DEMOGRAPHIC EXPLOSION in the Sahel DIVIDEND OR BURDEN? COUNTRY FOCUS: CENTRAL AFRICAN REPUBLIC Photo credit: World Bank/Anne Laure Senges DEMOGRAPHIC EXPLOSION in the Sahel OR D BU EN RD ID EN IV D ? 1 6 2 0 LL FA COUNTRY FOCUS: CENTRAL AFRICAN REPUBLIC FALL 2016 FOREWORD...................................................................................................................................................................iii ACRONYMS.....................................................................................................................................................................v ACKNOWLEDGEMENTS.............................................................................................................................................vii SPECIAL TOPICS............................................................................................................................................................ 8 Dealing with the Demographic Challenge: A Population Dividend for Some Sahel Countries? Central African Republic, Chad, Guinea, Mali, Niger................................................................................................. 8 Country Focus: Building a New Foundation for Stability and Growth in the Central African Republic.............................................................................................................. 20 Possible Impacts of Floating the Nigerian Naira on Niger’s Economy.................................................................. 33 SPECIAL FIGURES.......................................................................................................................................................40 What Do AFCW3 Countries Export? Main Exports per Country and Size of Bilateral Trade in 2015 (% of total exports)........................................................................................... 40 How Do AFCW3 Countries Rank among Most Fragile States Worldwide?........................................................... 42 COUNTRY ECONOMIC FOCUS................................................................................................................................45 AFCW3 economies at a glance................................................................................................................................... 45 Central African Republic.............................................................................................................................................. 46 Chad...............................................................................................................................................................................50 Mali.................................................................................................................................................................................55 Guinea............................................................................................................................................................................59 Niger...............................................................................................................................................................................63 foreword I am pleased to write the foreword to the second AFCW3 Economic Update corresponding to fall 2016. It is part of a series of reports analyzing macroeconomic and social change in AFCW3 countries—the Central African Republic (CAR), Chad, Guinea, Mali and Niger. This series seeks to generate a public debate over the key options in macroeconomic and fiscal policy intended to support a reduction in poverty by making public the preliminary conclusions of studies under way and encourage exchanges over issues of development. One of these objectives is to succinctly explain these analyses and the regional trends that are shaping up, even though the analyses are not yet completed. In short, this series is a platform designed to enable the World Bank to spotlight the priority reforms that have not yet been settled or even debated in these countries. The results, interpretations, and conclusions expressed here are those of the World Bank’s departments and do not necessarily represent those of the World Bank Group and its affiliated organizations, its Executive Directors, or the countries they represent. The five countries covered in this report share a number of characteristics and are facing similar challenges that justify their being monitored jointly. First—and this is the main topic of this report, they face critical demographic issues that require immediate action to enable them to experience a population dividend rather than a population burden that might foreshadow interminable political and social conflicts in the future. Second, with the exception of Guinea, these are landlocked, low-income Sahelian economies, heavily reliant on the agricultural sector, their main source of revenue and means of subsistence, with a significant livestock sub-sector based in part on traditional pastoral nomadism. These five countries have major natural resources exploitation industries—gold for Mali, uranium and oil for Niger, bauxite for Guinea, diamonds for the Central African Republic, and oil for Chad—that account for a crucial portion of their export income and public revenue. This dependence on the primary sector makes these economies highly vulnerable to FOREWORD iii climate-related shocks and to volatility in the price of raw materials. Each one is struggling to overcome a legacy of instability and violence, exacerbated by fragile sociopolitical conditions and the severity of regional security issues. Finally, four of the five countries are members of a monetary union that uses a regional currency tied to the euro and exerts considerable influence on the macroeconomic policies of its Member States. In terms of the economic outlook, I am especially pleased to report that the news is promising. All of these countries, with the exception of Chad, are looking at positive growth rates of around 4–6 percent, and with the exception of Guinea, at downward-trending inflation rates close to the 3 percent targeted by the regional institutions. This performance deserves to be underscored since despite their common characteristics and ongoing external shocks, these countries continue to come up against unique structural constraints in terms of development and opportunities for speeding up economic growth, reducing poverty, and sharing prosperity. Because economic diversification is low and on-going electoral processes are complex, joint effort are currently underway to construct new development strategies. In this regard, this report introduces a special section “country focus” centered on the Central African Republic given its recent economic collapse. However, CAR is not the only country facing complex challenges. In Chad and Guinea, the collapse of world prices for oil and bauxite, respectively, weighs heavily on the public finances. In Mali, problems with governance place major constraints on growth, while in Niger, the authorities’ ambitious development and investment plans require loans and grants in order to avoid exposing the country to risks associated with debt sustainability and absorption capacity. Finally, I would like to express my gratitude to our government and technical and financial partners for their cooperation and multiple joint contributions over the past few months. Their encouragement and technical advice have made it possible to create an environment particularly well suited to a rich and regular exchange of views on development policy. I hope that this new series will make it possible to deepen these discussions and get them out into public space in order to inform citizens and allow them to express their own views. Paul Noumba Um Director of Operations Central African Republic, Chad, Guinea, Mali, and Niger FOREWORD iv acronyms 3N Nigeriens Nourish Nigeriens BCEAO Central Bank of West African States (Banque Centrale des Etats de l’Afrique de l’Ouest) BoP Balance of Payments CAR Central African Republic CEMAC Central African Economic and Monetary Community CNP National Planning Commission (Commission nationale de planification) CREDD Strategic Framework for Economic Recovery and Sustainable Development (Cadre stratégique pour la relance économique et le développement durable) CSCRP Growth and Poverty Reduction Strategic Framework (Cadre Stratégique pour la Croissance et la Réduction de la Pauvreté) DDR Disarmament, demobilization, and reintegration ECF Extended Credit Facility ECOWAS Economic Community of West African States ENERCA Central African Energy (Energie Centrafricaine) EOD Economic Orientation Document ERPT Exchange rate pass-through FDI Foreign Direct Investment FLEGT Forest Law Enforcement Governance and Trade GNF Guinean Franc ICT Information and communications technology KP Kimberley Process KPCS Kimberley Process Certification Scheme MDAs Ministries, departments, and agencies MPFBEG Macroeconomic, Public Finances, and Business Environment Group MSME Micro, small, and medium-size enterprises NGN Nigerian Naira PAG Governmental Action Program (Plan d’action gouvernemental) PAP Priority Action Plan PBF Performance-based financing PDA/RN Accelerated Development Plan for Northern Regions (Programme de développement Accéléré des Régions du Nord) PFM Public finances management PNDES National Economic and Social Development Plan (Plan national de développement économique et social) ACRONYMS v acronyms PRED Sustainable Recovery Plan (Plan de Rélance Durable) PRSP Poverty Reduction Strategy Paper REER Real effective exchange rate SEDS Social and Economic Development Strategy SODECA Central African Water Distribution Company (Société de distribution des eaux de Centrafrique) SSA Sub-Saharan Africa SSR Security Sector Reform TDR Total dependency ratios TSR Re-export tax WAEMU West African Economic Monetary Union WDI World Development Indicators ACRONYMS vi acknowledgements This report was prepared by José López-Calix with the enthusiastic participation of an interdisciplinary team composed of Miriam Schneidman, Emi Suzuki, Abdoulahi Garba, Olivier Béguy, Arsène Kaho, Luc Razafimandimby, Ali Zafar, Patricia Geli, Abdoul Ganou Mijiyawa, Weneyam Hippolyte Balima, Mahaman Sani, Mahamoud Magassouba, Santiago Herrera, Irum Touqeer, Ousmane Maurice Megnan, Jean Charles Amon Kra. Paul Noumba Um, Seynabou Sakho, Sona Varma, Paola Ridolfi, Anne Laure Senges, Johannes Hoogeveeen, Jean Christophe Maur, Michel Rogy, Christophe Lemière, Aly Sanoh, Michel Rangvald Mallberg, Jean Christophe Carret, Adama Coulibaly, Siaka Bakayoko, and Rachidi B. Radji provided helpful information and suggestions. Finally, compiling the report would not have been possible without the assistance of Silvia Gulino, Edmond Bagde Dingamhoudou, Carine Belinda Bianda, Fatimata K. Sy, Mariama Diabate-Jabbie, Salimata Bessin Dera, and Béatrice Toubarot Mossane. Precious editorial and composing work was timely executed by Valérie Bennett, Maria Deverna and their translation and editing colleagues at JPD Systems. ACKNOWLEDGEMENTS vii SPECIAL TOPICS Dealing with Demographic Challenge: A Population Dividend for Some Sahel Countries? Central African Republic, Chad, Guinea, Mali, Niger By Miriam Schneidman and Emi Suzuki INTRODUCTION Like many other countries in Sub-Saharan Africa, this sub-group of West and Central African countries has experienced relatively fast drops in mortality but persistently high levels of fertility, which implies continued high rates of population growth, which represent an important challenge to development prospects. At the micro level, families will face challenges to ensure that their children are well educated, nourished and healthy. At the macro level, governments will face enormous pressures to keep pace with additional cohorts of schoolchildren to educate, new entrants into the labor market, and a general rise in demand for health and social services that will outstrip the capacity of fragile systems in these countries. The authorities in these countries have an important window of opportunity for addressing demographic issues systematically as part of their broader economic development plans and long-term vision documents. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 8 DEMOGRAPHIC DIVIDEND Global experience has shown that an accelerated decline in fertility is critical to seizing the demo- graphic dividend, which is defined as the economic growth potential that can result from shifts in age structures. As depicted in Figure 1, the demographic dividend is divided into two phases. FIGURE 1: WHAT IS THE DEMOGRAPHIC DIVIDEND? The first dividend can be captured as the demographic transition from high to low birth and death rates speeds up and the age structure becomes more concentrated around working ages. Everything else being equal, a larger share of the working age population delivers higher per capita growth. The second phase comes along later in the demographic transition if countries are able to increase savings and investment as a result of having fewer dependent children, more disposable income, and prospects for longer lives. These investments in physical and human capital should result in higher productivity and higher aggregate pro- duction. However, this demographic dividend is not automatic. To create the demographic conditions for the dividend to materialize, this group of countries need to demonstrate strong political commitment and to put in place appropriate policies. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 9 The AFCW3 countries are in the pre-dividend phase as a result of high fertility levels and youthful age structures.1 Like other low-income countries, they lag behind in key human development indicators, and have persistently high fertility rates (Figure 2). The poverty headcount ratio is relatively high in all five countries (Mali: 43.6; Chad: 46.7; Niger: 48.9; Guinea: 53.0, and CAR: 62 percent). They also face very rapid population growth rates and have large shares of dependent populations. Two countries (Central African Republic, Guinea) appear to be approaching the early dividend phase, with patterns similar to those of other lower middle-income countries that are further along in the fertility transition. The authorities in all countries need to consider strategies and policies designed to reap the potentially accelerated economic growth that may be made possible by the opportunities created through changes in the age structure that will occur as they go through the demographic transition. Global experience has shown that accelerated action on reducing fertility is a critical step in bringing about change in the age structure that will create a more favorable environment for economic growth and poverty reduction. FIGURE 2: PROGRESS TOWARD THE DEMOGRAPHIC DIVIDEND Source: GMR 2015/2016 DEMOGRAPHIC TRANSITION Like the majority of countries in Sub-Saharan Africa, this group of West and Central African countries is experiencing a rapid drop in mortality but persistently high fertility, which implies continued high rates of population growth. The demographic transition from high to low birth and death rates remains generally sluggish and runs the risk of undermining growth prospects. Death rates have gradually declined 1 The latest Global Monitoring Report (Development Goals in an Era of Demographic Change) classifies all five countries as pre-dividend (World Bank Group and International Monetary Fund, 2016.) Pre-dividend countries are characterized by fertility rates greater than four births per woman and by relatively high poverty levels (i.e. 44 percent of the population lives below the poverty line on average). Early dividend countries have fertility rates above four and a much lower poverty rate of 16 percent. