controls, the Credit will strengthen the institutional underpinnings o f public expenditure management. By improving management o f public resources, it will favorably affect allocative efficiency and distributional impact o f public expenditures and will contribute to greater transparency o f expenditures. These benefits will be ensured by a number o f agreed measures including: (i) strengthening o f an interconnected information system at the central level and setting up an integrated information system at de- concentrated levels; (ii) improving budget reporting; (iii) goals setting and benchmarks for information interconnectivity between central and de-concentrated levels o f MEF and other agencies and among departments o f MEF; and (iv) raising disclosure requirements at vi decentralized levels for the 2005 budget in order to improve transparency o f and accountability for expenditure allocation and execution at the point o f service delivery. A feasibility o f a single action plan on hrther PEM reforms agreed by key donor partners would be explored to strengthen harmonization and streamline conditionality. Risks: The operation faces the following risks in order o f importance: external, institutional, and political. External risks stem mainly fiom the well-known vulnerability o f the Malian economy to vagaries o f weather and commodity price fluctuations as well as regional crises (e.g., Cote d'hoire, Liberia). Mitigating these risks will remain to be difficult over the horizon o f the proposed project. But by relaxing the authorities budget constraint, supporting the government's reform, including indirect support to the transport diversification and trade facilitation activities (including customs reform), the project will be broadly consistent with policies and initiatives to reduce Malian economy's structuralvulnerabilities over the mediumterm. Predictable and timely donor support and coordination will also be key in this regard. Institutional risk comprises o f threat o f weak capacity and governance to program implementation. This risk o f slower-than- required program implementation stemming from capacity constraints will be reduced through continued technical support by the World Bank and other donors to strengthen capacity. Project design also includes strengthening growth-critical areas such as prudent fiscal policy and financial sector development. Moreover, by building on the good record o f policy reform in public expenditure management, the Credit itselfwill contribute to the institutional strengthening o f various agencies involved in public expenditure management. Political risk remains that the government's current commitment to the continued reforms, including privatization and liberalization program (banking, cotton, transport, telecommunication sectors) could be insufficient. Implementation fatigue may set in, causing a loss of momentum in reform implementation. This risk is constantly monitored by the country team. It is being mitigated through the Bank's dialogue with the authorities in order to detect problem areas early on and adjust the Bank response as needed. Finally, and perhaps most importantly, given the low intemational cotton prices, there i s a key political risk that prevailing world cotton prices remain so low that they would dictate a sharp downward adjustment in local producer prices, an adjustment that could prove politically extremely difficult. While this risk i s not possible to control, the report provides some estimates o f the potential poverty and financial impact o f various cotton prices in order to inform the policy choices and trade offs between the need for local prices to reflect world market conditions and the desirability o f cushioning the temporary impact on the poor. vii Estimated Disbursements: The credit will b e disbursed ina single tranche upon effectiveness. Implementing Agencies: Ministry of Economy and Finance coordinates implementation, which also involves several line ministries and agencies. ProjectIDNumber: PO83272 viii INTERNATIONALDEVELOPMENTASSOCIATION PROGRAMDOCUMENTFOR A PROPOSED FOURTHSTRUCTURAL. ADJUSTMENT CREDIT - - TO THE REPUBLICOFMALI I. INTRODUCTION 1. Mali's reforms established solid foundations for a market economy, and poverty declined in recent years. Followingthe establishment o f political and social stability in early 1 9 9 0 ~further macroeconomic and structural reforms, and the devaluation o f the CFA franc in ~ 1994, Mali's annual real GDP growth rate accelerated to an average 5 percent over the period 1994-2002, in large part driven by the private sector, which responded to a more liberalized regulatory environment. Inthis period, Mali developed a relatively strong track record o f policy reform, especially on public expenditure management. The poverty rate declined from 71 percent in1994to 56 percent in2001.1 2. Despite good track record, however, much remains to be done on the structural front to sustainbroad-basedgrowth, strengthenthe financial sector andpublic expenditure management, and improve service delivery to the poor. Under the medium-term macroeconomic framework 2004-07 recently revised and agreed with the IMF, average annual growth is projected at about 5 percent and current account deficits o f about 6 percent o f GDP. During2005, prudent fiscal policy management, especially expenditure management will be key to maintaining macroeconomic stability, efficient mobilization and allocation o f public resources, and effective service delivery, which is critical for further poverty reduction. It will also underpin favorable investment climate for private sector growth. There i s also a need for strong financial system with limited incidence o f bad loans and fewer constraints on lending to small and medium-size Malian entrepreneurs and farmers, as a prerequisite for broad-based growth. These are the issues to be addressed bythis operation. 3. The proposedproject supports the authorities' objectives and policieselaboratedin the Poverty Reduction Strategy Paper (PRSP) (2002) and the Bank's CAS (2003). The PRSP was endorsed by the Bank and the Fund Boards and is supported by the donors. This strategy rests on: (i) accelerating shared, private-sector led growth; (ii) strengthening institutions, govemance andparticipation; (iii) developing humanresources and access to basic services; and (iv) strengthening basic infi-astructure and productive economic activities. The proposed project expounds mainly on the first two pillars o f the PRSP and, by helping promote growth and strengthen expenditure execution, it supports poverty reduction and social objectives. The proposed operation's selectivity and limited scope builds on the lessons o f Bank involvement in stressing advantages of flexible, graduated operations with simpler, robust design closely aligned with the client's priorities. 4. The borrower's commitmentto and ownership of reforms and the proposedSAC is deemed adequate and evidenced by the track record under SAC I11and the ongoing IMF- 'National poverty rate based on per capita consumption. Source: Mali: Millennium Development Goals: Diagnostic and Tools,World Bank (draft), December 2004. 1 supported PRGF program, but slow progress with cotton sector reform has held the country from accessing a wider Bank support in the form of PRSCs.* The government's reform ownership and commitment i s evident in its completion o f the first phase reforms under SAC 111, its request for a new operation, and its ongoing implementation o f the PRSP. Followingan IMF-supported PRGF, which expired in2003, the authorities reached an agreement on a new PRGF which was approved by the FundBoard in June 2004. This new PRGF agenda encompasses revenue mobilization, prioritizing expenditures, and supporting sustainable growth through faster human capital accumulation and private sector development, including via privatizations in the key sectors o f cotton and telecommunications. Progress to date under the PRGF arrangement has been broadly satisfactory and the IMF has completed its first review under the arrangement. The Bank and the Fund coordinate closely in the structural policy dialogue. For example, under the agreement with the World Bank and the IMF, priority poverty- reducing budgetary expenditures will be protected as long as the program remains on track and sufficient external assistance i s secured. At the same time, however, Mali's reform has not advanced far enough in the cotton sector area (e.g., privatization has proved slow and the financial position o f the cotton company poses a risk to fiscal sustainability) to merit programmatic support from IDAthrough such instruments as PRSCs. 5. Because Mali is not yet ready for the PRSC support, SAC I V is envisaged as a transitional instrument that builds on the lessons of the SAC 111, while supporting some elements of the wider policy agenda and providing a framework for the medium-term policy dialogue with the authorities. As a result, the SAC IV was designed as a limited, one- tranche operation with most policy actions to be completed before disbursement. As such, the emphasis i s on short-term actions mostly implementable by end-December 2004 that in some cases represent just an early step (e.g., audits o f the commercial banks) in a wider menu o f reforms with significant medium-term impact (e.g., clean-up of banks' portfolios and strengthening o f the financial system). This design is hoped to give the Bank the needed flexibility to strike a balance between the support o f the ongoing reforms inthe short term while assisting the authorities to advancing towards a wider reform agenda (and possible PRSC support) inthe mediumterm. As manyreforms will require longer time horizon (e.g., cotton) the SAC IV has also made explicit and agreed with the authorities on certain Post-SAC IV actions as elaborated in the Letter o f Development Policy and the policy matrix to help support medium- term reforms and guide future Bank adjustment operations. 11. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK A. RECENT ECONOMICDEVELOPMENTS 7. Political developments. The Malian democracy has been evolving gradually with democratic elections taking place every five years since 1992 in a consensual and peaceful manner. The ApriVMay 2002 presidential election, won by Mr. Amadou Toumani TourC, was the first democratic transition from one elected president to another. Legislative elections o f July 'The new economic team has strong technocratic credentials, and there is continuity in the government at sub- ministeriallevel, and relatively broad consensus on reform objectives. 2 2002 resulted in a broad coalition government in October 2002 led by Mr. Ag Hamani as no party gained simple majority. But Mr. Ag. Hamani resigned on April 8, 2004. The President appointed Mr.OusmaneMalga as Prime Minister on April 29,2004, and a new government was sworn in M a y 2004. The business environment, notably road transportation, continues to suffer from the protracted stalemate inthe resolutiono f the crisis inCGte d'Ivoire. 8. Macro environment and growth. On the heels of favorable rainfall, economic growth acceleratedto an estimated7.4 percentin 2003 from 4.3 percentin 2002, despite a decline in gold production. The strong economic performance o f 2003 was driven by a very rapid growth in the primary sector, especially in cotton and food crops, that more than offset the decline in gold production. In particular, output o f cereals and rice each increased by 30-40 percent, boosted by favorable rainfall conditions; cotton production surged by 40 percent, reaching a new record, inpart due to a 10percent increase inproducer prices. However, in2003, gold output declined to 54.6 tons from a highlevel o f 66.1 tons in2002. 9. Gross investment and saving rates have been Figure 1.Mali: Real GDP Growth and inflation Rates (1999-2003) highly volatile, reflectinglarge fluctuations in cotton (annual YOchange) and gold production. In 2003, a large build-up in stocks (especially o f cotton) caused non-government investment to jump to over 18 percent o f GDP. Similarly, increases in govemment saving and imputed earnings o f cotton farmers (the counterpart o f the stock -5 buildup), which more than offset a drop insaving o fthe miningsector due to the drop ingoldproduction, helped gross domestic saving to reach 20 percent o f GDP in 2003. 10. Inflation remained under control. Reflecting Figure 2. Mali: Fiscal and Current a 10 percent drop in food prices, together with price Account Balances 1999 -2003 reductions for telecommunications, water, and energy, (Yoof GDP) inflation remains low. In fact, the consumer price index dropped by 1.3 percent in during 2003 due to a decline 1 1 0 , T O infoodprices, atrendthat continuedin2004. 11. The external current account deficit (excluding official transfers) is estimated to have +Current widened to almost 7.0 percent of GDP in 2003 from ext. bal. (left axis) 4.3 percentin 2002. Export volume fell by an estimated +Overall fiscal def. (right axis) 12 percent while import volume increased by about 11 percent andthe terms o f trade deteriorated slightly. 12. Export receipts suffered from lower gold production, and declines in tourism revenueand cotton exports, the latter resultingfrom transport difficulties associated with the crisis in C8te d'Ivoire. The current account deficit, including official transfers, increased by one and a half percentage point o f GDP to 4.5 percent in 2003. The deficit was more than financed by official assistance, including debt relief under the enhanced HIPC initiative and external budget support, resulting in an overall balance o f payments surplus. As a result, Mali's 3 contribution to the gross intemational reserves o f the Central Bank o f West African States (BCEAO) reached the equivalent o f over 7 months o fimports. 13. On the fiscal front, government revenue increasedto 16.4 percent of GDP in 2003 from about 16 percent in 2002. This was due to higher tax revenues from the mining companies and better collection o f income taxes. Had it not been for the shortfall in transfers from WAEMU (about ?4a percent o f GDP) and ad-hoc exemptions that the authorities granted enterprises to help them cope with effects o f the crisis in CBte d'Ivoire, the revenue outcome would have been even better. 14. Publicexpenditureswere containedto 22.1 percent of GDP in 2003 comparedto the initial budget projection (25.4 percent of GDP) and the 2002 outcome (23.2 percent of GDP). This shortfall reflected much lower-than-anticipated investment expenditures. Despite greater emphasis on social sectors in line with the PRSP, the 2003 investment budget could not be filly executed because o f insufficient project preparation; cumbersome implementation procedures, especially for foreign-financed projects; and human resource constraints. Current expenditures also declined somewhat as a share o f GDP in 2003. Furthermore, following the government's decision to cut electricity and water tariffs, CFAF 5.1 billion (0.2 percent o f GDP) was paid to Energie du Mali (EDM) at end-December 2003 to compensate it for the resulting revenue losses in2003. 15. The government continued to make progress in strengthening public expenditure management.Reforms have been directed at improving budget preparation and execution, and making public consolidated government financial information. On the govemance side, intemal andexternal audits are beingstrengthened. Inaddition, the audit section of the SupremeCourt is beingreinforced and an Auditor General was appointed inMarch2004. 16. Recent monetary and financial developments were marked by the BCEAO reduction of the discount rate by 200 basis points to 4.5 percent between mid-2003 and early 2004 inresponse to the decline ininflation inthe WAEMU, the decline ininterest rates in the euro area, and the high level o f intemational reserves. However, this monetary easing apparently has had no major impact on bank lending because o f banks' high level o f free reserves. Broad money continues to rapidly expand, growing by 22 percent in 2003. The financial condition o f the banking system may have improved slightly in2003, with the ratio o f non-performing loans to gross bank credit to the economy declining by about one percentage points but still remaining high at 18 percent. 17. Finally, Mali has made good progress in observing the WAEMU convergence criteria, but more efforts are still neededwith regard to tax and external current account deficit. The level o f tax revenues has to be raised to at least 17 percent o f GDP, andthe external current deficit has to be lowered. Mali's trade regime shared with other WAEMU members i s considered relatively open. The country enjoys also the import duty exemptions arising from the Cotonou Convention, and is eligible for the benefits o f the African Growth and Opportunity Act inits trade with the UnitedStates. 4 B. OUTLOOK AND FINANCINGREQUIREMENTS Growth and InflationOutlook 18. Mali's strong growth in 2003 weakened significantly in 2004 to only 2.2 percent in large part because of major exogenous shocks. This was because of: (i) low rainfall and the extensive damage o f locust infestation on the agricultural production; (ii)declining gold production; (iii) continuing uncertainties related to the regional impact o f the C6te d'Ivoire crisis, which has affected the business climate and road transport and trade between Bamako and Abidjan; and(iv) deteriorating terms o ftrade inthe secondhalfo f2004. 19. Inflation remains under control mainly because of the good agricultural year and a decline in food prices and macroeconomic performance under the new PRGF-supported program until end-December 2004 was satisfactory. The estimated CPI declined by 3.0 percent during 2004, largely reflecting a significant decline in food prices. Non-food price inflation has also been low, due in part to reductions in tariffs for electricity and water applied retroactively to January 2004. 20. The implementation of the 2004 PRGFprogram was satisfactory. Indicative targets for end-September 2004 were met. The govemment kept their fiscal program on track despite some revenue and financing shortfalls. The Fund mission that reviewed the budget situation in September and November 2004 found that the macroeconomic program was on track At the same time, privatization o f cotton, telecom and banking sectors has been slow and waivers were requested by the authorities on this part o fthe program. 21. Progress with structural reforms has been slow and in the summer 2004 the government delayed the privatization of the state cotton company CMDT to beyond the election scheduled for 2007. President Tour6 informed the Bank that the authorities were postponing the privatization o f the state cotton company CMDT by two years to 2008, because o f delays in selecting an investmentbank to advise the government on the privatization, the need for more time to strengthen producer associations, and the Presidential elections scheduled for the Springo f 2007. The IMF's PRGF performance criterion for end-June 2004 on the strategy to privatize the state telecommunications company SOTELMA has also been missed, although the issue is still under discussion. 22. Under the medium-termmacroeconomic framework of the PRGFArrangement, the program targets average.annua1 growth of about 6 percent during 2005-07 and continued low inflation (Table 1). For 2005, the program aims at a rapid recovery from the 2004 slowdown. The real GDP growth for 2005 is, therefore, projected at 5.8 percent, while containingthe inflation rate and containing the external current account deficit to under 6 percent of GDP. To those ends, the overall fiscal deficit excluding grants i s programmed to rise to no more than 1.4 percentage points to 8.8 percent o f GDP (3 percent o f GDP including grants) due to higher health and education expenditures inline with PRSP. 23. Based on the fiscal outcome through end-September 2004, fiscal objectives were achieved, despite significant slowdown in growth and some shortfalYdelay in financing. Revenues were on track while expenditures were kept below budget because o f delays in 5 external assistance. The deficit (exclusive o f grants) was, therefore, below programmed level while public expenditures on education and health monitored under the H P C monitoring remained on track. 24. Fiscal projections for end-2004 indicate that the fiscal programremained on track. The deficit i s projected at about 7 percent o f GDP. The delay in the SAC IV disbursement i s envisaged to be covered by a rollover o f Treasury bills maturing in December 2004 to 2005. In that sense, while the SAC N will be disbursed in2005, it de facto continues to support-with a delay o f a few months-the 2004 fiscal program. Since the 2004 fiscal progam i s ex-post fully financed, and the SAC N will be disbursed in 2005, the following discussion o f financing requirements focuses on 2005. 6 Table 1. Mali: Selected Economicand FinancialIndicators,2002-07 2002 2003 2004 2005 2006 2007 Prop, Proj Prog Proj Projectiom (Annualpercentage changes, unless otherwise indicated) National incomeandprices Real GDP 4.3 7.4 4.7 2.2 6.1 5.8 5.8 6.1 Nominal GDP (in billions of CFA francs) 2,330 2,574 2,699 2,602 2,925 2,753 3,049 3,320 GDP deflator 1.o 2.9 1.5 -1.0 2.1 0.0 4.7 2.7 Consumerprice index (annual 5.0 -1.3 2.5 -3.0 2.5 2.5 2.5 2.5 Extemalsector Exports, f.0.b. 17.6 -11.5 10.9 5.3 5.5 -4.7 12.2 7.4 Imports, f.0.b -8.5 13.7 7.5 4.5 7.9 7.8 4.2 4.6 Exportvolume 31.7 -11.8 3.6 -2.9 4.6 4.2 5.1 5.1 Of which: nonmining 47.3 -1.o 17.4 14.4 1.4 -3.9 -7.1 6.6 Import volume -10.4 11.1 8.3 -0.8 7.7 6.3 4.6 3.4 Terms of trade -9.5 -2.4 9.5 2.4 1.1 -9.8 7.7 1.1 Nominal effective exchangerate (average) 1.5 4.4 ... 1.3 ... ... ... ... Realeffective exchange rate (average) 4.8 1.1 ... -4.5 ... ... ... ... Central govemment finance Totalrevenue 19.2 13.7 8.9 5.9 10.4 12.6 12.5 10.7 Total expenditure andnet lending 16.0 5.3 19.8 13.3 9.0 15.5 5.2 8.9 Current expenditure 10.3 2.5 15.9 12.5 9.2 9.1 10.8 8.8 Capitalexpenditureandnet lending 24.6 9.0 25.0 14.3 8.8 23.4 -0.8 9.0 Money and credit Credit to the govemment 31 -1.8 -7.6 0.5 0.6 ... -3.9 ... ... Credit to the rest of economy 21.6 17.3 9.1 1.4 ... 14.2 ... ... Broadmoney (M2) 28.4 21.9 9.6 6.6 ... 5.9 ... ... Velocity (GDPM2) 3.7 3.4 3.2 3.2 ... 3.2 ... ... Interest rate (inpercent; end ofperiod) 2/ 4/ 6.5 5.0 ... 5.0 ... ... ... ... Investmentand saving Gross domestic investment 5/ 18.5 24.9 20.6 18.8 20.9 21.1 21.5 21.6 Govemment 7.0 6.8 7.7 8.0 7.8 8.2 8.2 8.3 Nongovemment 11.6 18.8 13.1 10.9 13.3 12.9 13.5 13.4 Gross domestic saving 18.5 20.0 17.1 13.9 17.1 13.1 16.0 16.5 Govemment 0.0 1.2 0.4 0.6 0.6 -0.4 1.I 1.5 Nongovemment 18.4 18.8 16.7 13.3 16.5 13.5 14.9 15.0 Central govemmentfinance Total revenue 15.9 16.4 17.0 17.2 17.3 18.3 18.6 18.9 Total expenditureandnet lending 23.2 22.1 24.5 24.8 24.6 27.0 25.7 25.7 Overallbalance(paymentorder basis,excluding -7.3 -5.7 -7.5 -7.1 -7.3 -8.8 -7.1 -6.8 Basic fiscalbalance6/ -1.3 -0.2 -1.2 -1.1 -1.1 -2.1 -0.6 -0.3 Basic fiscalbalance7/ 0.1 1.1 -0.1 0.5 -0.1 -0.8 0.4 0.6 Extemalsector Current externalbalance,including official -3.0 -4.5 -4.3 -4.6 -6.2 -5.9 -7.5 -6.9 Current extemal balance, excludingofficial -4.3 -6.9 -5.1 -6.4 -6.3 -9.0 -7.6 -7.0 Debt-serviceratio 8/ Before debt relief 10.0 10.1 10.5 10.5 10.8 10.4 8.7 9.1 After debtrelief 6.3 5.7 6.4 6.3 6.9 6.9 5.5 6.1 (Inmillionof US dollars, unless otherwise Overallbalanceof payments 138.2 159.3 -99.7 64.2 -144.1 -29.3 -180.5 -188.5 Gross intemationalreserves 594.5 908.7 870.0 1018.8 913.0 1041.8 1021.9 1002.3 (inmonthsof nextyear's imports) 91 5.4 6.9 7.0 6.7 6.7 6.8 6.7 6.2 Exports (inpercentof GDP) 31.9 26.6 26.9 27.7 26.2 25.4 25.6 25.2 ImuortstinDercentof GDPi 32.0 32.1 31.4 32.6 32.4 33.3 31.3 30.4 U.5.dolfar;ate (end of period) 625.5 519.4 ... 498.4 ... ... ... ..I Sources:Malian authorities; and staff estimates andprojections. 