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 10 over several decades, with the exception of a temporary rise in the Central African Republic (CAR) in the mid- 1980s (Figure 3). As discussed below, key mortality rates have declined and life expectancy has increased but at variable rates.2 FIGURE 3: DEMOGRAPHIC TRANSITION IN CAR, CHAD, GUINEA, MALI, AND NIGER CAR CHAD GUINEA CENTRAL AFRICAN REPUBLIC MALI NIGER Source: UN Population Division, World Population Prospects 2015 Revision Reductions in infant mortality have been dramatic in Niger and Guinea, moderate in Mali, and modest in Chad and the CAR (where infant mortality is 1.6 times higher than the regional average). Trends in under-five mortality3 show a similar pattern, with Niger, Guinea, and Mali recording relatively rapid progress, Chad experiencing a steady decline, and the CAR lagging behind. By contrast, fertility rates have remained generally high, with only minor declines (Mali, Chad) or no change (Niger) since 1990 (Figures 4 and 5). By contrast, fertility rates in Guinea and the CAR have declined somewhat faster. As a result, population growth rates currently range from 2.0 (CAR) to 2.7 (Guinea), 3.0-3.3 (Mali, Chad), and a staggering 4.0 percent (Niger) in comparison to the Sub-Saharan average of 2.7 percent. At these rates of population growth, the population of Niger will double in less than two decades, in 35 years in the CAR, and in 23-26 years in the other countries. Maternal mortality, which is a good indicator of health system performance, remains slightly above the average for Sub-Saharan Africa (547 per 100,000 live births) in Niger, Mali, and Guinea. By contrast, the maternal mortality rate is dramatically higher in Chad and the CAR (856 and 882 per 100,000 live births, respectively). As a result of these demographic changes, life expectancy has risen by 9-18 years in Niger, Guinea, and Mali, while in Chad and the CAR, it has increased by only 3-5 years since 1990. 2 The 2015 mortality and fertility rates are taken from the UN Population Division and represent best current estimates based on recent analyses conducted by the UN and its Inter-Agency Groups for Child and Maternal Mortality Estimation. As these estimates are adjusted and smoothed, there may be slight differences with original data drawn from household surveys. 3 The under-five mortality rate is a good barometer of child well-being as well as a good proxy measure of the availability of maternal and child health services, nutrition status and health knowledge of mothers, income and food availability at the household level, and access to safe drinking water and basic sanitation. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 11 FIGURE 4 FIGURE 5 Under-five mortality rate (per 1000 live births) Total fertility rate (per woman) 1990 and 2015 1990 and 2015 9.0 350 8.0 300 7.0 250 6.0 200 5.0 150 4.0 3.0 100 2.0 50 1.0 0 0.0 Niger Mali Guinea Chad CAR Niger Mali Guinea Chad CAR 1990 2015 1990 2015 High levels of fertility reflect the early marriage and childbearing age combined with low levels of contraceptive use. As in other high-fertility countries, a large proportion of girls marry before the age of 18 (i.e., Mali: 50 percent; Guinea: 60 percent; Chad: 70 percent; Niger: 77 percent) 4 and are pregnant with their first child by 19. These demographic patterns reflect both socio-cultural norms that encourage early marriage and childbearing as well as limited educational opportunities beyond primary school, with a relatively small proportion of girls progressing to secondary education. While modest progress has been made since 1990 in reducing adolescent fertility (i.e., births for 15-19 year olds), rates remain considerably above the average for Sub-Saharan Africa in all countries except the CAR.5 These trends suggest that much more needs to be done to postpone both the age of marriage and initiation of sexual activity. Use of modern contraceptives remains very low, ranging from 5 percent (Guinea, Chad) to 9-12 percent (CAR, Mali, Niger), and lags considerably behind other countries in the region, which have established strong reproductive health and family planning programs and are proceeding through the next phase of the demographic transition (e.g., Ghana, Kenya, Senegal). High levels of fertility mask socio-economic and geographic disparities in most countries. Females from the lowest wealth quintiles have fertility rates that are 1.3-1.4 times higher (Chad, Mali, Niger) and nearly twice as high (Guinea) than women from the highest wealth quintiles (Figures 6 and 7) while in the CAR fertility rates are similar across socio-economic groups. Fertility rates also vary with education, particularly at post-primary levels. Females with no education have fertility levels that are 1.3-1.7 times higher than those with secondary education and 1.8-3.6 times higher than those with higher education, underscoring the importance of expanding education opportunities, at least to lower secondary levels.6 Geographic disparities in fertility are notable, with total fertility rates in urban areas of 3.8-5.6, where women have higher levels 4 Data on child marriage is not available for the CAR. 5 The latest estimates (2010/2015) for adolescent fertility (births per 1,000 women age 15-19) are as follows: 91 (CAR), 130 (Chad), 140 (Guinea), 174 (Mali), and 201 (Niger) in comparison with the regional Sub-Saharan average of 106. 6 The total fertility rate by education level varies as follows for females with no education, secondary education, and higher education levels (respectively): CAR: 5.1, 4.0, 1.9; Chad: 6.5, 5.1, 2.8; Guinea: 5.7, 3.4, 1.6; Mali: 6.5, 4.0; 3.7; Niger: 8.0, 5.0, 3.6. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 12 of education and employment, in comparison to 5.8-8.1 in rural zones, where the majority of households continue to live in a subsistence economy, with high value attached to children as a source of labor and old- age security. In contrast to other high-fertility countries on the continent, there is little variation between wanted fertility and observed rates across wealth quintiles in the five countries, and overall desired family size remains high. This can be seen clearly in two of the highest-fertility countries (Niger, Guinea: Figures 6/7), where females continue to express a desire for large family sizes. As a result, the unmet need for family planning is generally low in all countries (i.e. CAR: 19 percent; Chad: 23 percent; Guinea: 24 percent; Mali: 26 percent; and Niger: 16 percent). This relatively low demand for family planning is a unique feature of the socio-cultural and demographic situation in the Sahel, and it underscores the importance of complementary actions on both the demand and supply sides, with a particular focus on vulnerable and poor women. FIGURE 6 FIGURE 7 Ni ger: Observed and wanted total fertility ra te Guinea: Observed and wanted total fertility rate by wea l th quintiles (per woman) by wealth quintiles (per woman ) Observed fertility Wanted fertility Observed fertility Wanted fertility 9.0 7.0 6.5 8.2 8.0 8.0 8.1 8.0 6.0 5.5 5.7 7.0 7.9 7.8 7.8 7.8 5.9 4.8 6.1 5.0 6.0 5.1 5.1 5.0 5.9 4.0 3.4 4.3 4.0 3.0 3.1 3.0 2.0 2.0 1.0 1.0 0.0 0.0 Lowest Second Middle Fourth Highest Lowest Second Middle Fourth Highest With the improved survival of children and stubbornly high and desired fertility rates in most of these countries, age structures remain generally youthful, and the majority of them have high dependency rates (Figure 8). Dependency ratios (i.e., number of dependents aged 0-14 and over 65 relative to the total working-age population, or 15-64) are below the Sub-Saharan average (86) in the CAR (75.2) and Guinea (83.8) and considerably above in Mali (100.2), Chad (100.7), and Niger (113). In comparison to typical age structures in South and East Asia (where the working-age population is proportionately higher than the share of the population consisting of dependents), the youthful structures in most of these countries reflect the challenges facing governments in providing schooling, health care, and jobs to the large cohorts that survive childhood and enter their reproductive cycles. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 13 FIGURE 8: POPULATION PYRAMIDS AND TOTAL DEPENDENCY RATIOS CAR 2015 Male Chad 2015 Male 80+ 80+ Female Female 70-74 70-74 60-64 60-64 Age group Age group 50-54 50-54 40-44 40-44 30-34 75.2 30-34 100.7 20-24 20-24 10-14 10-14 0-4 0-4 1 0 1 4 2 0 2 4 Population (milllions) Population (milllions) Guinea 2015 Male Mali 2015 Male 80+ 80+ Female Female 70-74 70-74 60-64 60-64 Age group Age group 50-54 50-54 40-44 40-44 30-34 83.8 30-34 100.2 20-24 20-24 10-14 10-14 0-4 0-4 2 1 0 1 2 4 2 0 2 4 Population (milllions) Population (milllions) Niger 2015 South and East Asia 2012 Male 90-94 80+ Female 80-84 70-74 70-74 60-64 60-64 Age group Age group 50-54 50-54 40-44 40-44 30-34 113.0 30-34 20-24 20-24 10-14 10-14 0-4 0-4 100 80 60 40 20 0 20 40 60 80 100 8 4 0 4 8 Population (milllions) Population in millions Even if fertility rates in this group of countries were to fall to replacement level immediately, the ab- solute numbers of people born would exceed the numbers dying for several decades. This pent-up population momentum is expected to contribute significantly to future growth as relatively large cohorts of children enter their reproductive years and bear children. Therefore, even if couples in these countries have only enough children to replace themselves (i.e., around 2.1 children per woman) when they die, for SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 14 the next few decades, the absolute numbers born will outstrip those dying as the historical high fertility rates have resulted in a high proportion of women of reproductive ages. As seen in Figure 9, although the absolute number of people projected under the three fertility scenarios will not vary dramatically by 2050, dependency ratios will decline gradually, which implies that the burden on working age adults will be gradually lessened with a progressive decline in the number of dependents. While the sheer numbers projected to rise by 2050 under the three scenarios may appear daunting,7 the cost of inaction would be even higher, which implies that governments need to adopt appropriate policies and strategies to set these countries on a path toward reaping the potential benefits of the demographic transition. FIGURE 9: POPULATION PROJECTIONS UNDER THREE FERTILITY ASSUMPTIONS, 2050 Central African Republic 2050-Low variant Male 2050-Medium variant 2050-High variant 80+ 80+ 80+ Female 70-74 70-74 70-74 60-64 60-64 60-64 Age group 50-54 50-54 50-54 40-44 40-44 40-44 30-34 45.9 30-34 52.7 59.3 30-34 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 0-4 1 0 1 1 0 1 1 0 1 Population (milllions) Population 8.8 M Population 9.7 M Chad 2050-Low variant Male 2050-Medium variant 2050-High variant 80+ 80+ 80+ Female 70-74 70-74 70-74 60-64 60-64 60-64 Age group 50-54 50-54 50-54 40-44 40-44 40-44 30-34 58.9 30-34 65.9 30-34 72.8 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 0-4 4 2 0 2 4 4 1 4 1 Population (milllions) Population 35.1 M Population 38.5 M 7 The current total population (in millions) is projected to rise by 2050, as follows, under the three fertility scenarios: (i) CAR: from 4.9 (2015) to 7.9 (low), 8.8 (medium), 9.7 (high); (ii) Chad: from 14.0 (2015) to 31.9 (low), 35.1 (medium), 38.5 (high); (iii) Guinea: from 12.6 (2015) to 24.8 (low), 27.5 (medium), 30.3 (high); (iv) Mali: from 17.6 (2015) to 41.3 (low), 45.4 (medium), 49.7 (high); and (v) Niger: from 19.9 (2015) to 66.7 (low), 72.2 (medium), and 78.0 (high). SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 15 FIGURE 9: POPULATION PROJECTIONS UNDER THREE FERTILITY ASSUMPTIONS, 2050 Guinea 2050-Low variant Male 2050-Medium variant 2050-High variant 80+ 80+ 80+ Female 70-74 70-74 70-74 60-64 60-64 60-64 Age group 50-54 50-54 50-54 40-44 40-44 40-44 30-34 52.3 30-34 59.1 30-34 65.8 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 0-4 2 0 2 2 0 2 2 0 2 Population 24.8 M Population 27.5 M Population 30.3 M Mali 2050-Low variant Male 2050-Medium variant 2050-High variant 80+ 80+ 80+ Female 70-74 70-74 70-74 60-64 60-64 60-64 Age group 50-54 50-54 50-54 40-44 40-44 40-44 30-34 61.2 30-34 68.1 30-34 75.0 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 0-4 4 1 4 1 4 1 Population 41.3 M Population 45.4 M Population 49.7 M Niger 2050-Low variant Male 2050-Medium variant 2050-High variant 80+ 80+ 80+ Female 70-74 70-74 70-74 60-64 60-64 60-64 Age group 50-54 50-54 50-54 40-44 40-44 40-44 30-34 80.2 30-34 86.8 30-34 93.4 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 0-4 8 4 0 4 8 8 4 0 4 8 8 4 0 4 8 Population 66.7 M Population 72.2 M Population 78.0 M Source: UN (2015) SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 16 H U M A N D E V E L O P M E N T PAY O F F S The demographic transition and changing age structures can also have large positive impacts on several key aspects of human development. There is strong empirical evidence about two broad sets of benefits, as summarized in the flagship publication Africa’s Demographic Transition: Dividend or Disaster (Canning et al. 2015). First, the drop in fertility at the household level contributes to both child and maternal health improvements as smaller family size enables families to increase investment per child. Moreover, investments in early childhood (health and nutrition) can have large effects on educational outcomes and lifetime incomes. Similarly, investments in child health have long-lasting effects on adult health and longevity. Reproductive health choices and behavior also have multiple benefits for both child and maternal health outcomes. Delaying the age of first birth and lengthening birth intervals can reduce the high pregnancy and childbirth risks (i.e., obstructed labor, child mortality, child stunting, and maternal anemia) affecting adolescent girls in most of these countries. Second, lowering fertility at the household level has substantial benefits for investments in girls’ education as households have greater disposable income to invest in girls and will focus increasingly on the quality of education over time. Likewise, smaller family size implies that the need for childcare and labor support by girls will decline, with older girls allowed to complete their schooling, while higher levels of educational attainment in turn will have substantial effects on earnings, with each additional year of schooling associated with a 10 percent increase in wages (Returns to Investment in Education: A Global Update, Psacharopoulos 1994). POTENTIAL BENEFITS OF THE DEMOGRAPHIC DIVIDEND Accelerating the demographic transition in this group of countries could bring about important structural shifts in the age structure, which in turn would contribute to economic growth and poverty reduction. Lower fertility would lead to substantial differences in the share of children in the population in both the medium and long run.8 Under the low fertility scenario, current total dependency ratios (TDR) would drop considerably as the relative share of working-age populations grows and the countries are better positioned to begin reaping the potential benefits of the demographic transition (i.e., CAR: 45.9; Chad: 58.9; Guinea: 52.3; Mali: 61.2; and Niger: 80.2). With the rise in working-age population shares and declines in child dependency ratios, these coun- tries are expected to experience corresponding increases in per capita GDP and possible reductions in poverty levels. Rising shares of people of working age suggest that the labor supply can grow faster than the total population even if employment ratios remain constant, leading to an increase in workers per capita. There would thus be an automatic increase in real per capita GDP growth. A higher proportion of workers and a smaller proportion of dependents can lead to an increase in aggregate savings if workers are saving at the same rate at least as previous generations. If these savings can be converted into productive investment, there will be faster capital formation and improvements in capital-to-worker ratios, leading to even faster real per capita GDP growth. 8 Under the low fertility scenario, the current share of children under 15 would drop as follows by 2030 and 2050, respectively: (i) CAR: from 39 to 32 and 24 percent; (ii) Chad: from 48 to 42 and 33 percent; (iii) Guinea: from 43 to 36 and 29 percent; (iv) Mali: from 48 to 42 and 34 percent; and (v) Niger: from 50 to 48 and 42 percent. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 17 A recent application of the National Transfer Accounts (NTA) methodology, developed by Ronald Lee and Andrew Mason, produced estimates of the potential impact on per capita GDP of the first demographic div- idend in several of these countries. The estimates ranged from -.57 percent in Niger, .08 percent in Mali and .29 percent in Chad. 9 These numbers remain modest in relation to the potential impact of the demographic dividend on economic growth. Based on empirical work conducted by the World Bank, a one percentage point increase in the working age population is estimated to boost per capita GDP by up to 2.0 percentage points, which demonstrates the potential of the demographic dividend in this group of countries that is yet to be attained. Similarly, a one percentage point reduction in the child dependency ratio is associated with a drop of roughly 0.4 percentage points in the poverty headcount rate (Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change, World Bank Group 2015). Ahmed et al. (forthcoming) found that demographic change could explain 11-15 percent of GDP growth as well as a substantial reduc- tion in the poverty count (i.e., 40-60 million fewer poor by 2030) for Sub-Saharan Africa. These estimates are broadly similar to findings from East Asia and other countries (e.g., Bangladesh) that have reaped the benefits of the demographic dividend.10 K E Y P O L I C I E S A N D S T R AT E G I E S To harness the demographic dividend, policies are required that both hasten the transition to smaller cohorts and enable these cohorts to be more productive (Canning et. al. 2015). As shown in Table 1 below, countries have a range of options to consider and will need to adapt these to their specific contexts. Governments may consider a two-pronged approach to reaping the potential benefits of the first economic dividend. First, they should ensure that policies are put in place to accelerate changes in the age structure, which will lower dependency ratios and create favorable conditions for economic growth and poverty reduction. Niger, Guinea, and Mali need to sustain the progress made in bringing about a reduction in child mortality by continuing to invest in programs that reduce morbidity and malnutrition. Chad the CAR need to redouble efforts to reduce the excessively high rates of infant and under-five mortality. Improved survival of children will help couples attain their desired family size and contribute to reductions in fertility. All five countries need to redouble efforts to address fertility more proactively, in particular the high levels of early marriage, which expand the reproductive years and remain an important determinant of high fertility levels. A combination of policies and strategies need to be considered, including: (i) enhancing opportunities and services for adolescent girls, including specialized reproductive health services, life skills, and informal education for those who are no longer in the education system; (ii) improving access to family planning and reproductive health services with a particular focus on women in the lower wealth quintiles with less education and/or those residing in rural areas; (iii) facilitating the transition from primary to secondary education and ensuring that girls complete at least the first four years of secondary education (Grades 6–9), which will postpone childbearing; and (iv) expanding economic opportunities to empower women to take control of their reproductive health. While most of these policy measures can be effectively addressed in 9 Formation en Economie Generationnelle et Realisation du Dividende Demographique au Sahel, Cheikh Seydil Moctar Mbacke et Latif Dramani, June 2016. 10 The empirical evidence from East Asia’s demographic dividend has been thoroughly documented (Bloom and Williamson 1998; Bloom et al. 2000). Similarly, the dramatic drop in fertility rates in Bangladesh has been found to account for up to 25 percent of the rapid reduction in poverty levels (World Bank 2013). SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 18 the medium term, others, such as expanding access to secondary education, will require a longer-term time horizon. Likewise, changing traditional social norms that regulate fertility decisions and promoting gender equality will take time and require open national debates about the choices open to couples and families in terms of childbearing and human capital investments, particularly in Niger, Mali, and Guinea. Second, governments need to put in place policies aiming to ensure the productive employment of the growing working-age population. While gainfully employing the sheer numbers of young people entering the labor force will remain a challenge, supportive investment policies (e.g., creating a strong enabling environment to attract foreign investment, reducing trade barriers) will boost demand for labor. To summarize, this group of West and Central African countries are at an important crossroads and have an opportunity to take bold actions and adopt appropriate policies to take advantage of the potential benefits of the demographic dividend. This process will be neither easy nor automatic. Given the historically high levels of fertility in most of these countries, total populations will continue to grow rapidly under all three fertility assumptions. Nevertheless, a rapid decline in fertility will bring about an important drop in dependency ratios, more favorable age structures, and substantial benefits at the household level in terms of child and maternal health. The economic growth trajectory and poverty reduction prospects in this group of countries will be substantially enhanced through policies and investments that result in smaller families and a rise in productive work for the working-age population. TABLE 1: POLICIES FOR REAPING THE DEMOGRAPHIC DIVIDEND Purpose Policies Accelerate the decline Reduce child mortality, morbidity, malnutrition in fertility Increase female education and gender equality Address social norms on fertility Reduce child marriage and teenage pregnancy Expand comprehensive family planning programs Reap the first economic dividend Improve and education and human capital Attract foreign direct investment Improve the business environment in order to build demand for labor Reduce trade barriers Encourage female employment outside the home Reap the second economic Improve policies and create institutions dealing dividend with domestic savings and investment Source: Africa’s Demographic Transition: Dividend or Disaster? Canning et. al. 2015. SPECIAL TOPICS: DEMOGRAPHIC CHALLENGES 19 COUNTRY FOCUS Building a New Foundation for Stability and Growth in the Central African Republic By Patricia Geli11 The Central African Republic’s (CAR) recently held presidential and legislative elections, which brought three years of political transition and fratricidal confrontations to an end. In February 2016, Faustin Archange Touadéra, former Prime Minister under deposed President François Bozizé, was elected Head of State with 63 percent of the vote. The second round of legislative elections took place the following day, and Abdoul Karim Meckassoua, a prominent Muslim politician, was elected Head of the National Assembly on May 6. This has brought the country to a turning point, with the return to democratic institutions offering prospects for ending the cycle of violent conflicts and political instability that has beleaguered the country starting in late 2012 and again since 2015, thus engineering a turnaround in rebuilding its economy, reducing poverty, and gradually emerging from fragility. The newly elected government is focusing on reforms designed to facilitate this process by improving security, consolidating the peace and reconciliation process, rebuilding government institutions, and strengthening economic management. 11 This article is a summary of the Synthesis of the CAR Policy Notes recently published. The author acknowledges valuable guidance and contributions from AFCW3 leadership team, Seynabou Sakho and Sona Varma. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 20 CAR’s positives are exceptional. The country possesses abundant natural resources that could drive rapid growth and expand social and economic development. CAR has an ample water supply—five times the Sub-Sa- haran African (SSA) average for renewable water resources per capita—and significant hydroelectric potential. Combined with a tropical climate and vast tracts of arable land, CAR enjoys highly favorable conditions for improving the agriculture sector, which could foster subsistence farming and independent sources of reve- nue for the population. In addition, substantial mineral and timber resources could increase employment op- portunities and public revenue as well as investments in social services. Although CAR’s extractive sector has focused primarily on gold and diamonds to date, its potential remains largely unexplored and could include many other minerals. CAR is located at the crossroads of the African continent and could therefore become a major trade hub if the infrastructure and necessary policies, including in the energy sector, were improved. Finally, the Information and Communication Technology (ICT) sector is now one of the least developed in Sub-Saharan Africa despite competition between several operators, having deteriorated considerably from a performance close to the Central African average at the end of 2010. However, CAR faces formidable challenges. Poverty has become entrenched, and is compounded by a fragile economy and poor governance. While CAR was already one of the poorest countries in the world before the 2012 conflict, poverty rates surged to more than 76 percent in 2013 and remain high. In 2014, the Gross National Income (GNI) per capita of US$600 (at PPP) was the lowest in the world. The State’s absence and chronically low revenue have resulted in the vast majority of the population lacking access to many public goods, including security, justice, and basic services. The maternal mortality ratio is one of the highest in the world, estimated at 882 deaths per 100,000 live births in 2015. In 2015, it was estimated that 68 percent of 15–24 year olds had not completed primary education. Children, particularly in rural areas, lost two years of schooling as a result of the crisis. Lacking the necessary financial capacity as well as professional and technical competencies with which to respond to such challenges, the public sector is riddled with clientelist practices. Successive regimes have increased predation by the State as well as the private capture of resources, further impoverishing the population and reducing State capacities, especially in remote areas. Last, the recent violence has created a severe humanitarian crisis, tearing at the country’s social fabric and leaving half the population in need of urgent support. Human rights violations and war crimes occurred throughout the country, including executions, rape, and lootings. The uncontrollable spread of atrocities committed by the Séléka coalition in 2013 led to the re-emer- gence of anti-Balaka militias, which were initially intended to be part of a protective force. As the confrontation between the two groups intensified, the anti-Balaka forces increasingly resorted to retaliatory attacks, leading to a cycle of unprecedented violence. With the killing of thousands of both militants and civilians by the two forces, the conflict threatened to mutate into genocide. The consequences of almost two years of armed confrontation remain far-reaching. A quarter of the population is still displaced, with more than half currently in need of urgent humanitarian support. Not surprisingly, agricultural, timber, and diamond production were severely affected by insecurity and pillage, impacting livelihoods, food security, and exports. The ensuing collapse of the economy—with a 36 percent contraction in 2013—further eroded the population’s capacity for resilience and complicated recovery. The extensive destruction of the country’s already weak public infrastructure was compounded by the rend- ing of social ties within and between communities. In 2013, as the shutdown of the Bangui-Douala corridor brought formal international trade to a halt, GDP dropped by 36 percent. The subsequent collapse of gov- ernment revenues led to the accumulation of more than three months of salary arrears, and public investment dropped from 6 percent of GDP to just 1.4 percent. By 2014, the country’s real per capita GDP had shrunk by COUNTRY FOCUS: BUILDING A NEW FOUNDATION 21 two thirds, making it the third poorest of the 213 countries included in the World Bank’s World Development Report. CAR also ranked 187th out of the 188 countries included in the UN’s Human Development Index. In addition, CAR’s income gap with the rest of Sub-Saharan Africa (SSA) has widened substantially since the crisis (Figure 10). As the security situation has improved and a new administration has taken office, indications of an incipient economic recovery have emerged: macroeconomic balances are returning to equilibrium, private investment is moving above its pre-crisis levels, public services are gradually being restored nationwide, and among CAR’s development partners, emergency aid is beginning to give way to long-term development assistance. However, economic gains have been far more limited. Current GDP growth remains anemic by the standards of SSA countries emerging from conflict. While inflation has receded from its double-digit peak at the height of the crisis, it remains above the 3 percent target set by the Central African Economic and Monetary Community (CEMAC). Domestic resources mobilization remains insufficient to cover public sector wages and priority expenditures, leaving the economy highly dependent on external aid. The capacity of the public administration must be rebuilt if it is to support a number of core functions, including revenue collection, expenditure management, public investment, and the maintenance of a hospitable business climate, particularly in the agriculture, energy, forestry, and mining sectors. FIGURE 10: EVOLUTION OF REAL PER CAPITA GDP, CAR AND SSA, 1960–2014 (1960 = 100) 200.00 CAR SSA 150.00 100.00 50.00 0.00 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: WDI 2015 The first few months of the political transition are providing the incoming government with a unique window of opportunity to leverage its electoral mandate into a decisive push for a bold reform strategy. A strong economic recovery marked by accelerated employment growth will be essential to the maintenance of political stability and the consolidation of the peace process. Robust growth would also be a necessary—though not sufficient—condition for addressing the sharp increase in extreme, multidimensional poverty brought on by the crisis. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 22 T H E “ F O U R R ’ S ” O F P O S T- C O N F L I C T R E S I L I E N C E AND RENEWED GROWTH CAR has a number of positives that could speed up its economic recovery. Although the country’s rich gold and diamond reserves have fueled the recent conflict, if properly managed, the sector could catalyze economic growth and provide a valuable source of fiscal revenue. CAR possesses an abundance of arable land and water resources and has the potential for food sufficiency and eventually net food exports. Though landlocked, the country is a natural hub for overland and river transportation between neighboring countries. Moreover, its young, rapidly growing population could generate a demographic dividend given a sufficiently fast rate of employment creation. To realize the full potential of these advantages, the authorities need to successfully address all sources of political and economic vulnerability via four channels: Reconciliation, Recovery, Reconstruction, and Restoration. The critical importance of coordinated action across all of the “four R’s” of post-conflict recovery cannot be overstated. As depicted in Figure 11, reforms in one area reinforce those in other areas, thus contributing to a virtuous cycle of renewed growth and social development. The following sections elaborate on the main issues and recommendations in each area. FIGURE 11: THE “FOUR R’S” OF POST-CONFLICT RESILIENCE Recovery, marked by strong, sustained, and inclusive growth => Objective: Employment Creation Reconciliation to avoid a Reconstruction of basic relapse into conflict infrastructure => Objective: Peace and => Objective: Physical Security Capital Development Restoration of essential social services => Objective: Human Capital Formation R E C O N C I L I AT I O N Reconciliation is the most fundamental prerequisite for post-conflict stabilization and renewed growth. Reconciliation is at the core of dealing with political and social fragility, and its dimensions extend well beyond the scope of this Policy Note series. Rebuilding trust in a deeply traumatized and divided society will be an extremely challenging long-term process. National reconciliation will require extensive dialogue, community- driven development, and a transitional justice system geared toward emotional redress, and closure rather COUNTRY FOCUS: BUILDING A NEW FOUNDATION 23 than retribution. Correcting regional imbalances in public services, investment, and economic opportunity by directing a larger share of resources away from the capital Bangui and toward the provinces would help build national and social cohesion. Over time, reconstituting and expanding the formal justice system will lay the foundation for a more just and peaceful society. Disarmament, Demobilization, and Reintegration and Reform of the Security Sector The economic reintegration