1/ Data at end-October for 2004. 2/ Data on a payment order basis. 3/ Change inpercent o fbroad money at the beginning o f the period. 4/ End-of-period interest rate inthe West African Monetary Union money market. 5/ Excluding PESAP; series therefore is slightly different from nafional accounts series on investment. 6/ Defined as total revenue (excluding grants) ?nus total expenditures and net lending (excluding foreign-financed investment). 7/ Defined as footnote 5 above, but also excluding HIPC Initiative-relatedexpenditure and exceptional expenditure financed by World Bank credit. 8/ Inpercent of exports o f goods and services. 91 Goods and semces. 7 2005 Budgetand FiscalRisks 25. The medium term macroeconomic framework underlying the PRGF projects the 2005 fiscal deficit (excludinggrants) to 8.8 percentof GDP or 3.5 percentincludinggrants (Table 2). Under the draft 2005 budget the difficult external economic environment from 2004 and the worse outlook for terms o f trade going forward (with implications for the cotton company deficit-see below), would have resulted in a fiscal financing gap o f 2.2 percent o f GDP. To reducethis gap, the authorities have agreed on additional measures worth 1.3 percent o f GDP. These measures consist o f spending cuts o f 0.6 percent o f GDP which reduce less critical spending while safeguarding poverty outlays; an increase in the petrol excise tax estimated to bring in about 0.6 percent o f GDP; and efforts to raise collection o f non-tax revenues by 0.2 percent o f GDP. The remaining financing gap o f 0.9 percent o f GDP (CFA 24.6 billion) i s expected to be financed by additional support from external sources in the form o f grants. The draft budget i s being adjusted inline with these changes. 26. A key issue in the discussions for the 2005 budget was the treatment of the large deficitprojectedfor CMDT. This deficit is currently projected at CFAF 65.6 billion, equivalent to 2.4 percent o f GDP. This projected deficit i s the result o f internal factors (CMDT's high operating costs andthe establishment o f the purchase price at an unrealistically highlevel, CFAF 210 per k i l ~ g r a m )and ~ external factors (the decline inthe international price o f cotton resulting from increased third country production and the depreciation o f the dollar relative to the euro to which the CFAF i s linked)4. The projected deficit i s expected to be partially met by CMDT through use o f undistributed benefits from the previous campaign (CFAF 10.4 billion), cost savings by CMDT (CFAF 7 billion), and contributions by CMDT's external partner, Dagris (CFAF 10.7 billion). The residual deficit, CFAF 38.4 billion, i s to be covered by a budgetary transfer to CMDT. This transfer i s accommodated in the budget by additional grant financing from donors (notably the EU and the Dutch) o f as much as CFAF 24.6 billion and aforementioned combination o f tax increases and expenditure reductions. IDA has reviewed the proposed expenditure cuts and has concluded that they do not compromise the development objectives o fthe budget. FinancingRequirementsin2005 27. For 2005, externalfiscal financingrequirements,after HIPC debt relief, amount to about CFAF 109.8 billion or about US$202 million (at CFAF543/US$); SAC IV would provideUS$25 million (about 12.4 percent) (Tables 1-2). The remainder i s anticipated to be mobilized from additional external support, including a possible $25 million SAC V5,later in calendar 2005, EU finance grant form, and support from a number o f other donors (The Netherlands, Sweden, France, EU, ADB, and Canada). BOPbudget support to Mali i s expected to help ensure that the implementation o f Mali's poverty reduction program remains on track. Under the pricing formula the price should have been set at CFAF 190per kilogram. The producer price o f CFAF 210 per kilogram was based o n a cotton price assumption o f U S 61 cents per pound and an exchange rate of US$ = CFAF544. Currently, the cotton prices is U S 53 cents per pound and the exchange rate i s US$ = CFAF480. Under the Bank's new policy, SAC V would be prepared and processed as a Development Policy Credit; 8 Debt relief under the Enhanced HIPC Initiativewill also contribute (with about third of the total) to closing the financing gap. Table 2. Mali: CentralGovernmentFinancesandFinancingRequirements 2002 2003 2004 2005 Revised Revised Actuals Program. projection Program. projection (Inbillions of CFA francs, unlessotherwise Revenue and 456.7 536.5 578.4 565.4 636.6 648.3 Total 370.9 421.8 459.2 446.5 507.0 502.7 Budgetary 337.2 384.4 420.2 407.5 467.0 462.7 Tax 306.0 349.2 383.7 390.9 427.3 434.1 Nontax 31.2 35.2 36.4 16.7 39.7 28.5 Special funds and annexed 33.7 37.4 39.0 39.0 40.0 40.0 Grants 85.8 114.8 119.3 118.9 129.6 145.6 Projects 69.2 63.1 74.3 74.3 80.5 75.2 Budgetar 16.6 51.7 45.0 44.6 49.2 70.4 Total expenditure and net 540.6 569.0 660.4 644.4 720.1 744.4 Budgetary 511.7 535.5 625.7 614.8 684.5 670.9 Current 308.7 316.3 366.7 355.8 400.6 388.2 Wages and salaries 93.5 106.2 122.0 122.0 134.7 140.2 Goods and 109.0 107.6 139.2 138.2 159.2 143.3 Transfers and 87.8 83.8 87.0 77.0 87.4 85.1 Interest 18.4 18.8 18.6 18.6 19.3 19.6 Capital expenditure 203.1 219.2 259.0 259.1 283.9 282.7 Extemally 140.3 140.9 169.0 169.0 181.4 185.2 Loans 71.1 77.8 94.8 94.8 100.9 110.0 Grants 69.2 63.1 74.3 74.3 80.5 75.2 Domestically 62.7 78.3 90.0 90.0 102.5 97.5 Special funds and annexed 33.7 37.4 39.0 39.0 40.0 40.0 Net -4.9 -3.9 -4.3 -9.4 -4.4 33.5 ofwhich CMDT 0.0 0.0 0.0 0.0 38.4 Measures ... -13.0 ... 0.0 Overall fiscal balance, payment order Excluding -169.7 -147.2 -201.3 -184.8 -213.1 -241.7 Including -83.9 -32.5 -82.0 -66.0 -83.5 -96.1 Overall fiscal balance, cash Excluding -171.0 -136.4 -209.5 -193.0 -213.1 -241.7 Including -85.2 -21.7 -90.2 -74.2 -83.5 -96.1 Financing 85.2 21.7 90.2 74.2 83.5 96.1 Extemal financing 88.5 106.1 114.1 90.9 125.6 141.5 Loans 102.6 112.7 124.7 101.6 133.6 153.2 Project 71.1 77.8 94.8 94.8 100.9 110.0 Budgetary 31.5 34.9 30.0 6.8 32.8 43.2 Amortizatio -41.6 -36.8 -40.3 -40.3 -37.7 -42.9 Debt relief, HIPC 27.5 30.1 29.6 29.6 29.7 31.2 Domestic financing -3.4 -84.4 -23.9 -16.7 -42.2 -45.4 Banking -9.9 -49.6 2.9 4.1 -3 1.3 -32.0 Privatization 29.4 1.o 3.2 9.2 4.5 4.5 Other -22.9 -35.8 -30.0 -30.0 -15.4 -17.9 Unidentified budgetary 0.0 0.0 0.0 0.0 0.0 0.0 11Allocates unidentified budgetary assistanceusing the rule of 60 percent grants and40 percent loans used inthe debt 2/ The figures presentedin the authorities fiscal table have been reclassifiedto reflect the agreedstatistical treatment o f payments to SOTELMA and net 31 Excluding wages in autonomous public agencies 9 111. IMPLEMENTATION OF THE 2003 PRSPAND BANKSUPPORT A. PRSPIMPLEMENTATION IN 2003-2004 28. Mali is in the middle of implementing its first Poverty Reduction Strategy (PRS) (May 2002) covering the period 2002-2006. The PRSP represents the Government's unified framework o f its medium term policies and strategies and i s the main document for alignment and harmonization with the donors. A recent progress report was prepared summarizing achievements in 2002-04 and outlining policy objectives for 2004-06. The report was subject to regional consultations before being validated by a seminar composed o f representatives o f government, civil society, the private sector, and the donor community. 29. The policydirection and quantitativeobjectivesofthe PRSP are basedon a vision of sustained and poverty-reducing growth. The PRSP specific objectives are organized around four major pillars: (i) pre-requisite: creating a macroeconomic environment for dynamic and shared growth; (ii)ensuring institutional development and improved governance and participation; (iii)developing human resources and access to basic social services; and (iv) developing basic infrastructure and productive sectors. 30. To date Mali has made satisfactoryprogress towards these PRSP objectives. a Pre-requisite pillar. Mali has been maintaining a stable macro environment with the consumer price index declining by 1.3 and 3 percent, respectively, since 2003-04 reflecting a decline infood prices following an exceptional cereal production. The overall fiscal deficit, on a payment order basis and excluding grants, was reduced to 5.1 percent o f GDP in 2003 compared with 7.3 percent in 2002, and was largely covered by foreign financing. The projected deficit for 2004 i s 8.8 percent o f GDP. Mali's economic situation improved significantly in 2003 in spite o f the crisis in CBte d'Ivoire: real GDP growth was 7.4 percent in2003 compared with 4.3 percent in 2002. However, reflecting unfavorable external conditions (highprice o f oil, locust infestation), Mali's performance deteriorated in2004, with a projected growth rate o f only 2.2 percent. a The first strategic pillar: institutional capacity building. The Malian authorities have undertaken major administrative and institutional reforms inthis area. These reforms aim to ensure a good management o f public affairs, social peace and stability without which no sustainable development action i s possible. They include: (i) improvement o f the performance o f public administration; (ii)continuation of the decentralization/ deconcentration process; and (iii)improvement o f the management o f public expenditures, rehabilitation o fjustice, fight against corruption and financial delinquency. a The secondpillar: sustainable human development and access to basic social services. > With regard to the health andpopulation component, objectives for 2002-03 have been satisfactorily attained, notably with respect to the extension o f health coverage and the organization o f the referral system. However, further efforts need to be made on vaccination, prenatal, and childbirth indicators. Moreover, 10 despite the availability o f HIPC resources, the share o f health in the current expenditure o f the central government budget is increasing too slowly. To improve the efficiency and coverage inthe health sector, the Ministryo f Health i s focusing on: (i) increased vaccination rates throughout the country; (ii) improving the quality o f services, with the creation o f a national Agency for Evaluating Hospital Services in 2002; and (iii) working more closely with the private sector to harness this potential, since the poor do make extensive use o f private services. Regarding the population subcomponent, the government adopted in April 2003 the updated National population Policy (NPP) the overall objective o f which i s to contribute to the improvement o f the standard and quality o fpeople's lives. > Conceming the education and literacy component, the preparation and implementation o f the ten-year Education Development Program (PRODEC) has been speeded up with the effective start-up o f the Investment Program o f the Education Sector (PES) jointly financed by the Central Government and donors. Moreover, the development o f a MTEF for the Education Sector will increase the capacity o f PRODEC to meet the PRSP and MDG targets. In particular, the objective o f 64.0 percent o f gross schooling rate (GSR) in the first cycle in 2002 has beenachieved and slightly exceeded (64.3 percent). It i s likewise for the GSR o f girls: 53.7 percent achieved as against 52.0 percent targeted. In addition, significant efforts have been made in improving budget allocations to the education sector, which have permitted the accelerated implementation o f PRODEC through the building o f classroom and recruitment o f contractual teachers, notably with resources from the enhanced HIPC Initiative. However, there i s the persistence o f the low quality o f the Malian educational system despite the improvement o f the pupil-teacher ratio, and inadequate numbers o f classrooms and teachers in the Teacher Training Institute (IFM).As a result, the objective o frecruiting and training 2,500 teachers was not reached. > With respect to drinking water and sanitation component, important institutional reforms and actions were conducted in 2002 and 2003, allowing better identification o f the difficulties inherent to this sector including, among others, delay in the transfer o f responsibilities skills, and the number o f entities interveninginthe sector with different strategies. e The thirdpillar: development of basic infrastructure and support toproductive sectors. This pillar aims at improving the economic environment and profitability o f factors o f production with the view o f attracting investment, creating jobs, increasing revenues, accumulatingwealth, and reducing poverty. 9 With respect to transportation infrastructure, institutional reforms have been undertaken in order to improve connections within the country and with the outside world and facilitate the movement o f people and goods. Regarding airport infrastructures, Government has decided to put in concession the management o f the Airports o f Mali (ADM). The Dakar-Niger railway has been successfblly 11 leased, and private operators are committed to improve the capacity and quality and safety o fthe service. > Concerning telecommunications, Mali's 1 per 100 persons ratio o f telephone penetration i s particularly low compared to other countries in the region. Moreover, telecommunications services are unequally distributed over the national territory, and basic communication tariffs are high reflecting the monopolistic structure o f supply. To address these issues, the authorities have decided to reform and open the sector to competition. > In the energy sector, progress has been made in increasing the national rate of access to electricity from 9.3 percent in 2001 to 12 percent in 2002, with objectives o f 13 percent in 2004 and 14 percent in 2005. In addition, the Malian Agency for the Development o f Rural Electrification and Domestic Energy (AMDER)was created. > To support productive sectors, the authorities emphasize the development o f the rural sector with the adoption o f the Government Program for the Development o f 50,000 irrigated hectares between 2003 and 2007. Restructuring o f the cotton sector, however, i s taking a longer time than anticipated. The authorities have delayed the CMDT privatization and are inthe process o f reflecting on the pace and scope o f cotton sector restructuring in light o f prevailing world market conditions. Considerable efforts are also underway inthe fields o f equipment and credit to producers, the development o f other agricultural products, the promotion and extension o f the results o f agricultural research in order to achieve food security and self-sufficiency. Progresstowardsthe MDGs 31. Mali has not yet completed the government's first report on the Millennium DevelopmentGoals (MGDs) which should providecomprehensiveinformationof the levels of monitoringindicators. But preliminary inspection o f the main trends with respect to MDGs indicates that Mali has the potential to achieve the overall objective o f bringing down poverty and hunger provided that growth is more redistributive than inthe past. On the social front, the current indicators are mixed. Progress in some education sectors (e.g., primary schooling) contrasts with setbacks inothers. It i s likewise inhealth. This makes the attainment o f the all the MDGobjectives unlikelywithout more robust and shared growth inmediumterm coupledwith a more effective service delivery to the poor. With respect to HIV/AIDS, it i s very likely that Mali will achieve the MDG objective. As to gender equality, based on the current trends it is more likely that Mali achieves the overall objectives by 2015, notably with respect to health and education. 12 B. BANKSUPPORTUNDERTHE 2003 CAS 32. The Bank's CAS (July 2003) emphasizessupportfor the PRSPand improvedpublic resource management for reducing poverty. The Bank's CAS is designed to support the implementation o f the PRSP and to complement interventions o f other donors. Inparticular, the Bank was closely involved in the preparation o f the 2002 United Nations Development Assistance Framework ( W A F ) .The program selectively focused on the following key themes: 0 Promoting growth by combining policy support from SACSand, potentially, PRSCs with an approach o f increasing agricultural productivity and diversification through rural sector operations andnon-rural growth drivenby the private sector. 0 Developing human resources by working with donors to strengthen programmatic approaches inthe health and education sectors. 0 Improving public finance management and governance by focusing on public sector financial accountability mechanisms covering public expenditure, procurement, and financial management systems. 33. Mali is currently in the CAS base-casescenario and the key instruments of the CAS in support of these themes were the following:(i) support via Structural Adjustment Credits (SAC); (ii) community driven development operations supporting productive sectors and fight against HIV/AIDS; and (iii)traditional investment operations targeting specific needs in transport and private sector development to enhance the competitiveness o fMali's economy. The Mali SAC IVYtherefore, represents a central instrument o f the on-going CAS to support the macroeconomic stability and public sector management. While SAC IV provides broad budget support for strengthening fiscal discipline and public expenditure management, and laying foundation for stronger financial sector, another Bank project under preparation (e.g., Agricultural Competitiveness and Diversification project) has focused on the more sector- specific rural development agenda (e.g., innovation, irrigation, improvement o f agricultural supply chain etc.). More detail on the SAC IV position within the current CAS and its relation with other projects inthe portfolio, andthe relations with the IMF, is found inAnnex 7. 34. Basedon the past record, the borrower's commitment to and ownership of reforms i s deemedadequate, but slow progresswith cotton sector reformhasheldthe countryfrom accessinglarger volume of Bank support in the form of PRSCs. The ownership is reflected in the track record under SAC 111, the ongoing IMF-supported PRGF program, and the implementation o f the PRSP. Under SAC 111, Mali has in the past three years made solid improvements in public expenditure management (as this component was rated highly satisfactory by the ICR) and also satisfactorily overcame the cotton crisis o f 2001. However, the broader development objectives have not yet been met, as the structural agenda i s unfinished, The country remains exposed to significant risks from fluctuating cotton prices and there is a needto deepen the reform agenda inthe sector. As anticipated inthe CAS, SAC IVbridges the SAC and PRSC worlds by initiating further reforms inthe public expenditure management area and financial sector while awaiting a deepening o f reforms in the cotton sector. Cotton sector 13 reforms under the credit are focused on those areas which impact directly on the budget (i.e., the price mechanism). The SAC IV was originally envisaged as a US$55 million, two tranche, operation. However, in light o f the above described developments in the cotton sector, SAC IV has been reduced to a US$25 million, single-tranche, operation, potentially to be followed by another US$25 million single-tranche, SAC V which i s also expected to be disbursed in2005. 35. Finally, the Bank coordinatedclosely the work of the SAC I V with the IMF team and other bilateral partners, especially in the area of cotton sector reform. Following an IMF-supported PRGF, which expired in 2003, the authorities have reached an agreement on a new PRGF which was approved by the Fund Board in June 2004. The first review o f the program i s scheduled for March 7, 2005. This new PRGF agenda encompasses revenue mobilization, prioritizing expenditures, and supporting sustainable growth through faster human capital accumulation and private sector development, including via privatizations in the key sectors o f cotton and telecommunications. The Bank and the Fund coordinate closely the structural policy dialogue. For example, under the agreement with the World Bank and the IMF, priority poverty-reducing budgetary expenditures will be protected as long as the program remains on track and sufficient external assistance i s secured. In the area o f cotton reform, the Bank has broadly shared views and strong collaboration with development partners including AFD, France, EU,theNetherlands, Canada, Sweden, USAID. c. LESSONS THESAC111 FROM 36. The SAC I11 (which was approved in December 2001) supported two areas of reformsthat were criticalfor poverty reductionin Mali: (i) restructuring o f the cotton sector to enhance efficiency and support growth; and (ii) reform o f public expenditure management to improve efficiency and transparency of budget management for poverty reduction. This US$70 million project was designed inthree tranches. The first tranche was disbursed and a supplement extended before project closure on June 30, 2004. According to the ICR (which was endorsed by the OED) the Credit broadly achieved its objectives with respect to macroeconomic performance, and to a significant extent in public expenditure management. The cotton sector reform, however, was less successful, especially with regard to adhering to the timetable for privatization o fthe cotton company and limitingthe fiscal risks to the budget. 37. Based on the completed Implementation Completion Report (ICR), the following were the main lessonsfromthe SAC I11for the Bank's future adjustmentoperations. 0 Development policy operations focusing on a limited structural reform agenda are more likely to succeed than ambitious or complex operations in countries with weak institutional and administrative capacity. 0 Restructuring and/or privatization o f SOEs should be planned over the medium term rather than short-term periods; the focus should be on best practice in privatization; and single adjustment operations may not be the best way of achieving specific privatization objectives. 0 Effective coordinationwith the IMFand other donors is critical. 14 0 Ensuring that key implementing institutions have adequate resources i s important for implementation (e.g., TA). 38. SAC I V directly builds on these lessons by focusing on: (i) selective and limited agenda; (ii) one-tranche design of the operation and emphasis on actions before disbursements; (iii)coordination with the IMF; and (iv) coordination with other TA operations(e.g., financialsector project)designedto buildcapacity.The SAC IV component emphasizing the fiscal (including the links between the cotton sector and the budget) and financial sector underpinnings o f growth i s building on the solid macroeconomic performance under the SAC 111. Its second component on public expenditure management and transparency builds on the strong record o f achievement under the SAC I11in order to strengthen budget execution and expenditure controls, and further improve transparency and advance the remaining decentralization agenda. Also, SAC IV builds on the analytical work stressing advantages o f flexible, graduated operations with simpler, robust design closely aligned with the client's own priorities. Finally, by focusing on a limitedbut robust agenda where the authorities have shown strong interest and credible progress, the Bank i s encouraging country-led process o f reforms. Such processes stand a better chance o f being fully owned and implementedby the government, especially inthe context of limitedimplementation capacity. IV. THE PROPOSEDFOURTH STRUCTURALADJUSTMENT CREDIT A. THECONTEXTOFTHE SAC Iv 39. Despitegood recentperformance,Malifaces importantchallenges to sustain growth for poverty reduction. Much remains to be done to strengthen fiscal discipline, enforce hard budget constraints on state enterprises while improving their management (e.g., in the cotton sector), strengthen the financial sector and public expenditure management, and improve transparency and service delivery to the poor. Prudent fiscal policy management, especially expenditure management will be key to macroeconomic stability, efficient mobilization and allocation o f public resources, and effective service delivery. These policies will also underpin favorable investment climate for private sector growth. A strong financial system with limited incidence of bad loans and fewer constraints on lending to small and medium-size Malian entrepreneurs and farmers i s also a prerequisite for broad-based growth. These are among the key issues and reforms to be supported by this Credit. 40. The internationalcontext of the SAC IV, affecting equally all West African cotton producers, is characterized by a significant decline in world cotton prices. World cotton nominal prices dropped from 85 cents/pound in 1995/96 to 69 centdpound in 2003/04 and then further to 52 centdpound in 2003/04 (The Cotlook Northern Europe). In part, this i s related to the advent o f the genetically modified cotton production that led to a major expansion in cotton output in West Africa's competitors such as China. This changed intemational environment, against the backdrop o f high local producer prices and excessive producer costs o f the Malian cotton company, results in potentially significant losses for the company and, therefore, fiscal risks for the govemment. InMali, this problem is dealt with by a combination o f fiscal measures and financing to maintain a consistent fiscal and macroeconomic framework duringthe period of 15 the program (see below section B.). Moreover, a new pricing mechanism that aims to minimize fiscal risks and make producer prices more responsive to world market conditions i s put inplace inorder to dealwiththe longertermimplications ofthe underlyingproblems ofthe cottonsector. However, application o f this mechanism in Mali is likely to lead to sharply lower cotton prices for domestic producers with implications on poverty (see Annexes 8 and 9). At the same time, the problem is not exclusive to Mali: it affects various countries in the region differently depending on the country-specific levels o f local producer prices and their cost structures. As such, other countries in the sub-region are likely to face a similar need to respond to a more unfavorable international cotton price environment thaninthe past. 41. The Credit supports the authorities' reforms (PRSP 2002) and represents a key operation of the Bank's on-going CAS (2003). The PRSP was endorsed by the Bank and the Fund Boards and is supported by the donors. Its strategy rests on: (i) accelerating shared, private-sector led growth; (ii)strengthening institutions, governance and participation; (iii) developing human resources and access to basic services; and (iv) strengthening basic infrastructure and productive economic activities. 42. The government is committed to the reforms supported under the SAC I V even thoughslow cottonreformshaveheldthe countryfrom accessingwider PRSCsupport.The commitment i s evidenced by the government's request for this operation and intensive collaboration inits preparation, the track record under SAC 111, the implementation o f the PRSP, and also the ongoing IMF-supported PRGF program. The Bank and the Fundcoordinate closely the structural policy dialogue. There is also strong coordination between the Bank and the bilateral donors in the cotton sector. At the same time, it i s now clear that most o f the cotton sector reforms will inevitably require a longer time horizon for implementation. 43. The SAC IV, therefore, is designedwith limitedscope, time horizon(essentially2004 and the first half of 2005) with the objective of acting as a transition instrumenttowards future adjustment operations and possible PRSCs. SAC IV is a one-tranche $25 million operation focused relatively narrowly on strengthening macroeconomic fbndamentals and improving public expenditure management, transparency and controls. As such, it emphasizes ex-ante actions inthe short term to help move the broader reform program forward andprovide a vehicle for the broader dialogue with the authorities on medium term issues (e.g., cotton sector), which will inevitably require more time for implementation. Also, clear markerdtriggers and actions have been agreed in the letter o f development policy and the policy matrix to assist the transition towards the subsequent adjustment operations. 44. Specifically, the SAC IV, in support of the authorities' reforms, will have the followingprincipalcomponentsandobjectives: 0 Contributing to broad-based growth and poverty reduction by strengthening fiscal policy andfinancial sector underpinnings of stable, long-run growth. a. Fiscal policy will be strengthened, inter alia, by: (i)promoting fiscal discipline and reducing fiscal risks to the budget from the cotton company finances; and (ii) strengthening the link between the PRSP and the budget; . 16 b. Financial sector reform will be advanced by taking steps towards strengthening o f the financial system(e.g., preparingthe ground for the clean up ofbad loans) and limitingthe risk o f bank insolvency. This is expected to result ingreater access to credit and broader financing alternatives to Malian entrepreneurs and farmers thereby promoting financial deepening and economic growth. 0 Improving efJciency, accountability, and transparency in public expenditure management. This will be achieved by strengthening budget preparation, execution, and controls, increasing transparency and disclosure including at decentralized levels, andhelping ensure better monitoring o f and access to basic services bythe poor. B. STRENGTHENING THE FISCAL AND FINANCIAL SECTORS StrengtheningExpenditurePlanning Maintaining a Coherent Macroeconomic Framework 45. The objectiveof the Government'sbudgetprogramfor the medium-termis poverty reduction,while preservingmacroeconomicstability and debt sustainability.At the macro level, in line with these objectives, the authorities aim to limit the budget deficit to the domestic and external financing available, avoiding any arrears. At the same time, the authorities' 2005 budget and the structure o f public expenditures reflects the priorities o f the Poverty Reduction Strategy Paper (PRSP). 46. In June 2004, the authoritieshave concludeda three-year PRGF arrangement with the Fund and the program remains broadly on track6.Inthe context o f the on-going PRGF program with the Fund, the government has committed to maintainprudent fiscal policy within a consistent macroeconomic framework. The 2004 budget was executed broadly in line with the program; the main adjustment was to allow a higher level o f domestic financing o f the budget deficit than originally envisioned to accommodate delayed disbursement o f SAC IV7. The Fund and the Government were able to reach agreement on the 2005 budget. Among the policy measures were increases in tax revenues on the order o f CFAF 19.2 billion resulting from adjustments in the levies on domestic petroleum products. These adjustments are already underway. In addition, the Government and the Fund agreed to expenditure cuts o f CFAF 16.7 billion from projected levels. These reductions have been reviewed by IDA. These measures, together with the additional donor grant financing mobilized to meet the cotton sector deficit, have enabled the overall macro framework to remain aligned with mediumterm fiscal objectives while accommodating the large budgetary transfer to CMDT. The first review o f this program i s scheduled for March 7,2005 'Discussion of the FirstReview ofthe PRGF arrangement is scheduledfor February23,2005. Inthe 2005 budget, this additional domestic financing is to be liquidated early inthe year upondisbursement of SAC I V funds. 17 Minimizing the Budget Risks Related to the Financial Situation of the Cotton Sector 47. Pending the restructuring and eventual privatization, the cotton sector in Mali, which is dominated by two government owned companies, poses a risk to the budgetary stability. The Compagnie Malienne de Dkveloppement des Textiles (CMDT) and the smaller Huilerie Commerciale du Mali (HUICOMA) have been slated for privatization but the schedule CMDT privatization has been postponed until 2008, accentuating the importance o f sound financial management inthe interim period. This i s even more so because the financial situation of these companies, particularly o f CMDT, has inthe past impacted on fiscal stability. 48. In 2004, with some restructuringand favorable cotton prices, there have been no budgettransfersand the CMDT has turned a modest profit;as a result, no fiscal issues arise inthis context in2004. 49. In 2005, however, there is a large projected deficit for CMDT which has complicatedagreement on the budget for that year. While the projected deficit is, thanks in large part to the additional financing made available by other donors, expected to be covered, this experience highlights again the need for more fundamental sector reforms, to reduce the risks to the budget. A key first step, in this regard, is the implementation o f the new cotton pricing mechanism which has the potential to align domestic cotton prices more closely to market prices and, thereby, reduce the need for budget transfers (see below). Improving the Alignment between the PRSP, the Medium-term Expenditure Framework (METF),theMacroeconomic Framework, and theAnnual Budget 50. Since 1998, the Government of Mali has made solid progress in aligning its PRSP with the MTEF andthe annualbudget.In1998, the government adopted budgetprogramming as the main tool for budget planning and execution. Budget programming i s an annual exercise that involves the preparation by each ministry o f a three-year forecast o f expenditures by program, subprogram and activity, linked to objectives and supported by results indicators. The first PRSP was prepared in 2002. This was followed by the introduction of a Medium-term Expenditure Framework (MTEF) in 2003: the MTEF is updated each year and provides a three- year forecast o f expenditures by sector for all the line ministries. The Macroeconomic Framework, typically produced around the beginning o f the year, provides key macroeconomic targets (e.g. growth rate, inflation rate) and corresponding macroeconomic projections which underlie the MTEF and the budget. At the same time, however, these various instrumentswere not always mutually consistent and there was a question o f the realism and updating o f their key assumptions. 51. The Government now intends to strengthen the consistency and coherence among these planning instruments, to ensure a gteater transparency of sectoral allocation and execution of public expenditures. A tight link will be established between the PRSP and the Budget and, in particular, through the alignment with the financial envelopes set in the MTEF. As a first step, the Government prepared in September 2004, a report that analyzes the sectoral allocations for the 2005 budget according to the priorities established inthe PRSP. Inspite o f a slight decrease inthe proportions o f total budgetary resources allocated to health and education, 18 the draft 2005 budget ensures the coverage o f the updated needs o f the education and health sectors specified for 2005 intheir respective MediumTerm ExpenditureFramework. 52. Currently, two key Ministries for poverty reduction-Education and Health-are fully engaged in the medium-term planning process through their sectoral MTEFs. The Ministries o f Equipment and Transport, and o f Agriculture are in the process o f preparing their first sectoral MTEF. Specifically: 0 The Ministry of Education finalized, in September 30, 2004, its METF for 2005-8 after the 2005 budget arbitrationprocess. 0 The Ministry o f Health updated its MTEF2005-7 for the year 2005 inOctober 2005. Integrating the PRSP and the Budget 53. The Government plans to integrate progressively the PRSP into the budgeting process. PRSP targets and instruments shouldbereflected inthe annualbudgets to ensure broad consistency. This should also ensure that there i s a feedback from implementation and periodic assessment o f the PRSP to the annual budgetprocess. To these ends, the reports o f the thematic groups for the follow-up of the PRSP's second year of implementationhave been completed in December 2004. The World Bank will be involved in the process o f finalizing the report, to ensure that it takes into account the I M F N o r l d Bank recommendations on the first year of implementation o f the PRSP. Improving Investment Planning and Monitoring 54. The computer applicationfor the "Three Year Investment Program" and the "One Year Special Budget Investment Program", managed by the Ministry of Planning, has limitations and is not compatible with the computerized application used by the Budget Directorate. Specifically, the Ministry o f Planning communicates the investment programs to the Budget Directorate for consolidation in the budget document. But the transfer o f the information to the budget i s effected manually and often with delays. To deal with these issues, the Ministryo f Planning i s developing a new system that will provide increased functionality and data transferability. To this end, under the post-SAC IV measures agreed, the Ministry intends to complete system testing; and make the system operational in 2005. These actions will result in more efficient, computerized transferability o f data to the budget, contributing to greater consistency and coherence between the two planninginstruments. MaintainingFiscalDiscipline Updating theAction Planfor the Cotton Sector Privatizations (CMDT and HUICOMA) 55. In 2000, a crisis in the cotton sector led to a massive Government interventionand financial support of the CMDT. The Government, in a Letter of Development Policy for the Cotton Sector (LDPCS), committed to privatize C M D T in 2006. The Government, however, following an exchange of letters with the President o f the World Bank during July 2004, has 19 postponed the privatization o f CMDT to 2008. HUICOMA was to be privatized under the SAC I11project, but the tendering was unsuccessful andthe Government has restartedthe privatization process; as o f writing, the Government i s negotiatingthe privatization o f HUICOMA. 56. In this context, the governmenthas made available to the Bank, during September 2004, a revised detailed Action Plan for the privatization of CMDT in 2008 and for the privatizationof HUICOMA. However, the proposed plan for CMDT privatization lacks key details relating to its implementation(e.g., the selection o f an externalprivatization advisor). Establishing a Supporting Action Planfor the Reform of the Cotton Sector 57. The Government plans to start the process for the preparation and adoption of a Supporting Action Plan, which specifies the measures accompanying the cotton sector reform.The planwouldhelp providethe legal andinstitutional framework for privatization. Improving the Cotton Purchase Price mechanism 58. Part of the large CMDT deficit is attributableto the implementationof the pricing mechanism.Inparticular, there is ambiguity as to the role ofthe Support Fund(which exists in principle, but is in reality unfunded). As a result, during the price negotiation with the cotton grain producers, there i s a tendency to set the cotton price at a high level, inconsistent with market conditions. This problem was compounded by an emphasis in the price setting mechanism on covering production costs rather than using the mechanism to signal to farmers the market conditions and the viability o f cotton production. The result was the establishment o f a cotton price at an excessively highlevel with the resulting CMDT deficit to be financed by the Government as the major shareholder. 59. To address this problem, the Governmenthas agreedwith IDA and other donors on a new pricingmechanismwhich is to be implementedbeginningin the 2005/06 campaign, This mechanism is described in a Protocol, which is signed by the three main parties: the Ministryof Finance, the management of CMDT, and representatives of producer organizations. Under this mechanism, there are two prices: abase price, which is set early inthe campaign, and a final price, which results from the marketing o f cotton. The base price i s to be set at a level that promotes sustainable development o f the sector while reflecting the interests o f the different agents operating inthe sector. It is proposedthat over the period 2005/06 -2007/08 this price be set in the range of CFAF 160 - 175 per kilogram, a level that i s roughly in line with historical averages and i s significantly below the price level during the current campaign (CFAF 210 per kilogram). The base price will be announced in early April o f each year'. Inthe event that the actual market price exceeds the base price, there i s a formula for sharing o f the resulting surplus among the sector parties (i-e., government, producers, and CMDT). There i s also a provision (Article 8 o f the Protocol) which specifies that, inthe event that by August of the year preceding the marketingof cotton, the initial baseprice is expected to be above the future market price, the base price should be adjusted downwards. Ifpresent market conditions (early 2005) prevail, this would imply a base price considerably below CFAF 160 per kilogram, the lowest point of the * Sowingof cotton begins inJulyJAugust with harvestingtowards the end of the calendar. Cottonsales occur inthe first halfof the following year. 20 range. In addition, the Protocol makes clear that the Support Fund i s only to be used, to the extent that it is actually financed, inthe event that sales prices are below the base price; however, the presence o fthe support fund should not dictate the setting o fthe initialbaseprice. 60. This new price mechanismrepresents a clear step forward in linkingthe sector to world market developments, and thereby reducing the risks to the budget. However, the degree to which this objective will be met depends critically on actual implementation. In particular, as noted above, if present world market conditions continue to prevail in the near future, there will be a need to set the baseprice at a significantly lower level than that envisioned bythe current price range, ifanother CMDT deficit is to be avoidedin2006. 61. If the world cotton prices continue to be low, however, even when the new mechanismis appliedandproducerpriceset at a morerealisticFCFA 160, CMDT is likely to continue operating at a loss in 2006. While this possible loss is likely to be significantly lower than in 2005, it would nevertheless remain, unless producer prices are reduced further below the FCFA 160 towards likely equilibrium price range o f FCFA 90-124, dependingon the assumptions about the world international prices and Mali's cotton output (See Annex 9 for details). At the same time, any major reduction inproducer prices will have major impact on the poor (See Annex 8). Accordingly, the Government i s likely to confront the need to balance competing objectives in the cotton sector as early as August 2005. It will be important that this decision be taken consistent with a medium-term strategy for the sector, including the outlook for cotton in sub-region, the possibilities o f improved efficiency inproduction o f cotton, and the feasibility o f diversification into crops other than cotton. The Government i s fully aware o f this need and has indicated its intention to develop an actionplan to guide restructuring o f this sector. 62. In addition, even with a new price mechanismthat reduces budgetary risks, there remainsthe need to improveefficiency in the cottonsector, particularlyin light of current world market conditions. While the new pricing mechanism can be helpful in this regard (by makingmore transparent the linkbetweenCMDT inefficiencies andthe price to the producer), it will not initselfimprove sector performance or reduce CMDT operating costs. The Government is currently considering how to proceed with reforms in this sector, taking into account the context and prospects o f the cotton sector in West Africa. It will be critical that this work proceed expeditiously. Supporting the OfJice du Niger Reforms 63. The Office du Niger (ON) has experienced a slowdown in its institutionalreforms since they were started in 1994. The Government intendsto develop a master planfor the zone under ON'Scontrol and to promote, through private investment, a large expansion inlandunder irrigation. To this end, the Government, withinthe SAC I V time horizon, has: 0 Prepared a Contract Plan acceptable and consistent with the reforms under implementation (February 8,2005); 0 Adopted a financing mechanism for irrigation; 0 Adopted a decree authorizing the issuance o f land titles for the Koumouna experimental perimeter. 21 64. Such measures could encourage better participation o f producers in the management in the irrigation infrastructure and also promote private investments inthe area. During the post- SAC IV period, the Government plans to implement the program in the contract plan o f the Office du Niger, and promote the establishment o f private producers in the experimental perimeter o f Koumouna according to the criteria described in the Credit agreement o f the Bank- financed Rural InfrastructureProject (PNlR). Reinforcing the Financial Sector 65. Financialsector reforms are in the early stage andwill take a longer time to be fully implemented. The ultimate objective is stronger financial system, greater access to credit, and lower cost o f credit to Malian farmers and entrepreneurs. The reforms have started with the support o f a technical assistance project (PDSF) o f which a mid-term review has just been completed. Currently, the bankingsector suffers from highmargins, inpart attributable to a large non-performing portfolio, weak management, and significant interference o f the state. The insurance sector operates well below its capacity, given the level o f development o f Mali, inpart because o f lack enforcement o f existing regulation (e.g., with respect to domiciliation, obligatory insurance, and payment o f premium to companies) and, also, because o f poor financial health o f some Malian companies. Furthermore, most micro-finance institutions lack longer term sustainability and the pension sector suffers from structural deficits. 66. In this context, SAC IV is viewed as an instrument to support important initial reforms in the financial sector. But, because o f the short time frame o f its implementation, SAC IV will only cover the first steps o f a broader, medium-term effort, which includes: (i) completing the clean up o f bank portfolios and the completion o f bank privatization; (ii) fully restructuring the insurance sector; (iii) strengthening micro-finance industry; and (iv) reforming the pension system. These first steps are: (i) the audits (according to Intemational Accounting Standards-IAS) o f bad loans o f commercial banks; (ii) the elimination o f discriminatory tax treatment o f the leasing industry; (iii) the implementation o f the domiciliation o f insurance companies' premiums; and (iv) the audit o f the Government's arrears to W S . These are the actions that can realistically be achieved within the limitedtime span o f the Credit. Strengthening the Portfolio of the Commercial Banks 67. The Malian commercial banks are burdened by a significant incidence of non- performingloans,which will need to be cleaned up in order to limit the risk of insolvency and macroeconomic risks in the future, and reduce loan margins. Some o f these non- performing loans have been on the balance sheets for many years and are the result o f incomplete restructuring inthe past. There i s a needto analyze the origin o f these bad loans and to develop an action plan to clean up the balance sheets o f commercial banks (which will include cost sharing between the Government and the commercial banks). As a first step, the government intends to undertake an audit o f the non-performing portfolio (as defined by the Banking Commission) according to accepted international standards. For this purpose, the Government has signed an audit contract; the audit itselfi s expected to be completed bymid-August2005. 