of ex-combatants and other conflict-affected groups is vital to the peace process. CAR has made three unsuccessful attempts at disarmament, demobilization, and reintegration (DDR) since 2000, and the breakdown of the DDR process following the signing of the Libreville accord in 2008 was a major contributor to the 2013 conflict. Although DDR is closely linked to the political and strategic balance of power under the peace agreement, the return of thousands of ex-combatants to civilian life has strained the government’s limited resources, and dedicated employment and vocational training programs supported by CAR’s development partners will be required to accommodate the influx of new workers into the labor force. Without access to income-generating activities, ex-combatants will face strong incentives to return to conflict as a means of subsistence. Rwanda’s successful DDR program provides a sound model for establishing local education and vocational training centers and linking ex-combatants to economic opportunities. Labor-inten- sive public works can provide critical temporary employment while vocational training programs are being established and the economic recovery is accelerating. Security Sector Reform (SSR), which entails reform of the military and security forces, including downsizing formal state military structures and related elements and establishing effective civilian control, has an important linkage to DDR. Although SSR was launched in 2008 and is supported by the UN and the EU, the lack of political commitment, funding, and state capacity to implement an ambitious program has stalled the process. To be successful, SSR will need political leadership, a functioning legal system, and massive sustained international support and will need to be carried out with strong fiscal consideration of what is a sustainable size for the security sector. Equitable rules of civil service recruitment and advancement should be considered for the sector, and these should take into account the need for civilian oversight. SSR should receive adequate financial support from donors, notably to provide enough support for retirement, screening, retraining, basic lodging, and equipment.12 R E C O V E RY A sustained economic recovery marked by expanded employment opportunities will create a powerful alternative to crime, violence, and exploitation. Measures designed to spur growth and promote formalization in employment-intensive sectors such as agriculture, forestry, and mining will enable CAR to take full advantage of its young and growing population. New jobs with clear potential to generate rising incomes over time will offer young workers—and especially former combatants and victims of violence—an opportunity for economic advancement through peaceful means, diminishing incentives to seek an income from crime and conflict. 12 Central African Republic Fragility Assessment, April 6, 2016. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 24 Conversely, failure to create sufficient jobs to accommodate the growing workforce could undermine social and political stability and encourage a return to violence. Macroeconomic Stability and Fiscal Discipline CAR’s economy has been slow to recover in the wake of the conflict. While post-conflict countries typically experience a period of rapid growth as economic activity returns to normal, this has not been the case thus far in CAR. Although the economy contracted by about 50 percent between 2013 and 2014, as of 2015, the GDP growth rate remained modest at around 5 percent. While the suspension of legal diamond exports during the crisis has been a major factor in the country’s slow recovery, efforts are underway to resume compliance with the Kimberley Process Certification Scheme (KPCS). A sharp rise in informality in the diamond, gold, and livestock sectors during the crisis is slowing the country’s recovery, and international timber firms have been hesitant to resume operations. As a result, exports remain 25 percent below their pre-crisis levels. Finally, widespread population displacement, the severe disruption of agricultural value chains, and the destruction of scarce productive capital among smallholder farmers continues to depress agricultural output, which is both a major component and the source of livelihoods for the majority of CAR’s population. The drop in eco- nomic activity has also had a deeply negative impact on fiscal balances. Domestic budgetary revenue fell by two thirds in 2013, and by 2015, it remained at about 60 percent of its pre-crisis level, or 7.1 percent of GDP. Meanwhile, public capital spending fell from 1.5 percent of GDP in 2012 to zero in 2013, then rose slightly to 0.3 percent in 2015. Meanwhile, external budget support was insufficient to cover large budgetary financing gaps in 2014 and 2015, leading to the accumulation of domestic arrears. The authorities are striving to reestablish the government’s core public finances management (PFM) functions. A strong PFM system is crucial to an effective public administration. Prior to the crisis, the government had made important progress in improving payroll and treasury management as the public payroll and civil-service database were merged into a single system, a new organizational chart was adopted, and until early 2013, all salaries were paid through the banking system. A Single Treasury Account was opened, and a Treasury Committee chaired by the Head of State was established to manage expenditure priorities. However, during the crisis, the civil service payroll system broke down, unpaid teachers and civil servants abandoned their jobs, and the computerized budget system ceased to function, with the result that budgetary processes had to be carried out manually. As the political situation has stabilized, the government has begun rebuilding its PFM systems. In 2014 the authorities began to implement a weekly treasury plan as a first step toward returning to the Single Treasury Account system, and in 2015, a Central Accounting and Treasury Agency was created. While the government has made important progress in this direction, management controls have yet to be fully reestablished, and as of 2015, about 70 percent of budgetary expenses were still approved via exceptional procedures. Agriculture The agricultural sector continues to play a major role in CAR’s economy. The sector accounts for about 55 percent of GDP, more than 75 percent of domestic food consumption, and over 70 percent of employment. However, just 5 percent of CAR’s 15 million hectares of arable land is currently cultivated, less than 2 percent of agricultural production is exported, and the agricultural sector accounts for less than 3 percent of total public spending. Food insecurity is widespread, and despite substantial food imports, CAR’s population has one of the lowest calorie intakes per capita in SSA. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 25 Food insecurity thus remains the top policy priority for the agricultural sector. Over the longer term, a gradual shift in favor of commercial crops could provide a valuable source of income and secondary employment opportunities. Yet even subsistence agriculture has enormous employment potential, and the sector will need to absorb a large share of returning refugees and displaced persons. To rebuild its agricultural value chains and promote investment in agribusiness, the authorities will need to remove binding constraints on productivity, including high transportation costs, a lack of processing and storage facilities, limited access to finance, underdeveloped input markets, and low levels of human capital. Moreover, unresolved conflicts between pastoralists and farmers continue to pose a serious threat, as do periodic cross-border conflicts with pastoralists from Chad and Sudan. In this context, the adoption of a new Agro-Pastoral Land Code could help improve security and promote greater investment in the sector. Forestry Timber is the country’s largest export commodity, accounting for over half of total exports, as well as an important contributor to fiscal revenues at the local and national levels. While the timber sector contributed about 7 percent of central government revenue before the 2008 global financial crisis, its share fell to about 2 percent after 2009. CAR has an estimated 5.4 million hectares of forested area: 3.8 million hectares in its southwest region, and another 1.6 million in the southeast. So far, industrial logging has taken hold only in the southwest, and the country retains vast unexploited forestry potential. The 2009 Forestry Code greatly enhanced the legal framework for the sector and contributed to CAR’s compliance with the EU’s Forest Law Enforcement Governance and Trade (FLEGT) process, which promotes sustainable forestry and combats illegal practices. As part of this process, CAR’s forests have been thoroughly analyzed and mapped, and socioeconomic studies of forest communities have helped develop a more robust understanding of their unique circumstances and development priorities. Prior to the crisis, the Agency for the Sustainable Management of Forest Resources oversaw the operations of 14 forestry concessions covering 3.5 million hectares and monitored compliance with the sustainable management plans agreed upon by forestry firms and the government. However, the 2013 conflict brought the forestry sector to a halt as work was either suspended or continued on a minimal level in all forestry concessions, and a number of firms suffered extensive looting and property damage. While some firms are attempting to restart operations, others are attempting to redress their losses. Persistent insecurity along the Bangui-Douala transportation corridor remains a major constraint. While the government is attempting to protect convoys, forestry companies report that a substantial share of their trucking fleet remains idle due to security concerns. Unresolved tax arrears to local communities are also a major sectoral issue and will require joint action by the government and the private sector. Mining CAR has significant mineral resources, including well-explored diamonds and goldfields, as well as largely unexploited reserves of uranium and other precious minerals. Mining in CAR is exclusively artisanal, and no commercial concessions are currently active. Artisanal mining is extremely labor intensive and represents a critical source of employment and income in certain areas. An estimated 80,000 artisanal miners manage permits on behalf of a registered mineral trader, each of whom hires an average of 4 laborers to work their claim. All artisanal miners are required to sell to intermediaries who act as collecting agents for major purchasing officers in Bangui. Overall, as many as 450,000 artisanal miners, laborers, collection agents, and purchasing officers were employed in the mining sector prior to the 2013 crisis. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 26 However, the mining sector is operating far below its potential as the conflict dramatically altered the nature of the sector, halting the development of the country’s only commercial mining concessions, an industrial gold mine and the nation’s first uranium mine. Meanwhile, legal diamond exports ceased as CAR was suspended from the KPCS in May 2013, thus reducing formal investment, production, exports, and fiscal revenues from the diamond subsector to negligible levels. The number of registered diamond purchasers fell from 352 in 2011 to 134 in 2015, though many soon reopened on the Cameroonian side of the border. However, artisanal diamond and gold activities did not stop completely, and a substantial informal trade developed. The UN estimates that in 2013–2015, two tons of gold were informally exported each year via Cameroon along with a total of 140,000 carats of diamonds valued at US$24 million. In June 2016, Berberati in southwestern CAR became the first compliant zone to export certified diamonds three years after the ban was imposed by the KPCS. It is estimated that only 20,000–50,000 carats are being exported from Berberati. With an average value of US$161.27 per carat (based on official statistics from 2005 to 2013), this would equate to less than US$1 million in tax receipts at a reduced export tax rate of 6% (a reduction currently under discussion in the Ministry of Finance). However, if the current export tax rate were to be applied (12%), a doubling of the tax receipt could be anticipated. Although a successful implementation in Berberati could open up possibilities for other diamond producing areas to resume legal trade activities under the KPCS, the government must overcome multiple challenges if it is to restore normal operations in the mining sector. While the 2009 Mining Code is largely aligned with international best practices for exploration, streamlining its overly complex commercial licensing regime would facilitate new investment in the sector. In addition, the registration system for artisanal miners should be revised to encourage formalization and promote continued KPCS compliance. The tax structure for both commercial and artisanal mining does not reflect international best practices, and its high tax rates and burdensome regulations further discourage investment, particularly in the commercial subsector. The social and environmental obligations included in the 2009 Mining Code also fall short of current international best practices, and the government should seek out technical assistance in order to develop a reform program in this and other areas of mining legislation. RECONSTRUCTION CAR’s economic recovery will hinge on the reconstruction of its core public infrastructure. Sound infrastructure— especially roads and utilities—is fundamental to investment and growth. It can also boost the efficiency of service delivery, particularly in poor and underserved areas. Public investment has steadily declined over the last several decades, leaving critical systems in an increasingly dilapidated state, which the recent conflict greatly exacerbated. However, a well-targeted investment program could yield rapid gains in energy, water and sanitation, transportation, and telecommunications, providing the basic infrastructure necessary to sustaining growth. Transportation Rebuilding CAR’s transportation infrastructure has the potential to drive inclusive growth by linking producers to markets, reducing the cost of imported consumer and capital goods, and providing both direct and indirect employment for the country’s rapidly growing workforce. However, CAR’s transportation infrastructure is extremely weak and has been heavily damaged by the recent conflict and by decades of chronic under- COUNTRY FOCUS: BUILDING A NEW FOUNDATION 27 investment. As a landlocked country, CAR is heavily dependent on its overland transportation system, which includes both the road network and navigable waterways. However, the country’s road network is extremely small and in very poor condition. Just 855 km, or 3.5 percent of the road network is paved, and only a small fraction of the country’s rural population has access to all-season roads. The Douala-Bangui corridor is the country’s most important trade route, accounting for a large majority of both imports and exports. However, poor road conditions and persistent insecurity along the corridor greatly increase transportation costs, further undermining CAR’s competitiveness in regional and global markets. While river transportation is a promising alternative to the road network, the volume of goods shipped along CAR’s waterways has declined steadily over the last several decades due to falling water levels, inadequate investment in ports, and failure to coordinate policies across multiple transportation modes and countries. Energy CAR’s inadequate energy supply is a binding constraint on growth and competitiveness. Reliable energy is crucial to both economic and social development. However, investment in electricity generation and transmission capacity has long failed to keep pace with demand, and the sector’s infrastructure is limited and dilapidated. The state power utility, Central African Energy (ENERCA), suffers from serious technical, organizational, and financial deficiencies, and the sector lacks a clear policy vision or development strategy. The 2013 crisis exacerbated all of these issues, leaving the energy sector on the brink of collapse. To compound problems, access to electricity is among the lowest in SSA, with just 8 percent of the population having access to electrical power. While the Bangui power grid serves about 28,000 customers, demand in the capital is currently estimated at double total supply capacity, and Bangui experiences rolling