22 Eliminating Fiscal and Regulatory Constraintson the Leasing Companies 68. There are certain fiscal constraints on the operations of the leasing companies in Mali, notably double taxation. To eliminate the discriminatory constraints in this sector, the Government has launched a study o f the fiscal regime applicable to the leasing companies. On that basis, the intention i s to revise the law on leasing activities. Strengthening the Business Climatefor Insurance Companies 69. A diagnostic study has been completed on the delocalization of insurance contracts, as a first step towards improving the health of the insurance sector. It was found that, contrary to regulation, a large number o f insurance policies are taken abroad and in many instances the obligation to ensure locally i s not respected. The Government plans to implement the study's recommendations on the domiciliation o fthe insurance policies; it started by issuing, inSeptember 2004, an actionplanand calendar for the implementationofthe recommendations. The implementation o f the recommendations o f the study will contribute to increase the level o f business o f the insurance industryand pave the way for the restructuring o f insurance companies. Strengthening the Pension System 70. The liquidation of certain Government owned enterprises has raised the issue of arrears on the social security contributions payable by these enterprises. There are different views between the pension fund (INPS) and the Treasury on these arrears. The Government has commissioned an audit o f the arrears on its payments to the INPS, which i s expected to be completedby mid-April2005. C. STRENGTHENING PUBLICEXPENDITURE MANAGEMENT, TRANSPARENCYCONTROL AND ImprovingBudget Execution and Monitoring Computerizing theAuxiliary Accounting System 71. I t is essential for the Ministry of Finance to monitor the evolution of its short-term payables and receivables, inter alia, to avoid the risk of developing payment arrears. An expanded information system will facilitate the extraction o f detailed lists o f the transactions that make up the balance o f those accounts, at the central and deconcentrated levels. Since the auxiliary accounting o f the Treasury is not computerized, the transactions included in the accounts payable and receivable are poorly known, and hence poorly managed. The National Treasury Directorate (DNTCP) maintains an "auxiliary accounting", with a twofold objective: (i) monitoring budget execution; and (ii) knowing at all times the accounts payable and receivable. However, the information system o f the National Treasury Directorate (DNTCP) does not provide details on orders to pay that are not yet executed. 23 72. Regarding the orders to pay that are not executed, the agents of the system should have detailed knowledge of the sums involved, classified by category, date and type of beneficiaries, especially for cash management as well as for the appreciation of possible arrears. InMali, arrears are defined as orders to pay which are not yet executed within a period o f three months after their issue from the authorizing officer. To improve the tracking of those transactions, DNTCP should provide regularly, at least monthly, a report showing the detailed content o f the balance o f those accounts. Specifically, the Government intends to take the following actions under the SAC IV: (i) o fthe functional and technical specifications; (ii) issuing implementation of the software at the central level; and (iii) implementation o f the software at the deconcentrated level. A committee has defined the terms o f reference and system specifications: The system should be implemented at the central level in 2005 and deployed in the regions in2006. Developing a Computerized Procurement Tracking System 73. The National Procurement Directorate (NPD) has no computerized database for the management of information on various phases of the public tendering process. Thus, it experiences difficulties in knowing the elapsed time for the various steps in the tendering process, inmanaging the follow up for possible litigations, and evaluating the risks ingeneral, 74. The NPD has, indeed, at its disposal information on every stage of the procurement procedure, insomuch as it attends every meeting. As part o f SAC IVYthis information should be incorporated ina databasethat would: e Contain information on the procedures for future, current or completedbids. e Report the elapsed time incurred in the preparation and implementation o f tenders, and furnish arecordo flitigation. e Allow the monitoring o f public contracts to determine whether they are done on time and within the limitso fthe budget, or whether adjustments havebeennecessary. 75* Such a systemwould also provide the following benefits: e Allow to make the necessary revisions inrules andprocedures. e Provide an essential input to risk evaluation o f the tendering process, a key review performedby the Financial Control and Finance Inspection. 76. The database should be connected to the Internet site for public contracts to ensure access by current and future bidders (and the public at large) of complete information on current and future tenders. The terms of reference for the database have been prepared and the system should be inplace duringthe Post-SAC IV period. Disseminating Unit CostInformation on Government Procurements 77. A reference list of unit costs for government procured goods and services is yet to become operational. This absence of a reference cost list reflecting market prices considerably weakens the relevance and quality o f the financial audit. This problem has been noted in the Bank's CFAA report (November 2002). 24 78. The Governmenthas recentlycarriedout surveys and establisheda referencelist of unit costs. However, this list is not readily accessible to the user agencies - the managers of appropriations and the audit entities, namelythe National Financial Control Directorate (NFCD), which is responsible for ex-ante control. 79. Therefore, as part of SAC I V a record of this information on a CD-ROM is to be sent to the concernedservices, includingthe explanationthat the correspondinglist should be updatedevery six months. The information has been integrated in a CD-ROM in January 2005. The CD-ROMs will be distributed over the coming months to the parties concerned (financial controllers, budget administrators). Integrating the Computer Systemswithin the MEF 80. The three main financial departments(NBD, NFCD and NTD) have each their own software programs, which are not connected with each other. A harmonization o f these systems is being implemented at the central level. Also, it is particularly important to connect the software programs o f these units into a unique database at the deconcentrated level. A single database would avoid duplication in recording o f transactions, increase the reliability o f information, and allow faster processing o f transactions. The reporting at the deconcentrated and central levels should be faster and more reliable. 81. The Governmenthas completedthe terms of reference and has agreed to carry out the following specific actions: (i)implementation o f the database on a test site; and (ii) implementationo f the database inthe regions under a post-SAC IV program o f measures. Developing an Integrated Action Planfor the Public Financial Management (PFM)System 82. A number of diagnostic studies were carried out in recent months on Mali's public finance management by institutions such as the European Union, World Bank (CFAA), IMF (ROSC, HIPC AAP), and the government of France. The recommendations in the various reports are complementary, but sometimes also overlapping, resulting inhigh transaction costs for the Government. 83. The objective of the Integrated Action Plan is to synthesize the various recommendations and establish a single, coherent action plan and schedule for implementation over the medium-term. The study proposing such an Action Plan was completed in October 2004 and its recommendations were reviewed during a workshop on the "Public Finance Improvement and Modernization," which was held during February 1-4, 2005. The recommendations o f the study and the workshop are expected to be implemented during the post-SAC IVperiod. Accelerating theDecentralization Process 84. The Government has adopted an Action Plan on comprehensive decentralization. The Plan aims to bring the government closer to local preferences and build local capacity to manage public resources. The objectives o f this action plan are: (i) accelerating the transfer o f responsibilities and resources; (ii) coordinating and harmonizing the existing decentralization 25 activities; and (iii)strengthening the capacity o f the decentralized administration in mobilizing financial resources. 85. Three sectors have been identified as prioritiesfor decentralization:water supply, health, and education. Water supply is the sector inwhich most progress has beenmade with decentralization. However, the central govemment i s experiencing difficulties in implementing decentralization: (i)slow progress in transferring responsibilities and resources to the local administration; (ii)weak mobilization of local resources; (iii)poor program coordination between the sector ministries and local administration; and (iv) incomplete and inadequate legislation, leading to weak coordination in planning and management o f regional and local development. 86. To acceleratedecentralization,the Governmenthas organizeda nationalconference to: (i) validate the recommendations o f the diagnostic survey for the transfer o f responsibilities and resources to the local level; and (ii)propose an action plan for such a transfer. The conclusions o f the conference are available and are beingexaminedbythe Cabinet. Strengtheningthe InternaVExternalAudits and PerformanceEvaluation Increasing the Number of Audits Performed by CGSP and IF 87. Financial and management audits are carried out by the Inspection des Finances (IF) and the Contrdle Giniral des ServicesPublics (CGSP). However, the audit coverage of these two control institutions proves very limited, covering about 10 to 14 percent o f the budget. Inaddition, not every mission carried by those institutions results in an audit, as defined by international norms (namely INTOSAI). For instance, only 20 percent o f the missions conducted by the IF meet the criteria o f an audit mission, the rest being administrative verification missions at the occasion o f the change o f managers. 88. To address these issues, as part of SAC IV the Government is committed to the following measures: (i)increase the number of both financial and management audits; (ii) complete the training o f inspectors and controllers on auditing; and (iii) the IF and CGSP provide additional computers and transport equipment. Two specific activities will address these issues: additional training and equipment, and production o f an activity report showing the increase in the number o f audits. 89. For fiscal year 2005, the CGSP plans to increase the number of its financial and management audits to 85 comparedto 65 in 2004. The number o f verification audits will be increased from 35 to 40. The total number o f audits will be raised from 100 to 125 during this period. Deflning Performance Indicatorsfor the DNCF 90. The Direction Nationale du Contrhle Financier (DNCF) exercises an ex-ante control at the stage of expenditure commitment.This control consists inverifying the conformity o f expenditure requests with the law, as well as the existence of sufficient budget appropriations. 26 91. To improve its performance, the DNCF has developed a list of performance indicators to be set at each of 3 processing financial control stages (notification, commitment, and liquidationand with respect to rkgies d'avances (a simplified expenditure execution procedure for smaller payments). The indicators are designedfrom the activities o f the DNCF. They aim to monitor the number o f requests received, approved, and rejected. The first report on the performance indicators was produced in September 2004. In addition, to facilitate a smooth flow o f resources, the DNCF has set a time standard necessary to manage an expenditure request to a maximum o f48 hours. 92. To improve the quality of the controls, as part of SAC IV the Government is committedproducethe following: (i) first semi-annual report on performance indicators for a expenditure controls on the performance indicators by end-March 2005; and (ii)subsequent reports 45 days after the end o f the period. DefiningtheSupportingDocumentationfor ExpenditureRequests 93. Ex-ante and ex-post controls are difficult to implement in Mali because there is no requiredsupportingdocumentationfor processing expenditurerequests.To facilitate these controls and limit the arbitrary exercise o fpower o f control, the Direction Nationale du Trksor et de la Comptabilitk Publique (DNTCP) has prepared a list o f requiredsupporting documentation, which will be customized for each category o f expenditure. This list will be mandatory for the appropriation managers and State suppliers as well as all parties involved inexpenditure control: 0 Ex-ante:DNCF andpublic accountants. 0 Ex-post: IF, CGSP, Chamber o f Accounts. 94. The Government circulated the list to all the ministries through an executive ministerial order issuedin September 2004. Strengthening the Chamber of Accounts 95. The Chamber of Accounts of the Supreme Court, in charge of audits, lacks adequateresources to performits mandate. Though the number o fjudges inthe Chamber o f Accounts has been increased during last years, the capacity o f the Chamber remains inadequate. The number o f judges increased from 9 in 2002 to 15 in 2003, but they need considerable professional training. Moreover, the Chamber o f Accounts reforms have not been adequately coordinated with the design o f the reforms o f the public finance management system: new accounting rules, budget nomenclature, and state and local government accounting system. 96. Under this program, the authorities are planningto take the following measures to reinforcethe Chamber inthe immediatePost-SACIV period: 0 Provide training in office automation as well as other public finance reforms: new rules onpublic finance, budget nomenclature, state and local govemment accounting system. 0 Write up aprocedures manual audits o fpublic entities. 27 ImprovingTransparency Disseminating Budget Execution I nformation through theInternet 97. Until recently,the Government publisheda quarterly Treasury note on the state of central government financial operations, and distributed it only to the development partners. Sector budget execution information, which indicated the pace o f budget implementation, was not accessible to the public, however, even though the Direction Nationale du Budget (DNB) produces it regularly. 98. In September 2004, however, as agreed under the SAC IV and to improve disclosure, the Government has for the first time published basic information on budget execution on the internet (www.timbagga.com.mVtresor). Moreover, it has also agreed to provide such information regularly, on a quarterly basis. Meanwhile, broader communication channels such as newspapers, postings, radio stations, will be used to make budget execution information more broadly available to the public. Reducing the Delays in the Submission of Budget Execution to the National Assembly 97. The Government has taken corrective steps to reduce delays in submitting annual budget execution reviews to the NationalAssembly within the prescribed deadlines. In the past, delays resulted in the National Assembly having to approve the budget without the reference to the previous year's expenditure performance. Under the SAC IVYthe Government has been able to submit the 2003 draft law on budget execution (Loi de r2gZement) to the National Assembly in December 2004. Steps have also been taken to submit the 2004 draft budget execution law by October 31,2005. V. CREDIT ADMINISTRATION AND RISKS A. CREDIT ADMINISTRATION EnvironmentalSafeguards 98. The implementationof the publicsector reformprogramis not expectedto haveany negative environmental impact, especially in the short-term horizon of the SAC IV- essentially until mid-2005. Implementation o f the longer-term cotton sector reforms may have environmental implications due to the potential increase in cotton production and attendant increase in fertilizer/pesticide use. An assessment o f the likely environmental impact shows, however, that the magnitude of environmental risks strictly associated with the cotton sector i s very limited, as no major expansion of cotton cultivated areas is expected. Specific measures that will address the minimal potential environmental impact o f the cotton recovery program are included inthe ISDS o fthe Agricultural Services Project (PASAOP, FY02). 28 99. As described in the ESDS and mitigationplan of the PASAOP, emphasis has been placed on the promotion and monitoring of environmentally responsible agriculture. Environmental issues have been integrated inthe PASAOP project design (inparticular, through: the rehabilitation and equipping o f the MDWIER Pesticides Residues Laboratory; the Integrated Pest Management Initiative; the Soil Fertility Initiative; and the Livestock Initiative). Issues associated with the privatization o f the two cotton sector companies (CMDT and HUICOMA) and the attendant increases in the use o f fertilizedpesticides associated with the increase in productionwill be raised as part ofthe ongoing dialogue with the authorities. SocialAssessment 100. The reform and restructuringof the cotton parastatal company CMDT, including measures to improve operational efficiency and limit the wage bill for 2005 may entail a reductionin the number of personnel.Mindfulo f the disruption this could cause to staff and the increased vulnerabilities they would face, the government intendsto prepare a Social Action Plan to fund the anticipated layoffs and facilitate the transition o fthose losing their jobs. FinancialAssessment 101. A Country FinancialAccountability Assessment was completed in FY03. The main conclusions o f this report are that the Malian PEM system i s quite coherent, with a strong budget process, functioning in a clear organizational framework with an improving control system. However, there are areas that need improvement. To further strengthen the financial accountability, an integrated action plan has been discussed and agreed with the Government. Some o f these actions are taken into account in the second component o f SAC IV.It i s expected that the other actions will be implemented inthe post-SAC IVperiod. Implementation 102. Disbursementand auditing: the Borrowerwill be the Republicof Mali, represented by the Ministry of Economy and Finance.Upon effectiveness o f the Credit, the Borrower will open a deposit account at BCEAO. IDA will deposit the proceeds o f the Credit inthis account at the request o f the Borrower. The proposed credit is expected to be released in one tranche, and will follow the simplified IDA procedures for adjustment operations (February 8, 1996). The borrower will provide a confirmation to the Bank that the amount o f the loan has been credited to an account that i s available to finance budgeted expenditures. The IDA disbursement will not be linked to specific purchases and hence, there will be no procurement requirements. In case the proceeds o f the Credit are used for ineligible purposes, IDA will require the Borrower to either: (i) that amount tothe account forusefor eligiblepurposes; or (ii)refundtheamount return directly to IDA, in which case IDA will cancel an equivalent undisbursed amount o f the Credit. Although an audit o f the deposit account will not be required, IDA reserves the right to require audits at any time. 103. Supervision and monitoring of results: a Technical Committee will manage the programsupportedby the SAC IV and monitor implementationand impact of the project. The Technical Committee o f the Ministry o f Economy and Finance will be chaired by the 29 Secretary General of the Ministry o f the Economy and Finance overseeing the SAC IV program, and will comprise, among others, the Mission de Restructuration du Secteur Coton (MRSC) and other relevant government departments. 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; (ii) macroeconomic developments, particularly budgetary outcomes; and (iii) status o f the deposit account. On a monthly basis, budget revenues and expenditures, reconciled bank accounts and statements o f the SAC IV's deposit account will be submitted to the IDA. IDA supervision missions will also monitor SAC IV implementation, and coordinate with the IMF and other major donors. The Borrower is committed to monitor the impact of its reform program, particularly those elements supportedby the SAC IV. Inthis context, periodic informationwillbe submittedto IDA. Risksand MitigatingMeasures 104. The operation faces the following risks in order of importance: external, institutional,andpolitical. 0 External risks stem mainly from the well known vulnerability o f the Malian economy to vagaries o f weather, other natural causes such as locusts, and commodity price fluctuations as well as regional crises (e.g., Cote d'Ivoire, Liberia). Mitigatingthese risks will continue to remaindifficult over the horizon o fthe proposedproject. Butbyrelaxing the authorities budget constraint, supporting the government's reform, including indirect support to the transport diversification and trade facilitation activities (including customs reform) the project will facilitate reduction in the Malian economy's structural vulnerabilities over the medium term. Strong, predictable and timely donor support will also be key inthis regard. 0 Institutional risk resulting from the threat o f weak capacity and governance on program implementation. This risk o f slower-than-required program implementation stemming from capacity constraints will be reduced through continued technical support by the World Bank and other donors to strengthen capacity. Project design also includes strengthening growth-critical areas such as prudent fiscal policy and financial sector development. 0 Political risk remains that the government's current strong commitment to the continued reforms, including privatization and liberalization program (banking, cotton, transport, telecommunication sectors) could wane. Inthe cotton sector, the government has been addressing these structural issues very gradually in spite o f repeated crises from CMDT performance.. This risk i s constantly monitored by the country team. It i s being mitigated through the Bank's dialogue with the authorities. Moreover, the very design o f the operation as a one tranche credit (which builds on the lessons o f SAC 111) stresses the ex- ante actions before disbursement, therefore giving the Bank the flexibility to respond effectively in an uncertain environment and varying degrees of commitment. Finally, given the low international cotton prices, there i s a key political risk that prevailing world cotton prices could remain so low that they would dictate a sharp downward adjustment 30 in local producer prices, an adjustment that could prove politically extremely difficult. While this risk i s not possible to control, the report provides some estimates (Annexes 8 and 9) o f the potential poverty and financial impact o f various cotton prices in order to inform the policy choices and trade offs betweenthe needfor local prices to reflect world market conditions and the desirability o f cushioningthe temporary impact on the poor. VI. CONDITIONS PRIOR TO BOARDPRESENTATION 105. The last adjustment operation was approved by the Board in 2001. Since then, the government has made substantive progress in implementingits PRSP program o f actions, many of which require a political commitment. The progress to date and reform actions already undertaken under SAC IV are summarized in Sections I11and IVYas well as inthe Development Policy Actions matrix. The Matrix also outlines planned reforms in 2005, in the post-SAC IV period, including some triggers for a possible transition towards the next development policy credit, These triggers will be used to gauge progress with selected reforms for a possible new development policy credit inthe post-SAC IVperiod. 106. Of the many reforms undertaken under the SAC IVYthose selected as upfront actions prior to Boardpresentation o f SAC IV (which hadbeen completed) are shown below: 1. Submission o f a Letter of Development Policy for the SAC IV comprising: (i) the measures to strengthen budget policies and the financial sector; and (ii) actions to the strengthen public expenditure management, control andtransparency. Budgetpolicies andfinancial sector component: 2. A continuing IMFprogram on track, insupport of a prudent budget policy and a coherent macroeconomic framework. 3. MinistryofEducation's MTEF2005-8 finalized inlinewiththe results ofthebudget arbitrage. 4. MinistryofHealth's MTEF2005-7 validated; the mechanisms for its updatinghavebeen defined. 5. Strengthening of the commercial banks: the contract for the audit o fbad loans has been signed. Public expenditure management, control and transparency component: 6. Integration o f the information systems used within the MEF (by DNB, DNCF and DNTCP): the terms o f reference for the integration have been finalized and the tendering has been initiated. 7. Action plan to integrate the recommendation o f the studies fbnded by the donors for the strengtheningo f PFMsystem: The study has beencompleted. 31 8. Dissemination o f information on budget execution: a quarterly bulletin, covering the status of HIPC expenditures and budget execution by expenditure function, was disseminated through the internet and other means of communication. VII. CREDIT EFFECTIVENESS 107. The one tranche in the amount of SDR 16,500,000 (US$25 million equivalent), will be disbursed upon credit effectiveness. The credit will become effective upon due authorization or ratification by all necessary legislative and governmental actions and IDA'S receipt o f a legal opinion 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 bindinguponthe Borrower inaccordance with its terms. 32 ANNEX 1: LETTEROFDEVELOPMENTPOLICY Unofficial translation of the French original MINISTRYOF ECONOMYAND FINANCE MALI Bamako, February 11,2005 NO.0121kiEF-SG The Minister o f Economy and Finance To: Mr.JamesWOLFENSOHN President o f the World Bank Washington, DC, 20433 (USA) LETTER OFDEVELOPMENT POLICY DearMr.President, IhavethehonortosubmitthisLetterofDevelopmentPolicytosupporttherequestbythe Government o f Mali requesting the assistance o f the World Bank for the Fourth Structural Adjustment Credit. The requested support will permit the Government to implement its program of reforms covering two main components: (a) strengthening fiscal policy and financial sector, and reforms in the cotton sector and the Office o f Niger in support o f broad-based growth; and (b) improving the management o fpublic expenditures. The Credit will also contribute to closing the residual financing gap for the fiscal year 2005 by assuring the financing o f priority public expenditures programs. The coordination o f the implementation o f actions supported by the SAC IV will be ensured by the Ministry o f Economy and Finance through a commission presided by the Secretary General o f the Ministry o f Economy and Finance and including, among others, representatives o f the Mission for the Restructuring o fthe Cotton Sector (MRSC) and other ministerial departments. The following pages represent an integral part o f this development policy letter. They describe the specific objectives, the strategies and the action plans related to each program component that the Government intends to implement, as well as their implementation schedule. Sincerely yours, Abou-Bacar Traork Minister o fEconomy and Finance 33 1. THE OBJECTIVESOFTHE REFORMSPROGRAMSUPPORTEDBY SAC I V 1. The Fourth Structural Adjustment Credit (SAC IV) i s part o f the continuous assistance that the World Bank provides to Mali inthe context o f macroeconomic stabilization. Its purpose i s to support the Government's efforts to consolidate the fundamentals for robust, equitable economic growth. To this end, the Credit aims to address two major issues: (i) reinforcing and deepening reforms that the Government has engaged in the course o f the last two years (and which had been supported by the SAC 111), especially in the areas o f the management o f the public expenditures, the financial sector, the cotton sector (in terms o f limiting the macroeconomic risks) and o fthe Office o fNiger; and (ii) supporting the Government inits effort to implement the PRSP in the context o f an increased budget support during the post-SAC IV period, The reform program i s articulated around three main axes. 2. In 2002, Mali elaborated a Poverty Reduction Strategy framework based on a poverty diagnostic and shared understanding o f its hndamental determinants. It suggests a general strategy whose objective i s to significantly reduce the incidence o f poverty in the country over the medium term. To this end, a strong, robust and equitable economic growth i s indispensable in the context of macroeconomic stabilization. The lessons drawn from the first year of implementation o f the strategy reveal the vulnerability o f Mali's economy inthe face o f different types o f constraints and the necessity of: (i)pursuing important structural reforms (in particular inthe cotton sector); and (ii)improving implementation o f macroeconomic management. 3. The first axis of reforms,which could be supported by SAC IVYis set in this general perspective, It is focused on the macroeconomic framework and fiscal policy and the pursuit o f the important reforms inthe cotton sector and the Office o fNiger, inorder to maintainthe fiscal discipline and minimize, inthe near term, the fiscal risks linked to these sectors. Also, it supports the implementation o f reforms inthe financial sector. Over the medium term, we target five sets of actions: (i) macroeconomic stabilization within a context o f limiting fiscal risks due to the situation in the cotton sector; (ii)strengthening consistency o f the budget and the PRS; (iii) laying the foundation for a strong financial system and a reduction o f the risk o f bank insolvency; (iv) pursuit o f reforms in the cotton sector aimed at minimizing the risks on the budget and the financial situation o f CMDT; and (v) support o f the second generation reforms in the Office duNiger. 4. The second axis of reforms considered by SAC IV aims at strengthening public expenditure management. The objective i s to create conditions for stronger public expenditure management in terms o f a greater efficiency o f the budget process and better transparency and dissemination o f the budget information. The dissemination o f the budget information reflects two basic concems: making information available in timely fashion (efficiency of budget management) and strengthening participation andtransparency. 5. These actions considered are part o f continued progress achieved by the Government in strengthening budgetary procedures and implementation, which should contribute to better control o fpublic expenditures andresources inthe context external budget assistance. 34 6. The third supporting axis o f SAC IV is oriented towards Mali's decentralization process. It aims more generally at strengthening financial management at the local level, and improving the budget planning and execution at the local level, consistent with the support o f the deconcentrationo f the administrative functions o f government. 7. The execution o f the SAC IV program will rely on a strong coordination in the implementation of actions requiredat the level o f the Ministry o f Economy and Finance as well as the other ministerial departments. 2. REFORMOF THE BUDGET, FINANCIAL SECTOR, COTTON SECTORAND THE OFFICE DUNIGER 8. Here, the reforms supported by SAC IV have two main objectives: (i)strengthening macroeconomic management in the context o f the implementation o f the PRSP; and (ii) contributing to the maintenance o f fiscal discipline and fiscal policy conducive to shared economic growth and poverty reduction. 2.1. Macroeconomicframeworkandfiscal policyreform 9. Inimplementingthe PRS, economic management andfiscal policy shouldbe considered ina medium term perspective to allow greater consistency between fiscal management and the development priorities o f the country. Improving resource allocation within the overall economic framework and ensuring strong budget execution and expenditure controls both contribute to greater fiscal discipline. 10. Accordingly, and given the lessons learned from the implementation o f the PRS, the Government has given priority to a prudent fiscal policy for 2005. The 2005 budget has been elaborated with a view towards consistent macroeconomic framework, taking into account the need to accelerate the implementation o f the PRS. This has been made possiblebybold decisions in terms of sectoral allocation o f resources and the reliance on strategic programming in the process o f formulating the state budget. 11. In strengthening budget formulation, SAC IV supports actions towards operationalizing the Medium-Term Expenditure Frameworks in the context o f preparing the annual budgets. Sector allocations o f the 2005 budget are, de facto, based on sector envelopes provided by the Ministry o f Economy and Finance, and those for education and health ministries have been arbitrated on the basis o f the sector MTEF. This has enabled realistic basis for the strategies in education and health to be pursuedin2005, while preserving the specific objectives o f the PRS. In particular, efforts have been pursued at the level of the Ministry of Health to establish mechanisms for systematic annual updating o f the MTEF to make it operational during the budget process. The instrument has, with this intention, served as a basis for preparation for the second phase o f the PRODESS. 12. The process o f integration o f sector MTEFs with the annual budget will be strengthened inthe case o f other ministries, such as Transport and Equipment (an MTEFwill be operational for the 2006 budget) and Agriculture, which will finalize its MTEF in the context o f the 2006 35 budget. The present system for the programming and monitoring o f public investments i s also being improved to facilitate the transfer o f data to the Budget Directorate. Actions have been taken to implement a new computer application for the management o f the three-year investment program and the special investment budget, and this applicationi s currently being tested. 13. Interms of a better integration of the budget and the PRSP, the Government has made important progress adopting a timetable for monitoring/evaluation o f the PRSP to enable the integration o f the conclusions o f the evaluation o f the PRSP in the 2006 budget. The second report on the implementation o f the strategy has beenproduced and i s being adopted according to the monitoring arrangement approved by the Government. 14. Before end-September 2005, (after the implementation o f the SAC IV program), the Government will take the necessary actions to complete the new computer application for the management o f the Three-Year Investment Program (PTI) and the Special Investment Budget (BSI). This should allow strengthening of the medium-term public investmentprogramming at the level o f sector ministries. 2.2. FinancialSector Reform 15. The purpose o f the financial sector reform is twofold. On the one hand, it aims to strengthen the financial system and regulatory environment to improve efficiency and, on the other hand, to improve access to financial services as well as create altemative opportunities for financing activities o f Mali's entrepreneurs. This involves: (i) strengthening commercial banks through a complete clean up o f their portfolios, and their privatization; (ii) developing altemative sources o f credit, such as leasing companies; (iii) completing restructuring o f the insurance sector, by strengthening the regulatory environment (through better enforcement o f existing regulations such as mandatory insurance, domiciliation o f premiums) and restructuring o f individual companies; (iv) strengthening micro-finance institutions; and (v) dealing with the structural deficit o f the pension system. This reform benefits from the support o f the Financial Sector Development Project (FSDP) financedby the World Bank. 16. The reformswhich have been supportedduringthe periodof the SAC IV program, consist o f a set o f four actions: (i)undertaking an audit of non-performing loan portfolio o f each commercial bank, scheduled to start on February 15, 2005 in order to better understand the causes o f problems and design an action plan for the clean-up of the portfolio with a view towards burden sharing between Government and the banks. (ii)completing a study, currently under implementation, aiming at better understandingo f the effects o f the fiscal regime on leasing activities. Its conclusions and recommendations will be examinedby the government for implementation. (iii) establishing (arrstks No. 04-1333MEF-SG o f July 16, 2004 and No. 04-1867NEF-SG o f September 24, 2004 o f the Ministry o f Economy and Finance) a Monitoring Committee to implement the recommendations in the study on the domiciliation o f insurance polices and to 36 develop a timetable for implementing the recommendations. Since its creation, the Monitoring Committee has met 14 times and its main activities have been focused, among others, on the following: (i)reviewing the texts on the mandatory insurance: draft ordinances, decrees and arrSt6s have been elaborated and transmitted to the Ministry o f the Economy and Finance for validation and transmission to the General Secreteriat o f the Government, for their submission to the Cabinet; (ii) strengthening the controls o f the mandatory insurance: letters have been sent from the MEF to its counterparts o f Industry and Commerce, Interior Security o f Civil Protection, Equipment and Transport, Energy and Mines, as well as Justice, to solicit their collaboration with respect to the 'legislative and regulatory provisions on mandatory insurance and their domiciliation in Mali; and (iii) elaborating a program o f activities o f information and sensitizationon mandatory insurance inMali. This program, which will be co-financed byPDSF and the CCAM, will start during the month o f February 2005 and comprises debates on television and the radio, publicity and awareness campaign, as well as information dissemination and raising awareness among economic agents; and (iv) finalizing an audit mission, whose report scheduled for February 22,2005, to assess the situation o f the arrears on the payments due to the social security institutions from public enterprises which have been liquidated and, ifnecessary, the elaboration o f a plan for their settlement. 17. The reforms, which will be supported immediately after the period of implementation of the SAC IV program, will include: (i)cleaning up the banks' non performing portfolios, and completing their privatization; (ii) restructuring the insurance sector; (iii)strengthening micro-financeinstitutions; and(iv) conducting actuarialaudits ofthe two social security institutions, leading to revisions in contributions and benefits so as to reestablish financial balance. 2.3. Reformof the Cotton Sector and of the Officedu Niger 18 The progress in cotton sector reform remains a key factor for mobilizing larger budget support by the World Bank. The support o f this reform objective i s therefore crucial for the economic development o f the country. Thus, the Government confirms its commitment to update and implement the Updated Action Plan o f the Letter o f Development Policy for the Cotton Sector (LDPCS), adopted by the Cabinet duringits session o fNovember 5,2003. 19. We will pursue the reforms and the liberalization o f the cotton sector through the implementation o f a series o f actions centered around restructuring and improvement in the effectiveness o f the sector. We will also continue to pursue the second-generation reforms inthe Office o fNiger, whose development i s important for Malian economy. 20. Within the framework of the SAC IV, the Government has implemented the followingmeasures: 21, At the cotton sector level: 0 An acceptable proposalto absorb the deficit relatedto the 2004-2005 campaign. 0 An acceptable proposal for the improvement in the price mechanism and the calculatiodmanagement o f the rehnd, through the signature, on January 13, 2005, o f a 37 Protocol agreement between the State, CMDT, and the producers on the pricing mechanism. The Protocol agreement will be implemented according to the following three principles: 0 The initial price i s fixed in a fiscally prudent manner, at a range o f 160 to 175 CFAF/kg, and for a three-year period. 0 The final price is fixed based on a formula for sharing the sector's gross revenues, calculated on the basis o f international market prices. 0 The support fund is not a "sine qua non" condition for the application of the price mechanism. 22. At the level of Office o fNiger: 0 The preparationof an acceptable contract plan, consistent with the ongoing reforms. 0 The adoptionof a financing mechanismfor irrigation. 0 The adoption of a decree authorizing the issuance of land titles on the experimental perimeter o f Koumouna. 23. Following the SAC IV, the Government will pursue its reform efforts in the cotton sector through the implementation o f the following measures: 0 The application of the Protocol Agreement between the State, CMDT, and the Producers for the determination o f the cotton grain purchase price. o The announcement o f a base price for the cotton producers for 2005-2006, which minimizes the risk to the state budget. o A downward adjustment in the price to producers in the event that the projected producer price i s below the base price, as envisaged inthe Protocol on the pricing mechanism. 0 The appointment, by the producers, of their representatives for monitoring privatization o f CMDT, while waiting for the establishment o fthe inter-profession. 0 The development o f an action plan for the restructuring o f the cotton sector, taking into account the current context andprospects o f the West African cotton sector. 0 The privatization o f HUICOMA. 0 The establishment o f private producers in the experimental perimeter o f Koumouna according to the criteria described inthe credit agreement o f the Rural Infrastructure Project (PNIR). 0 The implementationo fthe program o fthe contract planfor the Office duNiger. 2.4. Reformof the PublicExpenditureManagementandImprovementinthe Transparency 24. During the last three years, Mali's budget system experienced some important improvements. The efforts o f the government were concentrated on the design and management instruments that, overall, are now operational. Notably, these include: (i) interconnection at the the central level of the key structures o f the Ministry o f Economy and Finance involved in the budget process (the Budget, Financial Control, and Treasury Directorates) and activity is fundamental for integrity o f the budget data; (ii)the adoption o f a complete budget nomenclature, which permits the presentationo f budget allocations according to the international 38 standards; (iii) implementation o f budgetary and accounting nomenclature for the territorial the collectivities, consistent with the budgetary nomenclature recommended by the WAEMU; and (iv) the design o f tools at the disposal of the budget administrators and of the financial controllers to improve the execution o f the state budget. 25. These policy instruments are now operational, meriting their integration and adoption by the budget actors, aiming at a general improvement in the efficiency o f public expenditures. Also, the reforms supported by the SAC IV respond to three major concems (i)pursuing computerization o f the public expenditure chain, with the objective o f improving expenditure execution; (ii)continuing to strengthen control structures and instruments to improve significantly the audit and control functions; and (iii) improving flow and dissemination o f the financial information to increase transparency and tracking o fpublic funds. 26. The strategy o f execution o fthese objectives will be based on two fundamental pillars:(i) improving public expenditure execution and procedures in assuring the integration o f the information systems, and strengthening intemal/extemal audits and performance evaluation (increasing the number and quality o f management audits, and improvement inprocedures); and (ii)improving transparency and tracking o f public fimds, by ensuringwider dissemination o f the consolidated accounts o f the Government. 27. The proposed plan o f action for the objectives stated above is articulated around two time horizons, to allow for a gradual implementation o f the reforms and consistency with the Government's medium-term vision. Duringthe period supported by the SAC IVYthe greatest attention will be paid to three complementary elements. These are: (i) enhancing credibility o f the budget data and budget execution; (ii)strengthening the operational controls; and (iii) improving transparency o f budget management and accountability. 28. In terms of credibility o f budget data and ensuring budget execution, the information interconnection o f the Budget National Directorate, the Financial Control Directorate, and the Treasury and Public Accounting National Directorate, has been strengthened at the central level through the completion o f updating o f the financial control and treasury databases. The process has been initiated at the deconcentrated level (regional directorates) and a tender has been launched for effective implementation o f the interconnection. At the level o f state accounting, actions have started towards the implementation of a computerized auxiliary accounting for the Treasury's accounting offices. Currently, the specifications have beenprepared (December 2004) and the next stage of activities consists o f launching a tender for implementation. Inaddition, in order to control procurement costs, the reference price list has been updated on the basis o f a survey carried out in 2004, and is available on a CD-ROM. For better monitoring o f procurement, terms of reference have been elaborated for the implementation o f a database reporting on the different phases o f the procurement. 29. Over the past few years, the government had completed a number o f studies and diagnostics aimed at understanding the strengths and weaknesses o f Mali's budget system. On that basis, it developed an overall action plan, over the medium term, for strengthening and modernization o f budget management. Its objective i s to provide a framework for strengthening 39 the overall budget process, and reflects the Government's desire to implement PRSP using a robust budgetmanagement system. 