blackouts for up to 16-18 hours every day. Outside Bangui, ENERCA typically provides only a few hours of electricity each night, and although several provincial cities have their own diesel generators, only two of these are currently operational. Firms that require reliable electricity are often compelled to purchase private generators, thus massively increasing their production costs. Expensive, unreliable electricity systematically discourages investment in more sophisticated industrial and service sectors, preventing CAR’s economy from diversifying away from low-value-added agricultural commodities and natural resources. Inadequate electricity also has important social implications as it greatly limits the functionality of hospitals, schools, and social services, especially outside Bangui. Limited electricity access greatly compounds socioeconomic disparities between the capital and the provinces as well as between CAR’s rural and urban populations. Water Although CAR has ample renewable water resources, access to safe drinking water and sanitation services is extremely limited. Just 30 percent of the population has access to safe drinking water, with rates ranging from 36.5 percent in Bangui to 27 percent in rural areas. Bangui’s water infrastructure is antiquated and poorly maintained, and even at full capacity, the city’s water supply would not be adequate to meet demand. Most rural households rely on boreholes equipped with hand pumps, and water grids are restricted to Bangui and a handful of major cities. CAR has no integrated sanitation system combining sewerage and wastewater treatment. While many urban households use private latrines, almost all rural households practice open defecation, which poses serious environmental and public health hazards. Sanitation access rates range from 44 percent in urban areas to just 7 percent in rural areas, and the national average is estimated at 22 percent. The public water utility, the Central African Water Distribution Company (SODECA) suffers COUNTRY FOCUS: BUILDING A NEW FOUNDATION 28 from large technical and commercial losses, making it a potential source of contingent liabilities. Overall, inadequate water and sanitation services cost CAR an estimated US$64 million per year—or nearly 4.5 percent of GDP—in high healthcare costs and lost productivity. Telecommunications CAR’s information and communications technology (ICT) sector is one of the least developed in SSA, and its quality and coverage indicators are among the lowest worldwide. In 2014 CAR ranked 167th out of the 167 countries included in the International Telecommunications Union’s ICT Development Index, and the country was among the seven lowest-scoring in the World Bank’s 2016 Digital Adoption Index. At end-2015, the mobile connection penetration rate reached just 37 percent, compared to 67 percent for the Central Africa region and 77 percent for SSA as a whole. Mobile broadband penetration and internet usage rates are also very low. Although 3G services were launched more than three years ago, the number of 3G-enabled SIM cards per capita stands at less than 1 percent, well below the 8 percent average for the Central Africa region and 19 percent for SSA. CAR’s 3G mobile penetration rate is now lower than Chad’s (1.6 percent at end-2015), even though CAR launched 3G services in February 2013, a year and a half before Chad. Less than 1 percent of households in CAR have internet access at home, compared to an SSA average of 12 percent. Overall, while mobile phone services dominate the ICT sector, prices remain high and service quality is poor. The lack of a major international fiber-optic link to Cameroon, Chad, or the Republic of Congo is a major constraint on connectivity, and low international bandwidth contributes to high prices and limited competition in the ICT market. R E S T O R AT I O N An inclusive recovery will be vital to the peace process and will require the restoration of essential social services, with specific attention given to the needs of vulnerable groups. CAR’s economic and social indicators are far below those of comparable countries in the region. In this context, human capital formation will be essential to sustainable, broad-based growth. A healthier, better educated, increasingly skilled labor force will accelerate growth in labor intensive sectors and over time enable the emergence of new industries and services. CAR’s population includes a vast array of vulnerable groups, including conflict-affected communities, survivors of gender-based violence, and former combatants. Facilitating their participation in the country’s economic recovery will require carefully designed interventions, and the successful inclusion of these groups will be essential to the integrity of the peace process. Education For decades CAR’s education sector suffered from increasingly severe structural weaknesses. Long distances to schools, inadequate facilities, a lack of textbooks and other basic supplies, and the uneven quality of the teaching staff all posed serious obstacles to access to education even before the crisis. Moreover, these obstacles were compounded by gender, socioeconomic, and geographical disparities. Although the gross primary enrollment rate has remained broadly stable at 87 percent for nearly a decade, the primary completion rate is very low at 45 percent. In addition, education funding has declined in recent years, falling to just 1.2 percent of GDP in 2015, one third of the SSA average of 3.7 percent and one fifth of the 6 percent global standard. Due to chronic underfunding and the suspension of the teacher payroll system during the crisis, the teaching corps is dominated by untrained teachers recruited by parents on an ad hoc basis. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 29 The conflict greatly magnified the education sector’s challenges as unpaid teachers left their posts, school facilities were looted or destroyed, and thousands of children lost years of education. The loss of facilities and materials, the collapse of sectoral administration, and the displacement of both students and teachers forced schools to close for prolonged periods. As a result, the formal school system effectively ceased to function for two full academic years, with some schools slowly beginning to resume normal operations in early 2015. Teacher recruitment and training was similarly disrupted, further constraining the supply of qualified teachers. Restoring educational services requires urgent actions on both the supply and demand sides. Supply-side interventions should focus on the rehabilitation of school facilities, the provision of adequate instructional materials, accelerated teacher training, and the development of a quality learning environment. Demand- side priorities should concentrate on measures to encourage school enrolment and lower the dropout rate. Conditional cash transfers could provide families with a powerful incentive to keep children enrolled in school while offsetting the loss of their household labor. Both supply- and demand-side policies must account for the special needs of former child combatants and conflict survivors, who will require remedial education, psychosocial support, and vocational training in addition to normal educational services. Healthcare The 2013 crisis weakened CAR’s previously poor health indicators. The infant mortality rate rose slightly from 176 deaths per 1,000 live births in 2006 to 179 in 2010. In 2015, CAR’s maternal mortality rate was among the highest in the world at 882 deaths per 100,000 live births. In 2011 the total fertility rate for adolescent girls (aged 15–19) was estimated at 6.2 births, with disaggregated rates ranging from 6.8 births among girls with no education to 4.6 among girls who had completed secondary school. Currently, an estimated 27 percent of women of reproductive age and 23 percent of adolescent girls have unmet family planning needs. A 2014 study estimated that about 28 percent of CAR’s healthcare facilities had been partially or completely destroyed. Damage to facilities varied widely by region, ranging from 6.8 percent in the greater Bangui area to 46.1 percent in the country’s far northwest. In this difficult context, rebuilding the health sector will require increasing the number of clinically qualified healthcare personnel, especially in rural areas, restoring the sup- ply chain for pharmaceuticals, basic medical equipment, and other essential inputs, and investing in the phys- ical infrastructure of health centers. To maximize the impact of scarce public resources, the authorities should consider adopting a performance-based financing (PBF) system for the health sector. Social Protection Currently, there is no institutional framework in place for developing or coordinating social protection policies. CAR’s current social protection and social services programs are overwhelmingly reliant on the initiatives of the country’s development partners. As a result, financing levels are unpredictable and volatile, and the majority of social protection spending funds a large number of relatively small-scale, uncoordinated, short-term interventions. Moreover, these programs tend to focus on immediate humanitarian goals such as nutritional support while devoting less attention to more complex, long-term challenges such as the return and reintegration of refugees and internally-displaced persons. Establishing a national social protection system requires a clear institutional framework supported by adequate administrative capacity to coordinate social protection programs. The authorities should begin by COUNTRY FOCUS: BUILDING A NEW FOUNDATION 30 creating a social protection forum externally supported by selected donors and international agencies. The forum’s objective would be to solicit a broad range of national perspectives in order to formulate a revised social protection strategy focused on addressing the needs of displaced persons in the short term and providing support to vulnerable populations over the medium term. To implement these programs effectively, policymakers will need to compile a registry of potential beneficiaries. The government also lacks cash transfer programs that would allow it to improve the targeting of its resources toward the right beneficiaries. K E Y P O L I C Y R E C O M M E N D AT I O N S Going forward, concerted action in multiple policy areas will be vital to consolidating the peace process, rein- forcing political stability, and accelerating CAR’s economic recovery. While the reform agenda must ultimately be determined by the government in close consultation with other key stakeholders, the priorities presented here provide a starting point for further dialogue on the government’s reform strategy. A summary of the most urgent priorities by sector is presented in Box 1. COUNTRY FOCUS: BUILDING A NEW FOUNDATION 31 Box 1: CAR’s most urgent priorities by sector. These were chosen based on their urgency, relative simplicity, and feasibil- ity in the short term. Further details and a full list of priorities are presented in the Central African Republic Policy Notes (June 2016) and the Fragility Assessment (April 2016). RECONCILIATION Disarmament, Demobilization, and Reintegration Security Sector Reform Prepare comprehensive plan for DDR and SSR including a political settlement with various influential armed group leaders. • Strengthen institutions to initiate DDR activities. • Fiscal space analysis of right-sizing the security sector. RECOVERY Macroeconomic stability and fiscal discipline Agriculture Forestry Mining • Adopt measures designed to bring inflation back to the CEMAC • Focus scarce public investments on areas with high • Develop a strategy for clearing both local and • Expand the regional KCPS certification process beyond target of 3 percent agricultural potential. national tax arrears. its initial target areas. • Increase revenue and contain non-priority expenditure so as to • Modernize the regulatory framework governing the • Restructure or cancel concession agreements for • Adopt regulatory reforms designed to encourage the bring the budget deficit down to sustainable levels. agricultural input supply chain (seeds, fertilizers, idle areas, and award new concessions. formalization of artisanal mining operations. • Gradually eliminate tax exemptions and adopt measures etc.). • Resume full compliance with FLEGT standards. designed to increase tax revenues. • Implement legal reforms designed to reduce conflicts between farmers and pastoralists (Agro-pastoral • Assert strict control over the payroll. Code). • Clear arrears to the private sector. • Adopt measures designed to overhaul the management of COUNTRY FOCUS: BUILDING A NEW FOUNDATION public investments. • Strictly limit external deficit financing to grants and concessional loans. • Compile an inventory of commercial bank accounts held by public agencies and develop a plan for consolidating them into a single treasury account. 32 • Normalize the budget process and curb the use of exceptional spending procedures. • Keep adopting CEMAC-compliant measures strengthening budget transparency, accounting, and expenditure control. RECONSTRUCTION Energy Transportation Water and Sanitation Telecommunications • Invest in rehabilitating the country’s existing power generation • Invest in improving the capacity of the Bangui-Douala • Define a strategic investment program for Bangui • Engage private sector partners to invest in a fiber-optic and transmission system. corridor, including its northern link to N’Djamena, and the seven other urban centers covered by link to Cameroon. and in the secondary road network. SODECA. • Streamline the regulatory framework to facilitate • Adopt management contracts to improve ENERCA’s technical • Adopt management contracts to improve SODECA’s competition in the telecom subsector. and financial performance. technical and financial performance. • Extend networks (telephony, mobile money) in rural • Promote small-scale drinking water systems areas financed from the revenue collected from • Promote small-scale solar power generation in rural areas. powered by solar pumps in rural areas. universal access. RESTORATION Education Healthcare Social Protection • Invest in school rehabilitation and the procurement of • Rebuild the supply chain for pharmaceuticals, • Complete the urgent response strategy for educational materials. equipment, and medical supplies. internally displaced persons set up with the support of development partners. • Establish technical and vocational training programs for at-risk • Train rural health personnel and encourage the • Create a national beneficiary registry and launch a youth. deployment of qualified staff to rural areas. pilot cash transfer program. • Encourage attendance through school nutrition programs, • Gradually shift budget allocations to a performance- • General new poverty date through household especially in primary schools. based financing system. surveys. COUNTRY FOCUS Possible Impacts of Floating the Nigerian Naira on Niger’s Economy By Abdoulahi Garba, José Lopez Calix, Jean-Christophe Maur and Luc Razafimandimby13 Main Possible Impacts ─ In the short term, floating the naira may lead to a reduction in Niger’s growth. The main transmission channels are bilateral trade and transfers and to a lesser extent customs revenue from the re-export trade. ─ The possible decline in the balance of trade surplus with Nigeria could even result in a temporary deficit. ─ The floating (and its expected short-term effects on the slowdown of growth in Nigeria) could also have a negative impact on the amounts of transfers from migrants to that country. ─ Eliminating the re-export of products to Nigeria will also cause Niger to lose some customs revenue equal to 1% of average GDP since 2013. ─ In the medium term, changes in the balance of trade with Nigeria will depend on a return to the equilibrium exchange rate for the naira and on an economic upswing in Nigeria as well as the elimination of non-tariff barriers to bilateral trade. The authors would like to thank the following for their contributions and suggestions: Paul Noumba, Siaka Bakayoko, Sébastien Dessus, 13 Khwima Nthara, Rachid Benmessaoud, Jean-Christophe Maur, Santiago Herrera, Seynabou Sakho, and Cheik Anta Gueye (IMF). COUNTRY FOCUS: POSSIBLE IMPACTS 33 O B J E C T I V E A N D J U S T I F I C AT I O N This memorandum identifies the main possible channels through which the floating of the Nigerian naira, which became effective on June 20, 2016, could affect Niger’s economy. Nigeria maintains close trade relations with its immediate neighbors, including Niger. This is why Niger’s authorities closely follow decisions that have an impact on Nigeria’s macroeconomic behavior. The memorandum discusses possible effects on the balance of payments and growth and their impacts on vulnerable groups through transfers. The financial sector has been excluded as financial links between the two countries are minimal. SCOPE OF THE OIL PRICE SHOCK IN NIGERIA The drop in oil prices has been affecting Nigeria’s economy since 2015. In recent years, as in all large petroleum-exporting countries, Nigeria’s economy has suffered a severe drop in prices for this product, which has had very significant impact on Nigeria’s growth, and considerably reduced the availability of foreign ex- change reserves and, coming in the wake of the implementation of a number of exchange control measures, has made possible the opening up of a parallel foreign exchange market. However, these measures proved inadequate. Initially, the Nigerian authorities suspended the re-exporting of certain products from neighboring countries, mainly Niger and Benin. The 41 products included edible oils, sugar, white rice, pasta, and tomato concentrate. However, on June 20, 2016, the Nigerian government also announced a transition to a flexible exchange rate system, which went from a single-market structure (interbank window) to a structure in which the rate is determined by the market but subject to intervention by the authorities (“dirty floating”). Under the new system, the Central Bank participates in the exchange market with periodic interventions, buying or selling foreign currencies as needed. On the first day of operation under the new system, the naira underwent nominal depreciation, trading at NGN 260 per USD (down from 199) on the official free interbank market, while it traded at NGN 330 per USD on the parallel market. Since then, it has fluctuated between NGN 350 and 370 per USD on the parallel market, which led the Central Bank to auction off USD 530 million on the interbank market. GDP growth in 2016 entered in recession territory in the second quarter of 2016. IMF estimates that growth for this year will contract by 1.8%. N I G E R ’ S E C O N O M I C R E L AT I O N S W I T H N I G E R I A Trade with Nigeria. In general, Niger has had a positive balance in its formal trade with Nigeria over the past three years. However, it should be noted that since many transactions escape the official statistics, this is only an estimate. Food imports and exports, re-exports, and to a lesser extent transfers are at the core of Niger’s trade with Nigeria. Niger also imports electricity from Nigeria. Export structure. Livestock products are Niger’s main exports, with Nigeria receiving more than 95% of the total livestock products exported from Niger. However, these exports have declined by 28% in terms of value and 30% in terms of quantity since 2010, though these figures may be underestimated. In fact, live animal exports are far more likely to pass through informal channels given the openness of the border, non-tariff COUNTRY FOCUS: POSSIBLE IMPACTS 34 barriers, and multiple livestock markets along (% GDP) 2010 2011 2012 2013 2014 a 1,500 km border. While exports of livestock Exports 2.3 0.8 2.0 2.9 1.6 to Nigeria are not quantified with accuracy, Imports 1.6 1.4 1.4 1.1 1.0 conservative estimates put these exports in the range of $150-190 million yearly, about 2% of Balance 0.8 -0.6 0.6 1.8 0.6 GDP. Trade volume 3.9 2.2 3.5 4.0 2.7 Import structure. Nigeria is Niger’s fourth most important partner in terms of imports after China, France, and the USA. In terms of the main products imported, Niger’s import structure included capital goods (48%), food products (21%), and fossil fuels (7%) over the 2010–2014 period. With the start of petroleum exploitation in Niger in 2012, the share of fossil fuel imports dropped by 14% from previous years to 1.5% in 2014. Cereal imports, which account for 2% of GDP, play a major role in food security. Well-organized distribution channels supply Niger’s markets from regions of Nigeria where there is surplus production. Moreover, under an agreement with Nigeria, Niger imports around 80% of its electricity needs from Nigeria at relatively low cost, which makes it possible to supply consumers at relatively low prices. Transfers. In general, the ADB Group (in its bulletin entitled West Africa Observer No. 7 of July 2015) ranked Nigeria first in 2014 in terms of remittances by migrants back to Niger. Overall, interregional transfers ac- counted for 69% of total transfers, with Nigeria at the top of this transfer flow. This confirms the strength of the economic bonds between Nigeria and its main partners and neighbors. In absolute terms, Niger is the fifth largest beneficiary of transfers from Nigeria in the region after Ghana, Mali, Benin, and Togo. For smaller economies, flows are larger in relation to the size of the economy, representing 0.6% of GDP for Niger (Figure 12). In addition, estimates based on the bilateral transfer matrix show that Niger receives more than one third of all its remittances from Nigeria (Figure 13). Unsurprisingly, according to World Bank estimates, there is a strong correlation between all of remittance flows from Nigeria to West African countries, including Niger, and 400 2.5 Nigeria’s GDP. 350 FIGURE 12: ESTIMATED BILATERAL TRANSFERS FROM NIGERIA, 2015 2.0 300 250 1.5 USD Million 200 1.0 150 100 0.5 50 0 0.0 Total (in US$ millions, left axis) % of GDP (right axis) Source: World Bank Migration and Remittances data, April 2016 & WDI COUNTRY FOCUS: POSSIBLE IMPACTS 35 FIGURE 13: PERCENTAGE OF TRANSFERS RECEIVED FROM NIGERIA Cote d'Ivoire Burkina Faso Senegal Sierra Leone Guinea Cabo Verde Liberia Guinea-Bissau Gambia, The Cameroon Mali Ghana Togo Niger Benin 0 5 10 15 20 25 30 35 40 45 50 Source: World Bank Migration and Remittances data, April 2016 & WDI Re-exports. Re-exports is another element of trade between Niger and Nigeria. Niger functions as a ware- house state for products that are heavily taxed or subject to import restrictions in Nigeria, including in partic- ular used cars, textiles, rice, and cigarettes. These warehouse states are platforms for subsequent transport toward Nigeria. In 2014 and 2015, the value of re-exports to Nigeria represented 15% and 12% of the GDP, respectively. While these figures are not part of Niger’s trade balance they however contributed the equiva- lent of approximately 1% of GDP to the national budget each year in terms of customs duties. P O S S I B L E I M PA C T S O F T H E D E P R E C I AT I O N OF THE NAIRA AND OF THE BANNING OF RE-EXPORTS FROM NEIGHBORING COUNTRIES Depreciation of the Naira—What Are the Possible Consequences for Niger? In the short term, we can expect a reduction in formal Niger’s trade surplus and even a temporary deficit with Nigeria as well as an increase in commercial transactions in the informal sector. Given the naira’s nominal depreciation, its reduced value could initially translate into: (i) a rise in the prices of products coming from Niger and sold in Nigeria’s markets, which could have a replacement effect; or into (ii) a drop in the quantities exported by Niger. Given the new restrictive trade measures, this could also lead to an increase in trade passing through the informal sector for exports from Niger. On the other hand, there will be no changes for electricity produced which is paid for in euros, unless contract is changed. COUNTRY FOCUS: POSSIBLE IMPACTS 36 In the medium term, the effect of the devaluation on the balance of trade will depend in large mea- sure on the time it takes to find an equilibrium exchange rate, the expected recovery in oil prices, and growth in Nigeria in general. The naira’s depreciation could promote a recovery in economic growth in Nigeria in the medium term since it will improve its competitiveness. In this case, the consequences could be positive for Nigeria since trade (especially imports from Niger) may increase. In addition to the possibility of an initial worsening of the trade balance for Niger, the depreciation of the naira may also have a negative impact on the amount of transfers by migrants in Nigeria and on those segments of the population that receive them. A reduction in the amounts of transfers could have negative consequences for the families receiving these remittances. In fact, these transfers play a counter- cyclical role, particularly in times of economic crisis. A survey conducted by the Central Bank of West African States (BCEAO) in three regions of Niger (Niamey, Tahoua et Tillabéry) showed that transfers are used primarily to fund current consumption expenditure (52%) followed by capital expenditure, particularly the purchase of fields and the formation of business capital (18%). Social expenditures and savings each accounted for 8% of the total amount. In general, the families receiving these transfers belong to the most disadvantaged segments of the population, which could make them especially vulnerable. Restrictions on money transfer operators in Nigeria could also further adversely impact remittances. Nigeria’s central bank issued new money transfer guidelines in early August 2016 and warned the public against using unlicensed international money transfer operators (MTOs). This in effect narrowed the market to just three large licensed operators. However, in early September 2016, it issued licenses to 11 other MTOs. But, due to regulatory stringencies, the choice of available money transfer operators has narrowed. This may increase the cost of making formal remittances out of the country. In that case, there would be increased diversion of remittances to informal channels. This could adversely impact foreign exchange reserves in countries receiving remittances from Nigeria. Suspension of Re-exports—What Are the Possible Consequences for Niger? The suspension of re-exports of products will have a negative impact on the level of mobilization of customs revenues. The Re-export Tax (TSR) on products in transit to Nigeria has been equal to about 1% of GDP for the past two years. The main products involved in re-export to Nigeria and targeted by the Nigerian authorities’ measure include sugar, rice, vegetable oil, and powdered milk. Finally, the current context of Nigeria’s economy could affect Niger’s economic growth. The economic slowdown will translate in reduced demand in Nigerian markets. This would translate directly into a re- duction in net formal exports to Nigeria, which on average accounted for about 2 % of GDP for the 2010–2014 period. Indirectly, the drop in exports (especially agro-pastoral products) and in transfers from migrants will cause a drop in consumer spending, especially in rural households. Public consumption could also be directly affected by the possible drop in revenues associated with the Re-export Tax. COUNTRY FOCUS: POSSIBLE IMPACTS 37 A WORD OF CAUTION Although the channels through which the impact of the naira’s depreciation is transmitted are clear, quantitatively measuring these impacts must remain speculative for the time being. Aside from the loss of revenue caused by the elimination of re-exports, which has been quantified, the financial impact on the trade balance is difficult to measure because its scale depends on the naira’s depreciation and the price elasticity of the transactions involved, which may vary from product to product. In addition, many transactions escape statis- tical tracking. Although the naira has depreciated, it is still too early to estimate a target figure that is indicative in the medium term.14 A N N E X A : R E A L E F F E C T I V E E X C H A N G E R AT E I N N I G E R I A : M I S A L I G N M E N T, PA S S - T H R O U G H , G R O W T H , A N D I M PA C T O N P O V E R T Y ? 15 In 2010–2014, oil and gas represented on average over 95% of Nigeria’s exports of goods. In 2015, for the first time in 15 years, Nigeria ran a current account deficit. The World Bank’s Balance of Payments (BoP) projections indicate that this situation will persist. Thus the country switched from being a net savings exporter to the rest of the world to a net savings importer. Given the deterioration in the terms of trade and the change in the balance of external resources, the long- term real effective exchange rate (REER) has changed. Based on our own estimates as well as those reported in recent publications, we estimate that the long-term REER in Nigeria may have depreciated by 20% to 25% as a result of lower oil prices and the reversal of the external resources balance in the medium term. Exchange rate misalignment can impact growth. Using data for 188 countries over a period from 1950– 2004, Rodrik (2012) found a positive and statistically significant relationship between a measure of currency undervaluation and GDP growth, with the relationship being stronger for lower-income countries. A study by Raggl (2016) examined the impact of REER misalignment on growth in Nigeria and confirmed Rodrik’s findings. Raggl introduced an undervaluation measure in a conditional convergence growth model and found that the variable was significant for Nigeria. Based on Raggl’s results, we estimate the growth impact of 25% currency overvaluation as -1.25%. That is, growth with a currency overvaluation of 25% will be 1.25% lower than the same scenario without currency overvaluation. This adjustment of the nominal exchange rate is feared by the Central Bank of Nigeria due to its impact on inflation. The Bank’s earlier intervention to peg the currency led to a massive decline in foreign currency reserves, from USD 43 billion at the end of 2013 to USD 26 billion today. Our estimates of the exchange rate pass-through (ERPT) show a relatively low value of 25%, which means that a 10% nominal depreciation would cause a 2.5% rise in prices. A review of recent literature shows that the ERPT is in the range of 10% to 40%. The average of these two extremes coincides with our own estimate of the ERPT. A 2015 World Bank study of the ERPT in SSA economies showed that it was lower in countries with low fiscal deficits and lower M2 growth. In fact, the report found that countries with higher Country Policy and 14 As of June 22, 2016, one naira bought CFAF 2.05, against an average value of CFAF 2.95 during the first half of 2016, or equivalent to a 30 percent depreciation. 