30. To strengthen controls, actions have been focused on: (i)implementing at the DNCF level indicators o f quality o f controls in order to improve their performance (ex ante controls based on performance); (ii)establishing and disseminating among budget administrators a nomenclature for documentation facilitating the ex-ante control and reducing the rate o f rejection of the applications for expenditure commitments; and (iii) including inthe finance law of 2005 budget allocations to cover the costs o f the constitutional revision for the transformation o f the Accounts Section into an independent Court o f Accounts. Inaddition, it should be noted that the General Control o f Public Services has benefited from a strengthening o f its capacity in the domain o f financial audits (as well as the Accounts Section) with an 88% execution rate o f its control program. 31. To improve transparency in budget management, the government strengthened both its instruments and capacity to provide budget data on demand at the central and deconcentrated levels. This has contributed to improving the quarterly budget execution note, which summarizes the outcome of budget execution inthe priority sectors. This note, produced by the Ministry of Economy and Finance, relies on the availability o f information on budget execution, which i s made possible the systems interconnection between the National Directorates o f the Budget, Financial Control, and Treasury and Public Accounting. The note i s currently disseminated through the internet. Other dissemination channels are envisaged to make this information available to the largest number o f citizens. With respect to accountability, important progress has beenmade inthe area o f preparing draft laws on budget execution. The Government has, infact, submittedthe 2003 draft law on budget execution to the National Assembly on December 2004, which i s an important step toward compliance with legal requirements (three-month lag). Provisions are now already taken to submit the 2004 draft budget execution law by October 31, 2005 at the latest. 32. In the post-SAC IV period, and continuity of Government's reforms in medium term, the actions for the improvement in expenditure execution will be focused on: (i) strengthening the interconnection o f the information systems at the central level; (ii)implementing computerized auxiliary accounting within treasury (production o f specifications by end- December 2004, implementation at the central level before December 31, 2005, and deployment in the regions by end-June 2006); (iii)completing the database for the monitoring of procurement, for a better knowledge o f delays, eventual litigations, and follow-up on the files (availability o f specifications by end-February 2005 and implementation by September 30, 2005); (iv) integrating the information systems at the level o f deconcentrated services o f DNB, DNCF and DNTCP (implementation at the pilot site by June 30, 2005, and deployment in all the regions by December 31,2005). 33. To strengthencontrols and improve effectiveness o f expenditure, actions will be focused on: (i)increasing the number and improving the quality o f financial audits o f the Finance Inspectorate (IF) and the management audits o f the General Control o f Public Services (CGSP); (ii)completing audit training of Finance Inspectors and Controllers; (iii)improving the information and transport equipment o f the IF and CGSP; (iv) producing regular, semi-annual 40 activity reports of DNCF to assess the quality o f controls; (v) reducing progressively delays in the submission o f draft laws on budget execution to the National Assembly (production of draft 2004 law by end-October 2005); (vi) strengthening Accounts Section o f the Supreme Court (making available the resources necessary for the training program and equipment program); (vii) continuing monitoring to ensure more transparent management ofpublic expenditures. 2.5. The Decentralization Process 34. In the context of the consolidation of the decentralization process in Mali, the Government has adopted an Action Planto accelerate the transfer o f resources and competences, the coordination and harmonization of functions, and strengthening of the capacities of the Territorial Collectivities in resource mobilization. The Government also adopted the texts regulating the transfer o f competences in the domains o f health, education, and water supply. Some important progress was achieved towards strengthening capacities o f actors in the decentralization (establishment o f functioning Communal Counsel Centers) and technical and financial structures insupport o fthe Territorial Collectivities. 35. However, the Govemment i s conscious o f the difficulties that persist in the implementation o f the process. These are notably: (i)slow transfer o f the competences and resources o f the State to the Territorial Collectivities; (ii)weak mobilization o f the Territorial Collectivities' own resources; (iii)lack o f articulation between the sector programs (health, education, rural infrastructure) and the programs o f the Territorial Collectivities; and (iv) some gaps in the legal texts on decentralization, leading to a weak coordination in the domain o f the planningand management of regional and local development. 36. A key problem lies incompleting inpractice the transfer o f functions as prescribed by the laws, notably: (i) the law n"95-034 of April 12, 1995, dealing with the Code for the Territorial Collectivities in the Republic o f Mali; and (ii) the regulations mandating the transfer o f certain priority competences inthe areas o f health, education, andrural and urbanwater supply. Also, in the context o f SAC IV, arrangements will be made to formulate programs o f transfers of competences inevery region matchedby supporting measures. 37. The general objective pursued in the SAC IV program is to provide support for the implementation o f the financial instruments and deconcentration o f the administration; these are indispensable elements for the implementation o f the decentralization. These progressive steps will be based on a plan to operationalize the transfers of competences and resources. Also, a main action has been developed under the SAC IV framework, Le., a national workshop to: (i) validate the recommendations o f the diagnostic survey for the transfer the competences and resources o f the State to the Territorial Collectivities; and (ii) propose a concrete action plan for implementation of this transfer. The conclusions o f the workshop are available and are being examined by the Cabinet. 41 MINISTERE DE L'ECONOMIE ET REPUBLIQUEDU MALI Un DES FINANCES ----------------- Peuple- Un But - Une Foi ---------------- SECRETARIAT GENERAL No---- h 0 12/MEF=SG Bamako,le 11FE 2005 LeMinistrede 1'Economie et de s Finances A Monsieur James WOLFENSOHN PrCsidentde la BanqueMondiale Washington DC. OBJET : 4. LETTRE DE POLITIQUE DE DEVELOPPEMENT Monsieur le PrCsident, J'ai l'honneur de vous soumettre l a prtsente Lettre de Politique de DCveloppement en appui A l a requete du Gouvernement du M a l i sollicitant l'assistance de l a Banque mondiale pour un quatrikme CrCdit d'Ajustement Structure1 (SAC VI). L'appui sollicitt permettra au Gouvemement de poursuivre la mise en oeuvre d'un programme de reformes couvrant les domaines suivants : (a) la politique budgktaire, le secteur financier, l e secteur coton et 1'Office du N i g e r en relation avec l e soutien A la croissance partagte ; et (b) I'amClioration de la gestion des dCpenses publiques. I1 contribuera tgalement au financement du dtficit rtsiduel de financement pour 1'annCe budgitaire 2005 enassurant unfinancement duprogramme de dtpenses publiquesprioritaires de l'annte. La coordination de la mise en oeuvre des actions soutenues par le SAC IV sera assurCe par le Ministire de 1'Economie et des Finances A travers une commission prtsidte par le Secrttaire GCnCral du Ministkre de 1'Economie et des Finances et 42 comprenant, entre autres, des reprisentants de la Mission de restructuration du secteur coton (MRSC) et des autres dipartements ministdriels. Les pages ci-dessous font partie intigrante de la prisente lettre de politique de diveloppement. Elles ddcrivent les objectifs spdcifiques, les stratigies et les plans d'actions relatifs A chacune des composantes du programme que le Gouvernement compte mettre en oeuvre, ainsi que leur calendrier d'exdcution. Veuillez agrder, Monsieur le Prdsident, l'assurance de ma haute considdration. L e Ministre de la Promotion des Investissements et des Petites et Moyennes Entreprises, Ministre de 1'Economie et des Finances par intdrim, 43 4.1, LES OBJECTIFS DUPROGRAMMEDEREFORMES SOUTENUPAR LE SAC IV 1. L e quatrikme CrCdit d'Ajustement Structure1 (SAC IV) s'inscrit dans la continuitt de l'appui que la Banque Mondiale apporte au M a l i dans le cadre de la stabilisation macrotconomique. I1 a pour vocation d'appuyer les efforts du gouvernement dans la consolidation des bases pour une croissance Cconomique forte, durable et Cquitablement partagte. Pour ce faire, la perspective dans laquelle il s'inscrit rCpond a deux prtoccupations majeures : i)renforcer et approfondir les rCformes (soutenues par le SAC 111) que le gouvemement a engagdes au cours des deux demieres annCes, spdcialement dans le secteur de la gestion des depenses publiques, le secteur financier, le secteur coton (en termes de limitation des risques qu'il fait peser sur le cadre macro6conomique) et dans I'Office du Niger et ;ii)accompagner le gouvemement dans son effort de mise en place des conditions devant permettre au pays dorganiser le soutien de l a mise en oeuvre du CSLP dans le cadre d'un accroissement de l'appui budgCtaire direct dans la pCriode post-SAC IV. L e programme de rCfoiine s'articule autour de trois axes principaux. 2. L e Mali a ClaborC en 2002 un Cadre Strattgique de Lutte contre la Pauvrete qui se fonde sur un diagnostic de la situation de la pauvretC et une comprihension partagCe de ses dkteuninants fondamentaux. I1 propose une stratCgie globale dont I'objectif est de rCduire de manibre significative I'incidence de l a pauvretC dans l e pays dans un horizon tempore1 de moyen terme. Pour ce faire, une croissance Cconomique forte, durable et equitable est indispensable dans un contexte de stabilisation macrodconomique. Les enseignements tirts de la premikre annCe de mise en oeuvre de la strattgie rtvblent notamment la vulnCrabilitt de I'tconomie malienne face aux contraintes de difftrentes natures et la nCcessitC : I/de poursuivre les riformes structurelles importantes (en particulier dans le secteur du coton) et ;21 de renforcer les instruments de pilotages de 1'Cconomie et leur utilisation dans le contexte dune gestion macroCconomique rigoureuse. 3. Le premier axe de rCformes qui pourrait 6tre soutenu par le SAC IV s'inscrit dans cette optique gCnCrale. I1se focalise en effet sur le cadre macroCconomique et la 44 politique budgetaire et sur la poursuite des importantes riformes dans le secteur coton et a 1'0ffice du Niger afin de maintenir la discipline budgitaire et de minimiser les risques budgitaires lies B ces secteurs iicourt terme. 11 soutient egalement la mise en ceuvre de riformes concernant le secteur financier malien. Cinq siries d'actions sont particulierement ciblies dans un esprit de progressiviti et de coherence avec les objectifs poursuivis par l e gouvernement dans le moyen terme. 11 s'agit : I/de la stabilisation macroiconomique dans un contexte de risque budgitaire lii A la situation du secteur du coton ; 21 du renforcement de la cohkrence du budget de 1'Etat avec le cadre stratigique de lutte contre l a pauvreti ; 3/ de la priparation des bases pour le renforcement du systeme financier et la diminution des risques d'insolvabiliti bancaire ; 4/ de la poursuite des reformes du secteur coton dont la rialisation vise A minimiser les risques, sur l e budget de l'Etat, de la situation financikre de la CMDT et 5/ de l'appui aux reformes de seconde giniration de l'Office du Niger. 4. Le second axe de refoitnes envisagi par l e SAC IV est davantage centrC sur l a gestion des dipenses publiques. L'objectif poursuivi est de crier les conditions pour que les outils modernes de gestion mis en place avec succts au cours des deux dernikres annies soient viritablement opirationnels dans le sens d'une plus grande efficaciti du processus budgktaire et d'une meilleure transparence et la circulation de l'information budgitaire. L a circulation de l'information budgitaire o b i i t A deux prioccupations essentielles, a savoir, l a mise B disposition de l'information dans des dilais satisfaisants (efficaciti de la gestion budgitaire) et le renforcement de la participation et de la lisibiliti des actions de lutte contre la pauvreti. 5. Les actions ainsi envisagies demeurent dans le prolongement des progris rialisis par le gouvemement en termes de maitrise des procidures budgitaires et de mise en place d'outils dont l'opirationalisation devrait contribuer a sicuriser davantage l'utilisation des flux de ressources publiques dont ilest attendu une augmentation progressive dam le contexte de l'approche de I'aide budgitaire. 6. Le troisieme axe d'appui du SAC IV est orient6 vers le processus de dicentralisation au Mali. I1 constitue une itape vers un objectif plus giniral qui conceme le renforcement des instruments financiers au niveau local, l'amilioration du processus de planification et d'exicution du budget au niveau local en cohirence avec l'appui de l a diconcentration de l'administration. .-.--.- 45 , 7. L a bonne exkcution du programme SAC IV repose sur une bonne coordination dans la mise en oeuvre des actions requises aussi bien au niveau du Ministtre de 1'Economie et des Finances qu'h celui des autres dipartements ministiriels concemis. 4.2. REFORMEDES SECTEURS BLJDGETAIRE ETFINANCIER A N S I QUEDU SECTEUR COTON ETDE L'OFFICE DUNIGER. 8. Dans ce domaine particulier, les riformes soutenues par l e SAC I V visent deux objectifs principaux : 1/ renforcer la gestion macroiconomique dans l e contexte de l a mise enoeuvre duCSLP ;et 2/ contribuer a maintenir une discipline et une politique budgttaire favorables h la croissance Cconomique tquitable et B la rCduction de la pauvrett. 4.2.1. Cadre macroiconomique et riforme despolitiques budge'taires 9. Dans le contexte de la mise en oeuvre de la stratigie de lutte contre la pauvreti, l a gestion Cconomique et la politique budgCtaire doivent se situer dans une perspective de moyen terme avec comme prioccupation une meilleure cohtrence entre l'instrument budgitaire et les prioritis de dCveloppement du pays. L'optimisation du processus d'allocation des ressources et leur compatibiliti avec le cadre macroCconomique d'ensemble, l a sdcurisation de l'exicution budgdtaire et le contrdle des dCpenses contribuent B asseoir les bases d'une discipline budgttaire globale. 10. Dans cette optique, et compte tenu des enseignements tiris de la mise en oeuvre du CSLP, l e gouvernement a priviligii une stratdgie prudente dans l a politique budgitaire pour l'annie 2005. En effet, le budget 2005 a C t i Clabori dans un souci de cohirence du cadre macroiconomique et de prise en compte des prCoccupations d'acctliration de la mise en oeuvre de la stratCgie de lutte contre la pauvreti. Ceci a ttt rendue possible par la prise de dicisions courageuses en teiliies d'allocations sectorielles de ressources et le recours aux instruments de programmation stratigiques dans le processus de formulation dubudget de 1'Etat. 11,Dans le doinaine particulier du renforcement du processus de formulation budgitaire, les actions soutenues par le SAC IV ont concemi l'opirationalisation des 46 Cadres de Depenses a Moyen Terme dans le processus de prCparation du budget de 1'Etat. Les allocations sectorielles du budget 2005 sont en effet globalement fondtes sur les enveloppes sectorielles fournies par l e Ministbre de 1'Economie et des Finances et celles en faveur des ministbres en charge de 1'Cducation et de l a santd ont t t C arbitrtes sur la base des CDMT sectoriels de ces ministkres. Ceci a pennis, pour les secteurs de la santt et de I'tducation, de fournir une base rtaliste aux stratkgies qui seront poursuivies par les deux secteurs en 2005, tout en prtservant les objectifs spkcifiques du CSLP. En particulier, les efforts ont CtC poursuivis au niveau du ministbre de l a santt en vue d'dtablir des micanismes pour I'actualisation annuelle systkmatique du C D M T afin de le rendre optrationnel dans le processus budgdtaire. L'instrument a pour ce faire servi de base pour l e cadrage financier de l a seconde phase du PRODESS. 12. L e processus d'inttgration des CDMT sectoriels dans l a priparation budgdtaire sera renforct avec d'autre ministkres tels celui du Transport et des Equipement (qui dispose deja d'un CDMT qui sera optrationnel pour le budget 2006) et celui de I'agriculture qui finalisera son CDMT dans le cadre de l'tlaboration du budget 2006. L e systbme actuel de programmation et de suivi des investissements publics est en cours d'amtlioration afin de rendre sa prise en compte au niveau de l a Direction du Budget plus aiste. Des actions ont t t C prises en vue de l a mise en place d'une nouvelle application informatique gtrant l e systime du programme triennal d'investissement et du budget sptcial d'investissement et celle-ci est actuellement en cours de test. 13. En termes de meilleure inttgration du budget et du CSLP, le gouvemement a rCalist des progrbs importants dans l e sens de l'adoption d'un calendrier de suiviltvaluation du CSLP qui permette I'intCgration des conclusions de l'evaluation du CSLP dans le budget 2006. L e second rapport de mise en oeuvre de la stratigie est produit et suit le cours de son adoption suivant l e dispositif de suivi adopt6 par le gouvemement. 14. Avant fin septembre 2005, (aprbs 1'Cchtance de realisation du programme SAC . IV), le gouvemement mettra en oeuvre les actions ndcessaires pour achever la nouvelle application informatique gerant le systkme du Programme Triennal d'Investissement (PTI) et le Budget Sptcial d'Investissement (BSI). Ceci permettra de 47 renforcer la programmation des depenses publiques A moyen terme au niveau des ministkres sectoriels. 4.2.2. Riforme du secteurfinancier 15. L'objet de la rtforme du secteur financier est double. I1 s'agit, d'une part, de permettre l e renforcement du systeme financier et du contexte rkglementaire qui conditionnent son efficacitt et, d'autre part, d'amiliorer I'accks aux service financiers ainsi que de crter des opportunitCs alternatives pour le financement des entrepreneurs maliens. Ceci implique : (i)I'apurement des portefeuilles des banques et l'achkvement de leur privatisation ; (ii)le dtveloppement de sources alternatives de crtdit, telles que les sociitts de crCdit bail ; (iii)une restructuration complete du secteur des assurances en renforqant I'environnement rtglementaire (par une meilleure application des rkglements existants tels que I'assurance obligatoire, la domiciliation des primes d'assurance) et la restructuration des diffkrentes compagnies ; (iv) l e renforcement des institutions de micro-finance ; et (v) le traitement du dtficit structure1 du systkme des pensions. Cette reforme btntficie du soutien du Projet de Dtveloppement du Secteur Financier (PDSF) financt par la Banque mondiale. 16. Les rtfonnes qui ont Ctt supporttes durant laptriode de rtalisation du programme SAC IV, consistent en une strie de quatre actions L a rtalisation d'un audit du portefeuille compromis de chaque banque commerciale dont le dtmarrage est prtvu pour le 15 ftvrier 2005, afin de mieux comprendre les causes des problbmes, et concevoir un plan d'action pour l e nettoyage du portefeuille des banques avec une repartition des coats entre l e Gouvemement et les banques memes. L a rialisation d'une ttude actuellement en cours, visant 21 mieux apprthender les effets du regime fiscal sur les activitts de crtdit bail. Ses conclusions et recommandations seront examintes par les autoritts compttentes en vue de leur mise en oeuvre. L a mise en en place (par arret& No04-1333MEF-SG du 16 juillet 2004 et N004- 1867hlEF-SGdu 24 septembre 2004 du Ministre de I'Economie et des Finances), d'un comitt de suivi de la mise en oeuvre des recommandations foi inulies par 48 l'ttude sur la domiciliation des polices d'assurance et proposer un chronogramme de mise en oeuvre des recommandations. Depuis sa crtation, le Comite de Suivi est a sa 14eme reunion et ses principaux travaux ont CtC axis entre autres sur l/la relecture des textes sur l'assurance obligatoire des marchandises : des projets d'ordonnance, de dCcret et d'arr&tC ont C t i ClaborCs et transmis au Ministkre de 1'Economie et des Finances pour validation et transmission au SecrCtariat GCnCral du Gouvernement pour leur introduction au Conseil des Ministres ; 21 le renforcement des contr6les des assurances obligatoires : des lettres du MEF ont CtC envoyCes ses homologues de 1'Industrie et du Commerce, de la SCcuritC IntCrieure de la Protection Civile, de 1'Equipement et des Transports, de 1'Energie et des Mines ainsi que de l a Justice en vue de solliciter leur collaboration pour le respect des dispositions ltgislatives et rkglementaires relatives aux assurances obligatoires et iileur domiciliation au Mali ; 3/ I'Claboration d'un programme d'activitds d'infoiiiiation et de sensibilisation sur les assurances obligatoires au Mali. Ce programme qui sera cofinanc.C par le PDSF et le C C A M dimamera au mois de Fevrier 2005 et comporte des dCbats a la ttldvision et iila radio, des sketches publicitaires et de sensibilisation, des missions d'infoiination et de sensibilisation auprks des operateurs economiques. L a realisation d'une mission d'audit dont le rapport est attendu pour l e 22 fivrier 2005 pour Cvaluer la situation des arriCrCs de cotisations dus aux institutions de sCcuritC sociale liCes aux entreprises publiques liquidCes et, s i nkcessaire, Claboration d'un plan dapurement. 17, Les rbformes, qui seront supporties imm6diatement apris l a pCriode de realisation du programme SAC IV, incluront : (i)l'apurement des portefeuilles des banques et l'achkvement de leur privatisation ; (ii)la restructuration du secteur de l'assurance ;(iii) le renforcement des institutions de micro-financement ;et (iv) la conduite d'audit actuariels des deux institutions de sCcuritC sociale, menant A des rdvisions dans les contributions et les avantages afin de rCtablir un Cquilibre financier. 4.2.3. Rkforme du secteur coton et de l'office du Niger 18. Les progrks realists vers la mise en oeuvre et le renforcement duprogramme de reforme effective du secteur du coton restent l'eldment dtterminant pour toute 49 CventualitC d'accession a un support budgitaire plus large qui pourrait Ctre fourni par la Banque Mondiale au gouvemement du Mali. Le soutien h cet objectif de rCforme est donc crucial pour le developpement economique du pays. Ainsi, le gouvemement confiine son engagement a actualiser et 1mettre en oeuvre l e Plan d'Action Actualise de la Lettre de Politique de Developpement du Secteur Coton (LDPSC), adoptte par le Conseil des Ministresen sa sCancedu5 novembre 2003. 19. I 1 poursuivra les rCfoiines et la IibCralisation du secteur du coton grice h la mise en oeuvre d'une sCrie d'actions qui visent la restructuration et l'amdlioration de l'efficacit6 du secteur. I1 soutiendra Cgalement les rtfoiines de seconde gCnCration de l'office duNiger dont le dCveloppement est important pour 1'6conomieduMali. 20. Dans le cadre du programme SAC IV le gouvernementa mis en oeuvre les mesuressuivantes 21, Au niveau dusecteur du coton 0 unepropositionacceptable des moyens de risorption du deficit liC B la campagne 2004-2005. 0 une proposition acceptable visant a amiliorer lemdcanisme de prix et a amCliorer le calcul/gestion de la ristoume travers la signature, le 13 janvier 2005, d'un protocole d'accord entre I'Etat, la C M D T et les producteurs sur le mecanisme des prix. L e protocole d'accord sera mis en oeuvre selon les trois principes suivants 0 Le prix initial est fixC, dans unsoucis de prudence budgitaire, dans une fourchette de 160 a 175 FCFNkg et pour une pdriode de trois ans. 0 L e prix final est fix6 selon une formule pour le partage des recettes brutes du secteur, calcult sur la base des prix de march6 international. 