15 This Annex was prepared by Santiago Herrera with inputs from Alberto Pérez and Janine Waltz. COUNTRY FOCUS: POSSIBLE IMPACTS 38 Institutional Assessment (CPIA) scores had lower pass-through. The study also showed that the exchange rate pass-through effect declined over time by about 50%, with the results being attributed to improvements in economic management in the region. Given the 23% estimated misalignment of the REER (midpoint between 20% and 25% from previous Bank estimates), this level of ERPT implies that the misalignment can be corrected by a nominal depreciation of 31 percent (or .23/.75). Given the uncertainty affecting all of these parameters, it is advisable to let the currency overshoot its long-term level in order to avoid market expectation of further depreciation in the future. Otherwise, capital outflows may lead to further depreciation in the future in a situation of self-fulfilling prophecy. The impact on the poor of a nominal depreciation of the currency arises from its impact on inflation. The study finds that a 10% increase in all prices and the welfare loss associated by lower government expenditure implies a rise in poverty of 6 percentage points, from a baseline of 35% to 41% in the absence of any other policy action. COUNTRY FOCUS: POSSIBLE IMPACTS 39 SPECIAL FIGURES What Do AFCW3 Countries Export? Main Exports per Country and Size of Bilateral Trade in 2015 (% of total exports) By Weneyam Hippolyte Walima EXPORTS OF GOODS FLOWS MALI 1.51% 2.92% 0.06% 0.61% 0.05% NIGER GUINEA 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% CENTRAL 0.33% AFRICAN 0.01% CHAD REPUBLICAN 11.47% 0.27% Source: Author’s construction based on COMTRADE (2015). SPECIAL FIGURES 40 Three main export products to neighboring countries (HS4 classification-data for 2012): Central African Republic: Bitumen and asphalt and natural, shale, and tar sands bituminous oil; mixtures of odoriferous substances used as raw and cigarette paper. Note: timber, diamonds and meat were the most important exports during the mid to late 2010s. Mali: Mineral or chemical fertilizers; other iron or non-alloy steel rods; grain sorghum. Note: gold and cotton were the most important exports during the mid to late 2010s Niger: Oil (excluding crude) from petroleum and bituminous minerals; petroleum gases and other gaseous hydrocarbons; plastic tubes, pipes, and hoses and their fittings. Note: uranium and oil were the most important exports during the mid to late 2010s Chad: No data on neighboring trade available. Oil, livestock, and cotton were the most important exports by the mid to late 2010s Guinea: No data on neighboring trade available. Oil, livestock and cotton were the most important exports by the mid to late 2010s Main features of trade flows between AFCW3 countries: ● Trade flows between AFCW3 countries are highly marginal and involve mainly primary products; ● Intraregional trade is relatively developed between Chad and CAR and between Guinea and Mali; ● Many countries do not trade goods with each other. However, SPECIAL FIGURES 41 How Do AFCW3 Countries Rank among Most Fragile States Worldwide? Exploring the Multiple Dimensions of Fragility By Weneyam Hippolyte Balima and Irum Touqeer RANK: AFCW3 COUNTRIES RANKING IN TERMS OF FRAGILITY WORLDWIDE (FRAGILE INDEX 2016) MLI NER GIN CHD CAR Source: Fund for Peace. Note: MLI: Mali; NGR: Niger; GIN: Guinea; CHD: Chad; CAR: Central African Republic. SPECIAL FIGURES 42 DECOMPOSING FRAGILITY: RATINGS ACCORDING TO SINGLE CRITERIA (FROM 1 TO 10 – HIGHEST FRAGILITY, 2016) Demographic Pressure 10 Refugees and IDPs 9.8 9.9 00 N •n TCD NER GIN MU CAR CAR TCD GIN MLI NER Group Grievance Human Flight ": °' 8.9 9.3 °' •n 00 ": 00 00 00 ": r- ": r- CAR GIN TCD MU NER TCD MLI GIN NER CAR Uneven Development Poverty and Economic Decline 9.9 9.4 0() 0() CAR TCD NER MU GIN GIN CAR TCD NER MLI SPECIAL FIGURES 43 DECOMPOSING FRAGILITY: RATINGS ACCORDING TO SINGLE CRITERIA (FROM 1 TO 10 – HIGHEST FRAGILITY, 2016) Legitimacy of State 10 Public Services 9.8 9.8 00 N GIN CAR TCD NER MLI CAR TCD NER GIN MLI Human Rights Security Apparatus 9.9 0() CAR TCD GIN MU NER MLI CAR TCD GIN NER 9.6 External Intervention 9.5 00 '" 00 00 CAR GIN TCD NER MLI MLI CAR TCD NER GIN Source: Fund for Peace. Note: MLI: Mali; NGR: Niger; GIN: Guinea; TCD: Chad; CAR: Central African Republic. SPECIAL FIGURES 44 COUNTRY ECONOMIC FOCUS AFCW3 Economies at a Glance • • • • • •• ••••••••••••• •••••••••• • • ••• • •• • • • ••••• • ••• •• •••• •••••••••••••••••••••••••••••• •• • ••• •••••• • •• • •• • ••• ••••••••••••••• • • • • •• •• • MACROECONOMIC INDICATORS OF AFCW3 COUNTRIES AT A GLANCE, 2012-2016 •• •• COUNTRY ECONOMIC FOCUS 45 •• MACROECONOMIC INDICATORS OF AFCW3 COUNTRIES AT A GLANCE, 2012-2016 •• •• •• •••••• • • • ••• • • • • •• ••• • • • •• • ••• •• • • • •••• •••• •••• • •• ••••• • •• •• •••• • • •• ••• • • •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• • • •• ••• • •• ••• ••• • • • •• •• ••• •• •• •••••••••••••••••••••••••••••••••••••• •• • •••• ••• • ••••••••••••••••••• •• •• •• ••• • • •• •• • •• • •••••••••••••••• • • •• ••••• • •• ••••••• •••• •• •• • ••••••••••••• •••• • • •••••••• • • • ••••• • ••• •• •••• ••••• • •• • •••••••••••••••••••••••••• •• ••• • • ••• • ••• ••• Source: IMF and World Bank staff estimates; IMF AIV, several years. Note: data for 2016 are forecasts. Fiscal deficits include grants and • •• • • •••••••• ••••••••••••••••••••••• • • •• • • •• ••• ••••••••• • • ••• • • ••• •are ••• • ••• •••••••• ••• ••• on cash basis; they may slightly differ from those reported in the text done on a commitment basis. CENTRAL AFRICAN REPUBLIC Under improved security conditions, signs of economic recovery have emerged and macroeconomic balances are returning to healthy level. However, risks remain numerous. In 2016, real GDP growth is projected at 5.2 percent and should remain around an average of 5.5 percent in the medium term based on a rebound in agriculture, some normalization in the timber and diamond trades, the return of the remaining internally displaced populations (IDPs) and refugees following the restoration of transportation and other services countrywide, and some pickup in construction thanks to the implementation of major public investment projects in the energy and social sectors. Inflation is projected to gradually return to the CEMAC target rate of 3 percent thanks to an increase in agricultural output and better transportation conditions. Sizable imports COUNTRY ECONOMIC FOCUS 46 of reconstruction material may bring the current account deficit to around 9.9 percent of GDP. Gross official foreign reserves are projected to rise above from 4 months of imports from 2016 onward. The overall fiscal deficit is projected to reach -4.1 percent of GDP in 2016 but to keep falling afterward thanks to projected improvements in tax policy and administration and economic recovery. Tax revenue is projected to reach 7 percent of GDP in 2016, only partly offsetting a projected fall in external grants. Tight wage expenditure control and an improved fiscal space will allow for capital expenditure to reach 6 percent of GDP in 2016. Resulting financing needs are expected to decline to 4.8 percent of GDP in 2016 and to keep decreasing in line with fiscal consolidation. However, risks remain multiple. These include: (i) a resumption of violent conflict, which could lead to a return to or escalation in the use of emergency spending procedures and undermine the nascent economic recovery; (ii) a higher than expected decline in aid resulting from delayed disbursements in donor funding due to the inexperience of the new government in raising revenue, managing the capital budget, and implementing further public finances management (PFM) reforms; and (iii) lower diamond exports than expected due to the government’s inability to have its suspension from the Kimberley Process Certification Scheme (KPCS) fully revoked or to restore security and government control in the protected “green zones” in the eastern part of the country, which may prove more difficult than anticipated. RECENT DEVELOPMENTS The economy started to recover in 2015. Real GDP grew 4.8 percent, driven by increased demand, and inflation averaged 4.5 percent on account of improved security along the Douala-Bangui transport corridor and positive agricultural output. Private consumption rose 2.9 percent due to favorable weather conditions for farming and low energy costs. Gross investment rose significantly by 44.7 percent as business confidence improved. On the supply side, the recovery was led by agricultural production (3.5 percent) and services (2.7 percent) in spite of the large numbers of displaced people and insufficient access to seeds and farming inputs. Severe infrastructure constraints continued to hamper the industrial sector, which increased 1.3 percent on the back of manufacturing production, water and electricity, and construction. Large postwar recovery needs widened the external current account deficit to CFAF 115.9 billion in 2015 (9.1 percent of GDP). In part, this was due to a higher trade deficit arising from a disappointing export performance and booming imports associated with investment programs, which quadrupled over the past two years. Conversely, petroleum products, which accounted for a quarter of total imports before the crisis, decreased to 9 percent thanks to lower international commodity prices. Overall, CAR financed its current account deficit with a combination of official and private capital inflows, including budget support (20 percent), foreign direct investment, and portfolio inflows. Fiscal consolidation helped narrow the domestic primary deficit to 3.0 percent of GDP. Domestic revenue reached 7.1 percent of GDP, reflecting a strengthening of excise and customs controls, VAT on oil products, and closer monitoring of tax exemptions. Although efforts to downsize the payroll continued, these were counterbalanced by a 12.8 percent increase in the wage bill due to promotions in the defense forces and gendarmerie. Overall, current expenditures increased by 3.1 percent of GDP. Capital expenditures, meanwhile, increased by 2.6 percentage points to 4.7 percent of GDP—about one-third of their pre-crisis level. While domestically financed expenditures increased fourfold as a percentage of GDP, donor funds still accounted for the lion’s share (4.3 percent of GDP). The political, security, and food crises explained high budget execution rates in the agriculture and social affairs sectors, at 85 and 223 percent, respectively. COUNTRY ECONOMIC FOCUS 47 The level of poverty remains high. The last round of poverty measures from 2008 estimated that 66 percent of the population lived on less than $1.90 a day (2011 PPP). Since then, projections based on GDP per capita growth suggest a surge of poverty incidence to around 76 percent between 2013 and 2015. The livelihoods of the poor are predominantly rural and despite government efforts to distribute seeds and farming inputs, an estimated half of the population is food-insecure. OUTLOOK In the medium term, growth is projected to accelerate to an average rate of 5.8 percent by 2018. From 2016, this outlook is contingent on political stability and the continued stabilization of the security situation. Ongoing policy reforms should support a broad-based recovery and improved distribution channels. Furthermore, a rise in agricultural output will boost growth and help ease inflation to a level in line with the CEMAC target of 3 percent. Growth will also be driven by more dynamic trade, transportation, and public investment. Diamond exports should gradually resume, starting with Berberati, which was declared the first “compliant zone” by the Kimberley Process in 2016. Logging activity should also resume in all forestry concessions as many firms obtain assistance in overcoming the losses incurred during the crisis. The overall fiscal deficit is projected to decrease to an average of 2.3 percent by the end of the forecast period. Improvements in tax policy and administration and the economic recovery will contribute to boost tax revenue, which is projected to reach 9.3 percent of GDP by 2018. Government consumption is expected to increase to 45.6 percent in 2016, allowing for the redeployment of administration in all 16 prefectures. An improved fiscal space will allow gross investment to reach 14.8 percent of GDP by 2018. Current transfers are expected to increase by 0.6 percent of GDP in 2016 to cover increased social spending. Domestically financed expenditures are expected to increase to 1.3 percent of GDP in 2016 to accelerate the reconstruction efforts, while those funded by donors will increase to 4.9 percent. Although the recovery of the mining, forestry, and agricultural sectors may reinvigorate export growth, the current account deficit is projected to remain high at about 9 percent of GDP, reflecting large reconstruction, capital investment, and import needs. Furthermore, an expected rise in oil prices by 2017 would contribute to an increase in the import bill, widening the trade deficit. A financing gap of CFAF50 billion in 2016 is expected to be covered by external sources including budget support. Gross financing requirements from the balance of payments for reconstruction needs will more than double, reaching CFAF140.4 billion by 2019. Given the difficult security conditions, only small increases in Foreign Direct Investment (FDI) flows are projected, from CFAF3.2 billion in 2015 to around CFAF40 billion in 2017-2019. CHALLENGES Food security, the shift from emergency food assistance to sustainable agricultural production, is critical. The crisis has taken a heavy toll on agricultural production and eroded the capacity of the country’s population to secure sufficient food. Despite government efforts to distribute seeds and farming inputs, more than half of the population is in need of assistance. COUNTRY ECONOMIC FOCUS 48 Fiscal risks remain on the external debt and domestic arrears payments. Resolving them is important to avoid disrupting international financial support or undermining the financial stability of the domestic private sec- tor. The government’s capacity to execute public investment is limited, and steady implementation of basic PFM reforms needs to be closely monitored, with particular emphasis on revenue mobilization measures. Governance risks overhang CAR’s need to fully revoke its suspension from the Kimberley Process (KP). While one zone (Berberati) has recently been declared “green”, restoring security and government control in the eastern part of the country would allow legitimate diamond mining projects, but it may prove difficult. Resolving security risks, from armed groups stemming from the Seleka and gangs affiliated with the anti- Balaka that still control parts of the country, may take longer than expected. Full implementation of the disarmament, demobilization and reintegration (DDR) programs would allow ex-combatants to become active participants in the peace process and is key for a sustainable development path. TABLE 2: KEY MACROECONOMIC AND FINANCIAL INDICATORS, 2012-19   2012 2013 2014 2015 2016 2017 2018 2019 National Income and Prices Annual percentage change, unless otherwise indicated Real GDP 4.1 -36.7 1.0 4.8 5.2 5.5 5.8 5.8 GDP deflator 2.7 7.0 11.1 6.2 5.8 5.3 4.8 4.7 CPI (EoP) 5.9 5.9 9.7 4.8 4.0 3.5 3.0 3.0 External Sector Imports 12.2 -27.6 57.6 10.7 9.0 1.7 4.0 9.1 Exports 7.4 -27.9 -8.8 0.5 11.9 9.6 4.2 12.2 Terms of Trade (deterioration -) 2.8 19.4 8.2 26.9 6.9 -8.3 0.1 -3.1 Fiscal Accounts Percent of GDP, unless otherwise indicated Expenditure 16.4 14.9 12.7 14.9 17.1 16 16 16.4 Revenue and grants 16.4 8.4 15.7 14.3 13 13.2 13.7 14.3 Central Government Balance (incl. grants) 0 -6.5 3 -0.6 -4.1 -2.8 -2.3 -2.1 Selected Monetary Accounts Annual percentage change, unless otherwise indicated Base Money 1.6 5.6 14.6 5.3 11.8 12.8 10.9 10.9 Credit to the economy 30.2 -16.3 4 -3 10.3 10.8 10.7 10.6 COUNTRY ECONOMIC FOCUS 49 TABLE 2: KEY MACROECONOMIC AND FINANCIAL INDICATORS, 2012-19   2012 2013 2014 2015 2016 2017 2018 2019 Balance of Payments Percent of GDP, unless otherwise indicated Current Account Balance -4.6 -3 -5.6 -9 -9.9 -9.9 -9.4 -9.4 Imports 23.9 25.0 37.6 34.6 32.0 31.2 29.7 34.0 Exports 12.5 14.4 13.0 12.6 12.9 12.9 12.4 12.3 Foreign Direct Investment 3.2 0.1 0.1 0.3 1.6 3.5 3.3 2.8 Gross Reserves (in million US$, EoP) 172.1 199.4 279.1 199.1 206.5 247.1 287.3 317.1 In months of next year’s imports 5.6 3.7 5.1 4.2 4 4.5 4.7 5.0 As % of short-term external debt 30.8 17.5 12.6 7.4 Public Debt Total government (end of period) 23.5 38.5 51.1 48.5 47.2 41.2 35.8 31.2 o/w External debt 9.7 14.6 14.9 14.5 16.9 15.0 13.3 12.3 Memo GDP nominal (CFAF billions) 1108 750 842 937 1042 1158 1285 1424 Source: IMF and World Bank estimates CHAD Chad’s macroeconomic crisis continues to unfold following the persistent oil shock, adverse weather, and the domestic impact of regional security conflicts, thus placing recent gains in development outcomes under threat. Oil revenues have collapsed and are expected to recover only partially and gradually. Public spending has been significantly retrenched, liquidity problems abound, and domestic arrears are accruing on a large scale. Given the high government share of the economy, it is entering recession accompanied by severe deterioration in fiscal and external balances. Real GDP growth is expected to contract to -1.1 percent in 2016 compared to almost 5 percent growth over 2013–2015. However, gradual recovery in non-oil GDP growth is expected over 2016–2018, reaching 4 percent per year over the medium term, largely driven by agriculture, commerce, and transportation as fiscal constraints ease thanks to a rebound in fiscal oil revenues. Slumping demand should cause inflation to fall to around 3.3 percent in 2016. In the same year, the fiscal situation should improve thanks to a lower—though still high—overall fiscal deficit projected to decrease to 4.6 percent of GDP as a result of drastic fiscal adjustment. Hard currency rationing should bring the current account deficit down to -8.4 percent of GDP. These projections rely on the successful sale of equity in the oil sector and massive issuance of securities in the regional markets. Although foreign direct investment in the oil sector will remain a key source of external financing, gross foreign currency reserves will remain low, at about 0.6 months of imports. Under these adverse conditions, downside risks are significant. The threat to security COUNTRY ECONOMIC FOCUS 50 in the region remains serious, causing economic disruption, reprioritization of spending to defense, the need to host refugees and internally displaced populations (IDPs), and exacerbating a difficult economic situation. Furthermore, a potential deterioration in food security is a key risk that could lead to social and political tensions in an already fragile environment and jeopardize the government’s fiscal position as the authorities respond to crises. Externally, deterioration in regional security and low (and volatile) international oil prices pose significant fiscal risks and could further dampen economic growth prospects. RECENT DEVELOPMENTS