0 L e fonds de soutien n'est pas une condition a sine qua non 1)pour l'application du micanisme de prix. 50 22. Au niveau de la zone Office du Niger la preparation d'un contrat-plan acceptable et coherent avec les riformes en cours 0 l'adoption d'un mecanisme de financement pour I'irrigation I'adoption du dkcret autorisant I'emission de titres fonciers sur le pkrimbtre experimental de Koumouna. 23. Suite au programme SAC IV, le gouvemement poursuivra ses efforts de reformes dans le secteur coton grdce a la realisation des mesures suivantes - L'application du protocole d'accord entre 1'Etat- l a CMDT les Producteurs sur la - determination duprix d'achat du coton graine. L'annonce d'un prix de base au producteur de coton pour 2005-2006 qui minimise le risque de recours au budget de 1'Etat. 9 L'ajustement 21 la baisse du prix au producteur de coton dans le cas oh les projections de paiement au producteur sont inferieures au prix de base, tel qu'envisagk dans le protocole sur le micanisme de prix. L a designation, par les producteurs, de leurs reprksentants pour le suivi du processus de privatisation de l a C M D T en attendant l a mise en place de 1'interprofession. L'ilaboration d'un plan d'action de la restructuration du secteur cotonnier issu d'une r i f l e x i o n tenant compte du contexte et des perspectives des fili&res cotonnikres Ouest Africaines. . La privatisation de HUICOMA, '- L'installation de producteurs privks sur le pkrimbtre expkrimental de Koumouna selon les critbres decries dans l'accord de cridit pour le Project &Infrastructure Rurale (PNIR). - La mise en oeuvre du programme du contrat-plan pour I'Office du Niger. 51 4.2.4. Rkforme de la gestion des dkpensespubliques et amilioration de la transparence 24. Au cours des trois dernitres armies, le systtme budgktaire du Mali a connu des amtliorations importantes. Les efforts des autoritis ont i t 6 concentris sur la conception et la mise en place d'instruments de gestion qui, pour l'ensemble, sont aujourd'hui operationnels. On peut citer notamment : (i)l'interconnexion au niveau central des structures-clis du Ministkre de 1'Economie et des Finances qui interviennent dans le processus budgitaire (Direction du Budget, direction du Contrble Financier et Direction du TrCsor) dont l a portde est fondamentale sur la fiabiliti des donnies budgdtaires ; (ii)l'adoption d'une nomenclature budgitaire compltte qui permet une prisentation des allocations budgdtaires selon les normes admises au plan international ; (iii)la mise en place d'une nomenclature budgBtaire et comptable des collectivitis territoriales cohirente avec la nomenclature budgdtaire et celle recommandde au niveau de 1'UEMOA ;(iv) l a conception d'outils a l a disposition des administrateurs de cridits et des contrbleurs financiers afin d'amiliorer I'exCcution du budget de 1'Etat. 25, Ces outils sont aujourd'hui opdrationnels et mBritent, soit d'btre intdgris et internalisis par 1es acteurs budgdtaires dans une optique de gestion, soit amdioris dans une perspective ultime d'amilioration ginirale de l'efficacitk de l a dBpense publique. Aussi, les rtformes soutenues par l e SAC IV ripondent-elles A trois prioccupations majeures : (i)poursuivre les actions entreprises dans l e sens d'une informatisation de la chaine de la dBpense publique avec pour objectif d'amiliorer le processus d'exicution des dipenses ; (ii)continuer le renforcement des structures de contrble et la disponibiliti d'instruments permettant d'amkliorer significativement les fonctions d'audit et de contrBle ;(iii)amdiorer lesmdcanismes decirculationetdediffusion de l'infoinnation financikre en vue d'accroitre l a transparence et l a traCabilitB des fonds publics dans le contexte de la promotion de la participation. 26. L a stratigie d'exdcution de ces objectifs s'esl fondBe sur deux Blements capitaux (i) I'optimisation des fonctions d'extcution des dipenses publiques en assurant l'intigration des systkmes d'infonnation, en amiliorant les procBdures d'exicution des dipenses publiques et en renforqant I'audit interne/externe et I'ivaluation de la performance (augmentation du nombre et amilioration de l a qualiti des audits de 52 gestion, amilioration des procidures) ; (ii)l'amelioration de l a transparence et de la tracabiliti des fonds publics sera achevde en assurant une diffusion plus large des comptes consolides du Gouvemement. 27. L e plan d'action adopt6 pour repondre aux objectifs ci-dessus Cnonces s'est articuli autour de deux horizons dans un souci de gradualiti dans l a mise en ceuvre des riformes et de cohirence avec l a vision de moyen terne du gouvernement. Pendant l a pCriode soutenue p a r l e programme de reformes du SAC IV, une grande' attention a C t i accordCe a trois Bliments complimentaires qui sont : 1/ la fiabiliti des donnies budgdtaires et de I'exCcution budgitaire ; 2/ le renforcement des operations de contrdle et ; 31 l'amilioration de la transparence de la gestion budgitaire et l'obligation de rendre compte. 28. En termes de fiabilitC des donnies budgdtaires et de sCcurisation de l'exicution budgetaire, l'interconnexion infonnatique de la Direction Nationale du Budget, de la Direction du Contrdle Financier et de l a Direction Nationale du T r i s o r et de l a ComptabilitC Publique a C t i renforcie au niveau central par la finalisation des mises ajour de la base de donnCe du contrdle financier et trCsor). L e processus a i t 6 engagC au niveau diconcentri (les directions rdgionales) et au stade actuel, un appel d'offre a CtC lance en vue de l a rkalisation effective de l'interconnexion. Au niveau de la comptabilitd de l'Etat, les actions ont Ctk entamies en vue de l a mise en place d'une comptabiliti auxiliaire informatisie dans les postes comptables du trdsor. Au stade actuel les cahiers des charges ont CtC Clabores (ddcembre 2004) et l a prochaine itape consiste au lancement de I'appel d'offre pour la rialisation de l'activitk. Par ailleurs, dans la perspective d'une maitrise des cocts supportis par l'administration lors des commandes publiques, l a mercuriale des prix a CtC actualiste sur l a base d'une enquCte rCalisie en 2004 et est disponible sur support numtrique (CD-ROM). Dans un souci de meilleur suivi des marches publics, des termes de rifirences ont Btt Clabores en vue de l a rialisation d'une base de donndes relative aux diverses phases de l a passation des marchis. 29. D'une maniire ginerale dans le domaine de la gestion budgitaire, le gouvernement a dispose au cours des dernikres annies d'un ensemble d'dtudes et de diagnostics qui lui ont permis de mieux apprehender les forces et les faiblesses du systime budgitaire du Mali. Aussi s'est-il attelC A elaborer un plan d'action 53 d'ensemble qui propose sur l e moyen terne des reformes de renforcement et de modemisation de la gestion budgdtaire. Son intCrCt est de donner une perspective A la sicurisation du processus budgCtaire dans son ensemble et de constituer un signal dans le sens de la volontd du gouvernement d'organiser I'appui au CSLP dans le cadre de I'appui budgCtaire directe. 30. Concemant le renforcement des operations de contde, les efforts ont ett concentres sur : (i)la mise en place au niveau de la DNCF d'indicateurs permettant d'apprCcier la qualite des contrdles et d'en amtliorer I'efficacitt (contrble a priori fond6 sur l a performance) et (ii)Mablissement et la diffusion auprts des gestionnaires d'une nomenclature des p i k e s justificatives qui devrait contribuer b faciliter le contrdle A priori et a diminuer les rejets de demandes d'engagements de dCpenses ;(iii)la prise en compte dans l a l o i de finances 2005 de crddits budgdtaires pour couvrir les cotits de la rdvision constitutionnelle indispensable A la transformation de la section des comptes en une cours des comptes independante. Par ailleurs ilest b noter que le Contrdle GCnCral des Services Publics a btnCficiC d'un renforcement de capacitts dans l e domaine des audits financiers (ainsi que la section des comptes) avec un taux d'exdcution de son programme de contrdle de 88%. 31. En termes d'amdlioration de la transparence de la gestion budgitaire, les outils permettant l a mise A disposition, sur demande, des donnCes relatives aux ddpenses du budget de 1'Etat ont CtC renforcks ainsi que les capacitks des unites centrales dtconcentrtes. Ceci a contribuC A amtliorer la note trimestrielle qui inttgre dtsormais la situation d'exkcution du budget des secteurs prioritaires. Cette note, produite par le Ministtre de 1'Economie et des Finances, s'appuie sur l a disponibiliti de l'information sur I'exCcution budgCtaire rendue fiable par l'interconnexion inforr-atique entre les Directions Nationales du Budget, du Contrdle Financier et du TrCsor et ComptabilitC Publique. Elle est actuellement diffusCe sur l'intemet. D'autres canaux de diffusion permettant de rendre I'information disponible pour le maximum de citoyens sont envisagCs. Concernant l'obligation de rendre compte, les progrts ont CtC importants dans le domaine de l a production des projets de lois de rtglement au Mali. L e gouvemement a en effet introduit le projet de loi de rtglement de l'annCe 2003 au parlement en dCcembre 2004, ce qui constitue un pas important dans le sens du respect des dilais ltgaux (retard de trois mois). Les dispositions sont d'ores dCja 54 prises afin de deposer l e projet de loi de riglement 2004 au plus tard le 3 1 octobre 2005. 32. Apres 1'Cchbance de rdalisation du programme S A C IV, et dans la continuitt des riformes que le gouvernement entend mettre en ceuvre dans le moyen teune, les actions seront focaliskes, en termes d'amdioration de l'exicution des depenses sur (i)le renforcement de I'interconnexion des systimes &information au niveau central ; (ii)la mise en place d'une comptabiliti auxiliaire informatisee dans les postes comptables du trdsor (production des cahiers des charges ti fin dCcembre 2004, mise en oeuvre au niveau central avant le 31 dicembre 2005 et dkploiement dans les regions h fin juin 2006) ; (iii) l'achevement de l a base de donnies pour l e suivi du deroulement de la procedure de passation des marches publics, afin de mieux connaitre les dilais, Cventuels litiges, et suites donnCes aux dossiers ( disponibiliti des cahiers des charges a fin fevrier 2005 et realisation au 30 septembre 2005); (iv) l'integration des systimes informatiques en place au niveau des services dCconcentrCs de la DNB, DNCF et DNTCP (mise en oeuvre sur le site pilote au 30juin 2005 et deploiement dans toutes les regions au 31 dtcembre 2005) ; 33. En termes de renforcement des operations de contr6le et dans l a perspective d'une amdioration de l'efficaciti de l a dipense, les actions seront focalisees sur : (i) I'augmentation du nombre et l'amilioration de l a qualiti des audits financiers par 1'Inspection des Finances (IF) et des audits de gestion par l e ContrBle GdnCral des Services Publics (CGSP); (ii)l'achtvement de l a formation en audit des Inspecteurs de Finance ; (iii)l'amdioration dans I'dquipement informatique et de transport de I'IF et du CGSP ; (iv) l a production reguliire d'un rapport semestriel d'activiti de l a D N C F permettant dappricier l a qualit6 des contrales effect& ;(v) L'Climination des retards de soumission des projets de lois de riglement h 1'AssemblCe Nationale (production du projet 2004 ti fin octobre 2005) ; (vi) l a poursuite des actions de renforcement de la Section des Comptes (mise ti disposition des ressources nkcessaires au programme de formation et au programme d'iquipement) ; (vii) le suivi continu vers une gestion plus transparente sera assur6 par la mise en oeuvre de mesures permanentes relatives ti I'optimisationde l a transparence des dlpenses. 55 4.2.5.le processus de dicenlralisation 34. Dans I'optique de la consolidation des acquis du processus de decentralisation du Mali, l e Gouvernement a adopt6 un Plan d'action ayant notamment pour objectif d'accelerer le transfert des ressources et des competences, de coordonner et harmoniser les appuis existants en la matiere et de renforcer les capacitis des collectivitis territoriales dans la mobilisation des ressources. L e gouvernement a aussi adopte les textes reglementaires relatifs au transfert de competences dans les domaines de la SantC, de I'Education et de I'Hydraulique. Des progrks importants ont i t t rialises dans l e sens du renforcement des capacitis des acteurs de la decentralisation (mise en place de Centres de Conseil Communaux fonctionnels) A travers des dispositifs techniques et financiers d'appui aux collectivitis. 35. Toutefois, l e Gouvernement est conscient des difficult& qui persistent dans la mise en oeuvre du processus. I1 s'agit notamment : (i)des lenteurs dans le transfert des competences et des ressources de I'Etat aux Collectivites ; (ii)de la faible mobilisation des ressources propres aux CollectivitCs ; (iii) du manque d'articulation entre les programmes sectoriels (sante, education, infrastructures rurales) et les programmes des Collectivitis Territoriales ; et (iv) des lacunes et insuffisances dans les textes de la Decentralisation, entrainant une faible coordination dans l e domaine de la planification et de la gestion du developpement regional et local. 36. L e probleme de fond concerne la rtalisation pratique du transfert thtorique opCri par les textes, notamment : (i)la l o i n"95-034 du 12 avril 1995 portant Code des Collectivitis Territoriales en Rtpublique du Mali ; et (ii)les textes rtglementaires consacrant le transfert de certaines compitences prioritaires en matitre de santC, d'iducation et d'hydraulique rurale et urbaine. Aussi, dans le cadre du SAC IV, des dispositions ont CtC prises afin de progresser vers I'tlaboration des programmes de transferts des competences dans les regions assortis de mesures d'accompagnement. 37. L'objectif general poursuivi dans le programme SAC I V a et6 d'engager un soutien ila mise en oeuvre des instruments financiers et B la mise en oeuvre de la diconcentration de I'administration en tant qu'C1Cments indispensables B la mise en oeuvre de la decentralisation. La demarche sera progressive dans le domaine et se fondera sur le plan d'opirationnalisation des transferts de compttences et de 56 ressources dont la preparation est en cours par le gouvemement. Aussi, une action principale a-t-elle Ctt visie dans le cadre du SAC IV, a savoir, l a tenue d'un atelier national pour : (i)valider les recommandations de l'dtude diagnostique pour le transfert des compttences et des ressources de 1'Etat aux collectivitis territoriales ; et (ii) proposer un plan pour le transfert. Les conclusions de l'atelier sont disponibles et sont en cours d'examen par le Conseil des Ministres. 57 * Y c 0 I -EP3 3 v) n M ui et; 0 0 .-N 7 c c 3 '9 '9 ANNEX 3: KEYECONOMIC INDICATORS (Actual) (Est.) (Projection) Indicator 1999 2000 2001 2002 2003 2004 2005 National accounts (as % GDP at current marketprices) Gross domestic product 101.0 102.0 103.O 104.0 105.0 106.0 107.0 Agriculture 41.4 38.7 35.0 31.6 35.6 33.8 33.1 Industry 14.9 19.1 24.4 27.5 24.2 24.4 25.1 Services 32.8 35.3 33.1 33.4 32.9 34.3 34.0 Total Consumption 90.5 90.3 83.6 81.5 81.1 83.O 83.0 GDI 21.2 22.3 27.0 18.6 23.4 21.2 20.6 Government investment 9.4 7.8 6.1 7.0 6.3 7.7 7.7 Private investment 11.8 14.5 20.9 11.6 17.1 13.6 12.8 (includes increase in stocks) Exports (GNFS) 26.5 26.8 33.3 31.9 26.4 27.2 26.9 Imports (GNFS) 38.2 39.4 44.0 32.0 30.8 31.4 30.4 Balanceof Payments (US$m) Exports (GNFS) 680.2 630.6 862.4 1187.3 1125.3 1234.2 1324.9 Merchandise FOB 596.0 546.6 713.5 998.5 953.7 1057.3 1138.8 Imports (GNFS) 989.2 955.0 1138.4 1193.4 1316.1 1424.4 1500.0 Merchandise FOB 632.0 595.0 723.3 787.8 855.3 910.9 991.1 Net current transfers 106.7 127.4 133.7 163.1 184.9 111.4 94.1 (including official current transfers) Current account balance -135.2 -130.2 -230.4 -0.1 -70.2 -91.1 -161.9 (after official capital grants) Net private foreign direct 16.4 88.6 0.1 269.9 78.1 36.7 44.1 investment Long-term loans (net) Official 57.2 49.9 66.9 96.2 153.8 75.9 86.4 Private 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Change inreserves 55.5 19.0 71.8 57.1 -124.5 197.7 245.1 Public finance (as YOof GDP) Current revenues 18.3 15.7 16.1 15.2 17.3 16.5 16.2 Current expenditures 12.0 11.6 14.5 13.2 12.6 13.7 13.9 Capital expenditure 14.2 12.1 11.5 11.4 11.1 11.5 11.4 Foreign financing 8.2 6.4 6.3 6.8 7.7 6.4 6.2 67 ANNEX 4: STATUS OFBANKGROUPOPERATIONS(ALL IDA) (Inmillions ofUS.dollars, as ofFebruary 16,2005) Credit Fiscal Number Sector Year IDA&/ Undisbursedx CN0040-ML UrbanDevt & Decentralization 1997 80.0 21.1 C31550-ML Health SectorDev. Program 1999 40.0 16.1 C33930-ML Rural Infrastructure 2000 115.1 66.4 C33940-ML Finance Sec Dev 2000 21.0 15.4 C34490-ML EducationSect. Expendit.PrgmAPL 2001 45.0 15.3 C35830-ML Agricultural & Producer Organizations 2002 43.5 30.0 C32958-ML GEF HouseholdEnergy 2004 3.5 3.5 C38280-ML HouseholdEnergy & Universal Access 2004 35.6 36.8 C38690-ML Transport Corridors Improvement 2004 48.1 49.5 C40220-ML Emergency Locust 2004 6.8 6.8 H0900-ML DevelopmentLearningCt LIL (FY04) 2004 2.5 2.5 H0990-ML HIV/AIDS MAP SIL (FY04) 2004 25.5 25.9 40330-ML Growth SupportProject 2005 55.0 55.0 Totals (number of credits=13) 522.3 343.3 Original loan amount at time ofnegotiations. 2! Reflects changes inthe $/SDR rate since negotiations, and could be larger than the original amount ifthe dollar has depreciated. 68 ANNEX 5: MALIAT A GLANCE , Sub- POVERTYand SOCiAL Saharan LOW- Mali Africa income Developmentdiamond' 2003 Population. mid-year (millions) 11.7 703 2,310 Life expectancy GNi per capita (Atlas method, US$) 290 490 450 I GNi (Aflas mefhod, US$billions) T 3.4 347 1,038 Average annual growth, 1007-03 Population(%) 2.4 2.3 1.9 Laborforce (%) 2.4 2.4 2.3 GNi Gross primary Most recent estimate (latest year available, 10B7-93) capita nroilment Poverty(% ofpopulationbelownationalpovertyline) 64 Urban population(% of totalRORU/atlOn) 32 36 30 Lifeexpectancyat birth Wears) 52 46 58 infant mortality(per 1,000 live births) 113 103 82 Chiidmalnutrition(% ofchildrenunder5) 25 44 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 51 58 75 Illiteracy(% ofpopulation age 15+) 55 35 39 Gross primaryenrollment (% of school-agepopulation) 59 87 92 -Mali Low-incomegroup Male 66 94 99 Female 49 60 85 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1083 1BO3 2002 2003 Economicratios* GDP (US$ billions) 1.3 2.7 3.3 4.3 GrossdomesticinvestmentlGDP 12.1 21.8 18.6 23.4 Exportsof gwds and services/GDP 16.1 15.8 31.9 26.4 Trade Grossdomestic savings/GDP -3.2 6.4 16.5 19.0 Gross nationalsavings/GDP 10.0 16.1 19.4 T Current accountbaiance/GDP -15.3 -6.9 -3.3 -4.0 Domestic InterestpaymentsiGDP 0.5 1.5 0.7 0.5 Investment savings Total debffGDP 76.4 106.4 84.8 74.6 Total debt serviceiexports 8.3 14.5 7.1 7.3 Presentvalue of debtlGDP 37.1 1 Presentvalue of debtlexports 97.9 Indebtedness 1083.03 100303 2002 2003 200307 (averageannualgrowth) GDP 2.3 5.6 4.4 6.0 6.0 -Mali Low-incomegroup GDP per capita -0.4 3.4 2.1 3.7 3.7 ~ Exportsof goods and services 5.4 12.8 31.7 -10.4 4.9 STRUCTUREof the ECONOMY I 1083 1993 2002 2003 Growth of investmentand GDP (Oh) (% of GDP) II Agriculture 41.4 44.5 34.2 36.4 l W T industry 14.8 16.3 29.7 26.1 1 5500 1 A I Manufacturing 6.5 7.6 3.2 2.8 Services 43.7 39.3 36.1 35.5 3::; 0 Private consumption 92.1 80.7 70.8 70 8 71.1 -500 ~-50 General governmentCOnSUmPtiOn 11.1 12.8 10.7 9.9 Importsof goodsand services -GDI ' O ' G D P 1083-03 1903-03 2002 (averageannualgrowth) Agriculture 5.5 3.3 -3.6 Industry 3.7 8.6 18.4 -7.9 Manufacturing 6.3 -4.1 22.7 Services 1.0 4.0 1.1 Privateconsumption 1.2 2.8 -3.5 Generalgovernmentconsumption 5.2 7.1 3.0 Grossdomestic investment 6.2 8.3 -26.1 33.3 -Exports -0-lmpoTts importsof goods and services Note:2003 data are preliminaryestimates. The diamonds showfour keyindicatursin thecountry(in bold)compared with its income-groupaverage.if data are missing,the diamondwiii be incomplete. 69 ANNEX 5: MALIAT A GLANCE(CONT'D) PRICES and GOVERNMENT FINANCE 1983 I I993 2002 2003 Domesticprices lnflatlon (%) (% change) zo T Consumer prices -0.6 5.0 -1.3 Implicit GDP deflator 7.9 2.6 15.8 1.8 Government finance (% of GDP, includescunent grants) I Current revenue 73.8 15.4 15.2 17.3 Current budget balance 26.0 3.0 1.9 4.8 Overall surpluddeflcit -24.0 -8.0 -9.5 -6.3 -GDP deflator -0-CPI TRADE I 1983 1993 2002 2003 (US$ miiiions) Export and Importlevels (US$ mlll.) Total exports (fob) 349 998 954 Cotton 147 248 257 1250 T Gold 54 640 542 Manufactures Total imports (cif) 678 429 438 Food 97 Fuel and energy 74 Capital goods 182 Export price index (1995=100) 87 86 90 Import price index (1995=100) 93 97 99 Exports Imports Terms of trade (1995=100) 93 88 91 BALANCE of PAYMENTS 1983 1993 2002 2003 (US$ millions) Current account balance to GDP (Oh) 1 Exports of goods and services 209 424 1,187 1,125 Imports of goods and services 408 836 1,193 1,316 Resource balance -199 -412 -6 -191 Net income -17 2 -268 -167 Net current transfers 18 225 163 185 Current account balance -198 -185 -111 -173 Financing items (net) 202 213 54 298 Changes in net reserves -4 -28 57 -125 Memo: Reserves includinggold (US$ miiiions) 23 339 595 828 Conversion rate (DEC, locar/vS$) 381.1 283.2 697.0 581.2 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composltlon of 2002 debt (US$ mill.) Total debt outstanding and disbursed 988 2,903 2,834 3,229 IBRD 0 0 0 0 IDA 172 656 1,134 1,322 151 Total debt service 20 79 90 83 IBRD 0 0 0 0 IDA 1 8 10 13 Composition of net resourceflows Official grants 79 175 219 0 Official creditors 124 59 98 154 Private creditors Foreign direct investment 3 4 102 0 Portfolio equity 0 0 0 0 World Bank program Commitments 12 113 A . IBRD E Bilateral - Disbursements 19 47 91 95 B IDA - 0 Other multilateral - F. Private Principal repayments 0 4 4 5 C IMF - G -Short-term Net flows 19 43 88 90 Interest payments 1 5 7 8 Net transfers 18 39 81 02 70 ANNEX 6: MKEY PROCESSINGEVENTSAND TEAM MEMBERS Mali SAC IV Timetable Concept Note Review: May 2004 completed Identificationmission: May 26-June 7,2004 completed Pre-appraisal mission: July-August 2004 completed ROC/OC Reviews August-September 2004 completed Appraisal mission: February 7-9,2005 completed Negotiations: February 10-11,2005 completed Board approval: March 22,2005 Effectiveness: March 22,2005 Team composition Zeljko Bogetic TTL,LeadEconomist, AFTP4 Abdoulaye Konate Economist, AFTP4 Francesco Scaduto-Mendola Consultant, AFTP4 Noel K.Tshiani Sr. Financial Sector Specialist, AFTFS Robert Cauneau Sr. Public Finance Specialist, AFTP4 Andre Ryba Lead Financial Sector Specialist, AFTFS Patrick Labaste Sr. Ag. Economist, AFTS4 Yeyande Sangho Sr. Operations Officer, AFTS4 nhem Baghdadli YP,rural development team Bakary Kante Consultant, AFMML KevinLumbila Consultant, AFTP4 Jean-Pierre Mauduit Consultant Judite Femandes Program assistant Advisors Robert Blake (AFTP4), DavidA. Craig (AFC15), Judith Press (AFMML),Christina Wood (AFTP4), Quentin Wodon (AFTPM), IreneXenakis (AFTOS). Peer Reviewers Jan Waliser (OPCCE); LiliLiu(PRMEP). 71 ANNEX 7: RELATIONS WITH THE WORLD BANK GROUP AND THE IMF (As ofFebruary 17,2005) A. Partnershipin Mali's Development Strategy 1. Mali's development strategy increasingly emphasizes growth and poverty reduction. It's PRSP (adopted by the Government inMay 2002) highlights growth as a preconditionfor poverty reduction, and outlines programs for (i) institutional development and improved governance, (ii) humandevelopment and access to basic social services, and (iii) infrastructure development and support for key productive sectors. Mali's growth strategy aims to be private-sector-led and market oriented toward the West Africa regionas well as the global market. 2. The IMF and World Bank staffs maintain a collaborative relationship in supporting the Government's macroeconomic and structural reforms, in line with the guidelines for enhanced Bank-Fund collaboration. This has included regular participation o f Bank staff in the meetings with the Government on the Fund's program reviewmissions, and IMF staffhave beeninvitedto Bank internal review meetings and meetings with Government. The IMF has taken the lead in macroeconomic stabilization and the World Bank in social and structural areas, with close collaboration on a few structural areas that have a particular impact on macroeconomic stability. The Fund's dialogue and conditionality have been consistent with the structural programs agreed with the Bank, and the Bank's dialogue and conditionality have maintained consistency with the macroeconomic framework endorsedby the Fund. B. World BankGroup Strategy 3. The World Bank Group's Strategy, outlined in the Country Assistance Strategy (CAS) discussed by the Board o f Directors on 3 1 July 2003, emphasizes three broad themes inline with the country's PRSP: (i) promotion o f economic growth; (ii) resources development; and human (iii) financemanagementandgovernance. MalialsobenefitsundertheBank'sRegional public Integration Assistance Strategy (2001), notably program for connection to the West Africa Power Pool, harmonization o f country policies and/or regulatory frameworks (telecommunications, agriculture, financial sectors), water resource development o f the Niger and Senegal rivers, strengthening of road transport corridors, and strengthening the regional payments system. 4. Support to Mali during fiscal years 2004-2006 amounts to US$ 400 million inthe base case, with about 30 percent ingrants. Budget support of $25 millionannually will be providedthrough structural adjustment credits (SACs), subject to satisfactory macroeconomic management. This will be complemented by selected investmentoperations (targetinghealth, education, growth and infrastructure development) and community-driven development operations. In the high case, subsequent to implementation o f measures to reduce the budgetary risk o f cotton sector losses, the Bank envisions transition to PRSC-based budget support, most likely in FY08-09, at an amount double that currently provided under the SACs. The active portfolio i s detailed in Table 1. 72 5. The CAS also includes non-lending activities. Recently completed activities include a Country Financial Accountability Assessment, Macroeconomic Growth and Water Variability study, first phase Poverty Assessment, Country Procurement Assessment Review, and an Integrated Framework Trade Diagnostic Study. A Poverty and Social Impact Analysis of the cotton sector is nearing completion. The Bank has also assisted with development o f medium term expenditure frameworks (MTEF) for health and education, and MTEF support i s underway for the transport and agriculture-livestock-fisheries sectors. Planned activities include a Country Economic Memorandum on Growth (FY05) and a Public ExpenditureReview(FY06). Table 1. Mali: Status of World BankPortfolio(allIDA) (Inmillions ofU.S. dollars, as ofFebruary 16,2005) Credit Fiscal Number Sector Year IDA^' Undisbursedz CN0040-ML Urban Devt & Decentralization 1991 80.0 21.1 C31550-ML Health Sector Dev. Program 1999 40.0 16.1 C33930-ML Rural Infrastructure 2000 115.1 66.4 C33940-ML Finance Sec Dev 2000 21.0 15.4 C34490-ML Education Sect. Expendit. Prgm APL 2001 45.0 15.3 (35830-ML Agricultural & Producer Organizations 2002 43.5 30.0 C32958-ML GEF HouseholdEnergy 2004 3.5 3.5 C38280-ML Household Energy & Universal Access 2004 35.6 36.8 C38690-ML Transport Corridors Improvement 2004 48.7 49.5 C40220-ML Emergency Locust 2004 6.8 6.8 H0900-ML Development Learning Ct LIL (FY04) 2004 2.5 2.5 H0990-ML HIV/AIDS MAP SIL (FY04) 2004 25.5 25.9 40330-ML Growth Support Project 2005 55.0 55.0 Totals (number of credits=13) 522.3 343.3 Original loan amount at time of negotiations. Reflects changes in the $/SDR rate since negotiations, and could be larger than the original amount ifthe dollar has depreciated. C. IMF-WorldBankIMF Collaboration 6. Areas in which the Fund leads. The Fund takes the lead in macroeconomic stabilization including macro-fiscal policy, monetary policy, exchange rate policy and financial stability and riskmanagement. 7. Areas in which the Bank leads. The Bank takes the lead in structural areas where both institutions have conditionality, including cotton sector reform, privatization and regulatory reform (telecommunications, banking, energy sectors), and pension reform. The Bank also leads inother areas suchas: agriculturalcompetitiveness/diversification; rural development (irrigation, roads, support to producer organizations); private sector development (strengthening the investmentclimate, access to business services, support to small/medium enterprises); financial sector reforms; urban development (historic rehabilitatiordpreservation, land/housing market development, water/road infrastructure); transportation policy/infrastructure; energy sector 73 reforms; and social sectors (health, education and social protection, including HIVlAIDS). The Bank's work in structural areas includes analytical work and dialogue on trade and growth policies, which form part o f the overall economic policy dialogue. The Bank collaborates with other donors whenever possible (notably inhealth, education, agriculture and cotton sectors), and i s pursuinga harmonized approach for donor support to health and education reforms. 8. Areas of shared responsibility. Both Bank and Fund collaborate in assessing performance o f HIPC resource use. Both also monitor progress on budgetary and public expenditure management, yet emphasize different aspects o f the Government's reform program in the respective support operations. The Bank emphasis in this area i s on strengthening all phases o f the public expenditure system-budget preparation, budget execution, and budget controls-to support the Government's objectives o f progressive shifis toward result-based budgeting and improved effectiveness o f expenditures. Bank support i s at the national level in the finance ministry (global MTEF, integrated information technology system, audit capabilities, budget reporting) and sector ministries (selected sector MTEFs, inter and intra sectoral allocations), as well as at de-concentrated levels (budget nomenclature, IT system, capacity building). The Fund's emphasis is on fiscal management, expenditure management (including financing o f transfers to parastatals), revenue enhancing measures, and audit capabilities. Table 2 summarizes the areas o f Bank-Fund collaboration inMali. 74 Table 2. BankFundCollaborationinMali (ongoing or planned) Area SpecializedAdvice from Specialized Advice fromBank Key Instruments Fund Economic Fiscalhonetary policy, Trade diagnostic study, Global 7MF PRGFperformance criteria and Frameworwanagement Economic statistics MTEF, Economic growth benchmarks on fiscal and monetary targets; Statistics T A through AFRITAC. Bunk Analytical studies, Direct technical assistance Budgetary and Public Overall budget envelope, Sector MTEFs (Transport and IMF PRGFperformance criteria and ExpenditureReforms Expenditure management, Rural Sectors), Integrated benchmarks onoverall fiscal balance, Enhancement of tax and information system, Improved onpension system viability, and on non-tax revenue, Pension reporting onbudget execution, landrevenue policy. reform CFAA, CPAR, Public expenditure tracking survey Bank SAC 4 policy framework (healthkducation) actions (FYO5); Direct T A (MTEFs), Financialsector development project. Agricultureand Rural Rural development strategy, IMF: PRGFperformance criteria on Development(incl. Cotton) Agricultural export promotion, cottonprivatization. Irrigation, Rural roads, Community driven Bank SAC 4 policy framework development actions for cotton and Office de Niger (FYO5); Agricultural services Cotton: pricingpolicies, and producer organizations project privatization strategy, (ag. and rural development); A g liberalization o f critical diversification and competitiveness functions, capacity bldg o f project (Ag dev and export producer organizations promotion, FY05); National rural infrastructure project (rural roads and irrigation). Social Sector Reforms ineducation and Bunk Integrated healthsector ReformslPoverty health, HIVIAIDS program, investment project; Educationsector Monitoring Poverty assessment, Cotton expenditureprogram; HIViAIDS PSIA M A P project. Privatization and Private Privatization strategy IMF: PRGFconditions onBank and Sector Development (telecommunications, banking, Telecomprivatization strategies. energy), Pricing policy, Revenue management (mining), Bunk SAC4 policy framework Business development services actions on the financial sector; (incl. to SMEs), Financial sector development project (policy framework condition on State ownership o fbanks); Sourceso f growth project (telecom, mining, investment climate, SMEs; FYO5). Infrastructureand Other Strategy and investment Bunk Transport corridor project, Sectors program (transport, energy, Rural infrastructure project, water), urban land market Householdenergy and universal development, historic cities access, Urbandecentralization and rehabilitation and preservation. decentralization project. Preparedby World Bank staff. Questionsmaybe referredto Mr.Craig (Country Director, 473-2589), Ms.Wood (Sr. Economist,473-5829), or Ms.Cabal (Operations Analyst, 473-4334). 75 ANNEX 8: THE IMPACT ON POVERTY OF ALTERNATIVE COTTON PRODUCER PRICES 1. This annex provides estimates o f the potential impact o f different levels o f cotton production and producer prices on poverty among cotton producers in Mali. We focus on answering three different questions o f interest in the current context o f low intemational cotton prices: a) Under a "cotton crisis" leading to a sustained drop in prices and production, would producers be able to offset the resulting negative impact on their income and consumption by increasing other productive activities? b) Without changes in production, what would be the impact o f a drop in prices on poverty among cotton producers, and who among these producers would suffer from the largest losses? and c) Would the new pricing mechanisms agreed upon between the Government, CMDT and the producers help in stabilizing the prices paid to cotton producers? 2. The survey used. All estimates presented here are based on a small survey o f 400 rural producers carried by the World Bank in July 2004 as part o f a Poverty and Social Impact Analysis o f cotton sector reforms inMali and with funding from the Belgian Poverty Reduction Partnership Program. This small survey i s used because the nationally representative 2001 EMEP survey does not provide information on the income o f households, or their agricultural production. The cotton survey provides data, inter alia, on farming pattems, production levels, and production costs for three years (1999-2000, 2000-01, and 2003-04). Most (but not all) producers in the sample grow and sell cotton. Although the cotton survey has a fairly limited consumption module, and the unit o f analysis i s the production unit (rather than the household; some production unit comprise several households), the level o f per capita consumption observed among producers i s very close to the level o f per capita consumption observed inrural areas in the 2001 EMEP. This suggests that the small survey can be used as a basis for a meaningful poverty analysis. 3. Povertv lines. The extreme poverty line i s set at half the mean annual consumption per capita per year (FCFA 64,164). The moderate poverty line i s set at FCFA 144,022 per person per year (this i s the official poverty line used in Mali, which can be considered on the high side for poverty measurement purposes). Usingthese poverty lines, we find that among cottonproducers, a very high proportion i s poor (81.8 percent), with more than a third (37.3 percent) living in extreme poverty. 4. Cotton crisis scenario. A very large drop in prices could lead to a cotton crisis with households stopping production altogether or reducing their production substantially. This happened in the 2000-01 campaign, during which many producers reduced their production to protest against the low prices paid to them by CMDT. This cotton "strike" led to a reduction o f production inthis sample o f 62.1 percent. As shown inFigure A.1, the combined effect o f lower prices and lower production led to a drop in income by 40 percent and a decline in consumption by 29 percent. Households were not able to compensate for the loss o f cotton revenues by raising either their income from other sources or by increasing production for self-consumption. As a result, the share o f producers in poverty according to the official poverty line for Mali 76 increased from about 77 percent to 90 percent. Importantly, there may have been negative multiplier effects at work from lower cotton prices and production on other sectors o f the rural economy, as the drop in cotton income resultedin lower purchases by producers and, therefore, subsequent income losses for other groups inthe local economy. Given that cotton i s a relatively large sector in Mali's economy with strong forward and backward linkages, the cotton strike of 2001 i s also likely to have affected negatively Mali's economy as a whole. Finally, Figure 1also suggests that by 2003-04, only part o f the losses observed in 2000-01 had been recovered by cotton producers through a combination o f higher prices and production. A key lesson from the events of 2001 is that reforms are neededto avoid the recurrence o f such crises. Figure 1. Impactof the 2000-01 cottonstrikeon producerincome/consumption 120000 0Consumptionpercapita 0Incomepercapita 100000 80000 60000 40000 20000 0 1999-2000 2000-2001 2003-2004 Source: World Bank staff estimates using 2004 cotton survey. 5. Cotton pricing analysis under the system prevailing until January 2005. An analysis o f the impact o f future changes inprices on producers i s carried in a very simple way: we measure the 2003-04 income obtained from cotton production by households as measured in the survey, assess the difference in income that would follow from a change inproducer prices, and assume that this difference in income translates into an equivalent difference in consumption per capita (the analysis above, as well as work on Burkina Faso has suggestedthat the ability of producers to compensate for such losses i s limited.) The new consumption aggregate i s then used to measure poverty. The estimations given in this annex provide "first round," likely poverty effects from lower producer prices paid to households due to a drop in world cotton prices, assuming that households cannot compensate their cotton income loss via other activities, at least inthe short run.Key results from the simulations are providedintable 1below? 6. To interpret the data intable 1, it i s important to note that producers inthe survey declare receiving only around FCFA lOOkg, while the official price i s 210 FCFAkg. The price declared by producers must be net o f costs to be paid for inputs (which represent up to FCFA 70kg The headcount index of poverty is the share of the population with a level o f consumption per capita below the moderate poverty line. The poverty gap takes into account the distance separating the poor from the poverty line. The squared poverty gap takes into account the square o f that distance (and hence inequality among the poor). The same definitions apply to extreme poverty using the extreme poverty line. 77 according to the survey, and up to FCFA 9 0 k g according to other data sources), but even then, it i s low in comparison to other countries, in part because the cost o f inputs and other services provided by CMDT is high. A t the time o fwriting (February 2005), due to a sharp drop inworld cotton prices, the local market price would likely be around FCFA 130kg, instead o f FCFA 210kg as (a higher price could probably be paid to producers by CMDT ifit engaged inforward sales o f cotton when world cotton prices and exchange rates were more favorable). If the producers were to absorb the full shock o f the drop in world prices, poverty would increase substantially. Table 1 provides the estimates o f this poverty impact under various local prices. For example, if the net price received by producers were to drop to FCFA 70kg, assuming no drop inproduction, the headcount index o f poverty among cotton producers would increase from an already high base o f 81.8 percent in2003-04 to 84.5 percent. The share o f cotton producers inextreme poverty would increase from 42.1 percent to 46.1 percent. Again, this assumes that production remains constant, which may not be the case. A key message from this analysis i s that from a poverty point o f view, and in the absence o f reform o f the pricing mechanism (see below), it makes some sense to protect producers from an exceptionally sharp and temporary drop inprices. However, it could have beenbetter interms o f price signaling to already factor in at least part o f the drop inworld prices inthe prices set for 2004-05. Table 1: Impactof various net cottonproducerprices on povertyin Mali(2003-04 data) 100 90 80 70 60 50 Fcfa/Kg Fcfa/Kg Fcfa/Kg FcfaKg Fcfa/Kg FcfaKg Poverty, all rural producers Headcountindex of poverty 84,2% 84,5% 86,3% 86,6% 87,6% 87,9% Povertygap 43,4% 44,4% 45,4% 46,5% 47,6% 48,8% Squaredpovertygap 27,0% 27,8% 28,6% 29,5% 30,5% 31,5% Poverty, cotton producers Headcountindex of poverty 81,8% 82,1% 84,2% 84,5% 85,8% 86,1% Povertygap 39,9% 41,0% 42,2% 433% 44,8% 46,1% Squaredpovertygap 23,9% 24,8% 25,8% 26,8% 27,9% 29,1% Extreme poverty, all rural producers Headcountindex ofpoverty 42,1% 44,2% 44,7% 46,1% 47,9% 48,7% Povertygap 14,9% 15,5% 16,2% 17,0% 17,8% 18,8% Squaredpovertygap 7,1% 7,4% 7,8% 8,2% 8,7% 9,3% Extreme poverty, cotton producers Headcountindex ofpoverty 37,3% 39,7% 40,3% 41,8% 43,9% 44,8% Povertygap 12,2% 12,9% 13,7% 14,6% 15,6% 16,6% Squaredpovertygap 5,5% 5,9% 6,4% 6,9% 73% 8,2% Source: World Bank staff estimates using2004 cotton survey. 7. Cotton pricing reform: Price levels and variability over time. Cotton producer prices for the 2004-05 campaign have been maintained at 210 FCFAikg, which i s clearly unsustainable. Guaranteeing such high prices cannot be repeated from year to year to avoid providing wrong incentives to CMDT as well as producers, eventually at highbudget cost. Ifworld cotton prices were to remain depressed, incentives would have to be provided to producers to progressively shift to other crops or activities. Permanent shock requires adjustment. But in the case (perhaps more likely outcome) of temporarily fluctuating, but not necessarily very low long-term cotton prices, the focus o f reform should rather be on a) establishing a baseline price level in line with long-term expected world cotton prices; b) ensuring that producers obtain a higher share of the world price for their crop (given that in Mali, the producer's share o f the world price has historically been determined as a "residual" after all other production costs were taken into 78 account, leading to actual net producer price levels below those observed inother countries); and c) designing appropriate mitigating and coping strategies for dealing with price shocks. In fact, steps have been taken to this end under an agreement signed between the Government, producers, and CMDT on January 13, 2005. First, the baseline price level for the campaigns 2005-06 up to 2007-08 has been set at FCFA 160kg to FACFA 175kg, which i s much more in line with expected future prices than the current level o f 210 FCFAkg. Second, a formula has been adopted to define the producer price as a share o f the world benchmark price, after taking into account a number o f cost and efficiency variables related to the processing and commercialization o f cotton. The main objective i s to ensure that producers receive 60 percent of the income generated by the filibre, the other 40 percent going to CMDT. Third, the pricing mechanism agreed upon by the key parties includes a measure designed to fund a stabilization hnd. Inpractice, whether the new pricing model will work both interms o f reducing recurrent deficits inthe filibre and interms o f protecting the poor will depend inpart on the future level o f world cotton prices. This issue i s discussed indetail inAnnex 9. 79 ANNEX 9: ESTIMATED IMPACT ON THE 2006 CMDT FINANCIAL POSITION (AND IMPLIED FISCAL RISKS) UNDER ALTERNATIVE INTERNATIONAL PRICES 1. This annex attempts to provide a sense o f a possible impact on the financial position o f the CMDT in 2006 o f applying the new price mechanism using the low point producer price o f FCFA 160 agreed under the protocol, and assuming alternative assumptions on cotton international prices and Mali's cotton production. Two alternative intemational prices are considered: (i) 53 cents per pound, the price that was prevailing during February 2003, and (ii) 58 cents per pound, a medium term projected price of the International Cotton Advisory Committee (ICAC). Also, given uncertainty about Mali's cotton production in part due to uncertain supply response to lower cotton prices, two production scenarios are considered for each intemational price: 500,000 tons (representing a small decline compared with the 585,000 tons harvest o f 2004) and 350,000 tons (representing a significant decline in output). The estimates are based on a simplified module o f the financial position o f the CMDT, taking into account all the critical revenue and cost items. This model assumes that a portion o f the CMDT cost savings projected for the 2004/05 campaign are sustained for the following campaign. In addition, all estimates assume the current FCFA/U.S. dollar exchange rate o f 501 prevailing through 2006. The results are summarized inthe table below. Table 1. EstimatedPotentialImpact on CMDT2006 Losses of AlternativeInternationalPrices InternationalPrice At 53 centdpound 1/ At 58 cents per pound" ProducerPrice (FCFNkg) 160 160 160 160 FinancialBalance of CMDT (inbillion FCFA) -25.9 -25.3 -19.8 -22.7 Net financial balanceof CMDT (inbillions FCFA) 31 -23.9 -23.3 -17.8 -20.7 Breakevenprice (FCFAkg; ceteris paribus) 112 93 124 101 Memorandum: Exchangerate (FCFA/U.S. dollar) 501 501 501 501 Mali's cottonproduction, alternativeproj. (intons) 500,000 350,000 500,000 350,000.00 *'Projectedmedium-termprice "PriceprevailinginFebruary2005. (InternationalCottonAdvisory Committee--1CAC). 31Including "permanent" cost savingat CMDT estimated at FCFA 2 billion. 2. Two conclusions follow. First, it i s clear that given the likely international prices (assumed to range between 53 and 58 centdpound), even after the new price mechanism i s applied and the new base producer price set at FCFA 160 (the low end o f the FCFA 160-175 range agreed under the Price Protocol), CMDT i s likely to continue making a loss in 2006 (although substantially less than in2005 when gross loss was about FCFA 64 billion). 80 3. Second, given these assumptions, to eliminate the 2006 losses and attendant fiscal risks, the producer price would need to be reduced substantially below the FCFA 160 price in August 2005, consistent with the Protocol price mechanism. While the extent o f the reduction would vary depending on intemational prices and production levels, the reductions range from FCFA 35-70 per kilogram, consistent with equilibrium prices o f FCFA 90-124 per kilogram. At the same time, as noted in Annex 9, any major reduction in the producer price i s likely to exert a significant, direct impact on poverty. Given the tradeoffs involved, it will be important that the Government take this decision within a coherent medium-term framework which takes account o f the hture prospects for cotton inMali and their attendant implications for restructuring o f the cotton sector. 81