The oil price collapse, the rainfall deficit, and the deterioration of the security situation led the Chadian economy to start to decelerate in 2015. That year, the oil sector grew by 33.8 percent, driven by increased output following the coming on stream of new oil fields. But the oil price slump led Chad’s GDP growth rate to slow down from 6.9 percent in 2014 to 1.8 percent in 2015, with the non-oil sector contracting by 2.9 percent. Ensuing spillovers to the rest of the economy have been severe, causing thousands of layoffs in urban areas, reducing private consumption, and reversing gains in development outcomes. On the supply side, despite 10.1 percent growth in the primary sector, agricultural output was affected by lower rainfall, while the industry and service sectors were severely impacted by increased security risks, public spending cuts, the reprioritization of spending towards security, and reduced liquidity in the public sector. Despite a fall in demand accompanying the slowdown, inflation rose to 3.6 percent in 2015 due to decreasing agriculture production and disruptions to cross-border trade flows with Cameroon and Nigeria following regional conflicts. The contraction in non-oil sectors, the poor performance of agricultural exports, and accumulation of public arrears affecting firms increased the share of nonperforming loans from 11.7 to 16.5 percent of total loans over one year. Broad money growth contracted by 4.7 percent from a high 26.5 percent in 2014 due to the impact of the crisis on the financial sector. FIGURE 14: CHAD/ CONTRIBUTIONS TO ANNUAL GDP GROWTH (%) Contribution to GDP growth 8 6 4 2 0 -2 -4 2013 2014 2015 2016 2017 2018 Primary Industry Services GDP growth Source: Chadian authorities COUNTRY ECONOMIC FOCUS 51 Despite a drastic fiscal adjustment, the fiscal (and external) deficits have been high. The overall fiscal deficit (including grants, commitment basis) deteriorated significantly from 6.3 percent of non-oil GDP in 2014 to 6.6 percent in 2015. With oil revenue falling by 80 percent, total revenue fell dramatically by 36 percent. This led to an unprecedented reduction in expenditure of 38.5 percent. The adjustment was also shared by current expenditure—mainly transfers and subsidies—which decreased from 16.7 percent to 14.1 percent of non-oil GDP, and capital expenditure, which fell from 12.9 percent to 7.3 percent of non-oil GDP. Domestic arrears also accumulated, reaching 3.9 percent of non-oil GDP at end-2015. The large fiscal deficit was financed through the rescheduling of oil-sales advances, treasury bonds in the regional debt market, advances from the central bank, IMF disbursements, and budget support from donors. Although oil exports peaked (in volume), the steep drop in oil prices weakened the balance of payments. The current account deficit reached 12.9 percent of GDP in 2015, compared with 8.9 percent in 2014. It was financed by foreign direct investment in the oil sector and a rundown of pooled international reserves imputed to Chad. The most recent poverty and inequality estimates come from the 2011 household survey. The poverty headcount rate (at the national poverty line) fell from 55 percent in 2003 to 47 percent in 2011. Urban areas recorded the fastest decline. Estimates of the extreme poverty rate in Chad, based on a poverty line of $1.90 per day (PPP), also recorded a significant decrease between 2003 and 2011, with the poverty rate falling from 62.9% to 38.4%. However, the Gini coefficient rose from 0.39 to 0.42. A consumption-based household survey is under preparation and will help to update the poverty data. OUTLOOK Chad is in a recession. Real GDP is projected to contract by 1.1 percent in 2016. The oil sector is expected to record negative growth of 4.8 percent, contributing to a contraction in the non-oil sector also of 0.3 percent. All sectors will contract. The secondary sector is expected to be negatively affected by reduced construction activity (-6.0 percent) resulting from the sharp decline in public demand and credit to the private sector (-3.1 percent). Slumping demand should lead inflation to decrease to around 3 percent. The fiscal situation may improve thanks a lower, albeit still high, overall fiscal deficit, which is projected to decrease to 4.6 per- cent of non-oil GDP. Hard currency rationing should bring the current account deficit down to -8.4 percent of GDP. These projections assume the successful selling of oil equities and massive issuance of securities in the regional market. In the medium term, growth is projected to recover mildly in 2017 (1.7 percent) and continue with higher rate from 2018 (5.2 percent) onwards as oil prices recover more significantly. After a contraction in 2017, the oil sector is expected to expand in 2018 by 12.5 percent as new oilfields become operational. Non-oil GDP growth is expected to slightly recover in 2017 by 2.7 percent as a result of the fiscal adjustment on the secondary and tertiary sector and planned revenue reforms as well as accelerated growth in agriculture. Structural reforms relating to fiscal expenditures, the business climate, and transparency in the oil and agricultural sectors would also support the recovery. Downside risks include uncertainty over global oil prices, and the security threat from regional con- flict. Not only may oil prices remain low, Chad may also continue to be exposed to security threats from armed groups in neighboring countries, which would push expenditure towards security and deter private investment in an unsecure environment. COUNTRY ECONOMIC FOCUS 52 Based on actual and projected GDP growth rates, the poverty rate (at US$1.90/day 2011 PPP) gradually decreased after 2011, before increasing from 34.8 percent in 2014 to nearly 37 percent in 2017 as a result of the crisis. This increase may also reflect a decrease in consumption as livestock exporters lost revenue due to the closure of the border, the rainfall deficit in 2015, and public layoffs. Any minor reduction in poverty in 2018 will be contingent upon the economy recovering in 2017. CHALLENGES Chad’s main short-term challenge is the fiscal strategy it uses to address the shortfall in oil revenue. The government needs to significantly rationalize public outlays and obtain financing under favorable borrowing terms on the back of fiscal consolidation through sound revenue mobilization and budget planning, as well as efficient use of public resources. In the medium term, the establishment of a savings fund, economic diversification, and alleviating regional insecurity issues constitute the main challenges. The instability of oil revenues complicates fiscal management. This is exacerbated by the low level of economic diversification in non-oil revenue activities and by a regional conflict that is hampering trade, public expenditure, and private investment. COUNTRY ECONOMIC FOCUS 53 TABLE 3: SELECTED ECONOMIC AND SOCIAL INDICATORS 2013 2014 2015 2016 2017 2018 2019 (annual percentage change, unless otherwise specified) National Income and Prices Real GDP 5.7 6.9 1.8 -1.1 1.7 5.2 8.2 Oil GDP -7.1 5.7 32.2 -4.8 -3.1 12.5 27.6 Non-Oil GDP 8.0 7.1 -2.9 -0.3 2.7 3.8 4.3 Consumer price inflation (average) 0.2 1.7 3.7 3.3 4.2 3.0 3.0 Money and Credit Credit to government (a/) 10.0 18.0 31.6 3.0 1.3 … … Credit to the private sector (a/) 2.8 17.3 0.3 -1.6 2.5 … … Broad money (M2) 8.6 26.5 -4.7 0.4 6.9 … … External Sector Exports volume of goods and services -13.7 5.6 27.6 -9.4 7.1 14.9 17.4 Imports volume of goods and services -5.8 9.5 -20.5 -9.0 6.4 7.7 11.9 Overall balance of payments (% of GDP) -0.2 -1.2 -6.4 -2.6 -1.0 -0.7 -0.4 Current external balance (% of GDP) -9.2 -9.0 -12.4 -8.8 -8.8 -7.9 -7.5 External Debt (% of GDP) 21.2 29.2 25.1 23.5 19.9 17.4 14.5 (percentage of non-oil GDP, unless otherwise specified) Central Government Finance Revenue 25.4 21.2 10.9 11.2 12.9 13.9 16.7 Grants 2.4 2.1 3.9 4.3 3.8 3.7 3.7 Total expenditure and net lending 31.4 29.6 21.4 20.0 18.9 19.7 20.7 Non-oil Primary Balance (excl. grants, commit.) -18.2 -16.3 -9.8 -7.0 -5.0 -5.0 -5.9 Overall balance (incl. grant com. basis) -3.6 -6.3 -6.6 -4.6 -2.2 -2.1 -0.2 Overall balance (incl. grants, cash basis) -6.6 -4.5 -5.2 -5.8 -3.1 -2.8 -1.0 Total Debt (percent of GDP) 29.7 38.5 39.5 40.5 36.2 33.5 28.4 Domestic debt 8.5 9.2 14.4 17.1 16.3 16.0 14.0 Memorandum Items: Nominal GDP (FCFA billion) 6,397 6,884 6,444 6,163 6,811 7,273 8,204 Nominal non-oil GDP (CFAF billion) 4,661 5,151 5,153 5,157 5,567 5,790 6,251 Overall balance of payments (CFAF billion) -9 6 -412 -162 -71 -49 -35 Gross Int. Reserves (imputed, months of imports) 2.5 2.1 1.0 0.6 0.6 0.6 0.6 Terms of trade (annual percentage change) 8.1 -4.3 -46.2 -6.0 12.2 2.7 10.1 Chadian Oil price (US$ per barrel) 103.9 98.0 43.4 33.8 45.2 48.5 50.8 Sources: Chadian authorities, IMF and Bank staff COUNTRY ECONOMIC FOCUS 54 MALI Economic recovery and political stability keep gaining momentum following the signing of the peace agreement in June 2015. However, the external situation has weakened, and security conditions remain fragile. In 2016, the recovery continues, with strong GDP growth, low inflation, and a strengthening of the fiscal position. Mali’s real GDP is projected to grow by around 5.3 percent, reflecting a return to normality and a gradual tapering of the recent surge in international aid. While all economic sectors are expected to contribute to growth, the tertiary sector should be the most vigorous thanks to the dynamism of telecommunications and transportation activities. Primary sector growth will benefit from the good performance of agriculture (especially irrigated rice), while growth in the secondary sector will slow due to a continued decline in gold production. Inflation is projected to remain at 1 percent as a result of normal food output growth and low global inflation. The external current account deficit is projected to widen to 6.5 percent of GDP, reflecting continued strong import growth associated with further increases in public investment. The latter implies a degree of loosening of the fiscal stance to accommodate new expenditure linked to the implementation of the regional development strategy, particularly in the north of the country, which is a key government commitment under the peace agreement that incorporates additional spending of about 1.5 percent of GDP primarily allocated to investment projects. Overall, the overall deficit should reach 4.3 percent of GDP. However, a number of downside risks linked to security conditions, weather conditions, and external prices may affect this outlook. Setbacks in improving security, especially in the capital Bamako, may dampen consumer and business confidence and derail the economic recovery while potentially affecting the public finances. Agricultural output remains vulnerable to adverse weather conditions. High dependence on gold and cotton exports leaves Mali’s balance of payments exposed to fluctuations in international commodity prices. RECENT DEVELOPMENTS Mali’s GDP growth has been robust since 2015. That year, it increased by 6.0 percent, driven by a solid performance in the primary and tertiary sectors. The primary sector grew at a rate of 7.6 percent on the back of favorable weather conditions, expanded access to inputs, and an extension of agricultural land under cultivation. The tertiary sector experienced 6.9 percent growth, led by renewed dynamism in telecommunications, and, to a lesser extent, in trade and financial services. However, after a remarkable 10.9 percent expansion in 2014, the secondary sector contracted by -1.1 percent due to declining manufacturing output and gold mining production. On the demand side, private consumption and public investment drove economic growth. Households’ consumption grew by 5.8 percent, fueled by income earnings in rural areas and stable food prices in urban areas. Public investment expanded by 18.3 percent, reflecting higher road, health, and irrigation infrastructure construction as well as increased spending on military equipment. Half of public investment was financed by external resources from development partners. Private investment, meanwhile, which was mainly concentrated in the mining and telecom sectors, increased by a meager 1.1 percent. The overall fiscal deficit started to narrow significantly in 2015, reaching 1.8 percent of GDP thanks to progress in domestic resource mobilization and under-executed expenditures. Tax revenue accounted for 14.0 percent of GDP, a 1.5 percent of GDP increase compared with 2014. Nonetheless, tax revenues remained well below the WAEMU convergence criterion of 20 percent. The marked improvement in tax collection stemmed primarily from increased fuel taxation, as the authorities have taken advantage of the drop in imported petroleum prices to remove the implicit subsidy by keeping retail prices roughly unchanged. COUNTRY ECONOMIC FOCUS 55 Mali’s current-account deficit deteriorated slightly in 2015 to 5.1 percent of GDP, compared with 4.7 percent in 2014. Despite the positive impact of the decline of oil prices and the depreciation of the CFAF against the US dollar, imports of goods and services rose as a result of the increase in public investments. The current- account deficit was financed by capital and financial account surpluses, mainly in the form of foreign aid and foreign direct investment. As a result, the overall balance of payments deficit narrowed from 2.5 percent of GDP in 2014 to 1.6 percent in 2015, leading to a depletion of Mali’s foreign assets of 14.0 percent. Inflation remained subdued at 1.4 percent, well below the WAEMU convergence criterion of 3 percent thanks to good crop production and declining international petroleum prices. This was also a result of exchange rate and monetary policies managed at the regional level by the community central bank. The economic slowdown that followed the security and political crises in 2012-13 led to a 1.5 percentage point rise in the extreme poverty rate to 50.9 percent in 2013. More recently, poverty declined to 46.9 percent in 2015 after exceptional agricultural output growth in 2014 and tertiary expansion in 2015 led to strong GDP per capita growth. Inequality is also likely to have eased, as the increased revenue should have mostly benefited households working in the agricultural and tertiary sectors, where the poverty incidence is greatest. OUTLOOK Mali’s economy is projected to grow by around 5 percent annually over the next three years, starting from 2016, reflecting a return to normalcy and a gradual tapering of the recent surge in international aid. All economic sec- tors are expected to contribute to growth, albeit to varying degrees. The tertiary sector looks set to be the most vigorous, with a growth rate increasing from 5.6 percent in 2016 to 6.9 percent in 2018 thanks to the sustained dynamism of telecommunications and transport activities. Growth in the primary sector will level off at around 5 percent, matching the growth rate of the economy as a whole, owing to the good performance of agricul- ture (especially irrigated rice). Conversely, the secondary sector’s growth rate is expected to slow down from 5.1 percent in 2016 to 1.3 percent in 2018, due to a continuation of the decline in gold production. The fiscal deficit is expected to widen in 2016 to 4.3 percent of GDP before receding to 3.5 percent by 2018 following improvements in tax revenue collection and continued discipline regarding recurrent expenditure. The deterioration in 2016 will result primarily from higher public spending to implement the peace agree- ment, while the increase in the deficit will be financed primarily through domestic and regional markets. The current account is also projected to deteriorate slightly to 6.5 percent of GDP in 2016 as a result of strong growth in total investment. This deficit is expected to continue to widen to 6.9 percent of GDP in 2018 under the effect of less favorable terms of trade. The current account deficit should be financed mainly by financial inflows in the form of FDI and official aid. The poverty rate is expected to decline steadily during 2016-18. The continuation of the robust expansion of the Malian economy over the next few years will result in rising per capita GDP and a concomitant decline in the poverty rate to around 42.9 percent in 2018. COUNTRY ECONOMIC FOCUS 56 CHALLENGES Mali’s favorable economic outlook is subject to substantial and persistent downside risks. Slow implemen- tation of the peace agreement and the restoration of security throughout the country are crucial to econ- omy-wide growth, as are sustained improvements in the welfare of households in conflict-affected areas and the return and reintegration of displaced households and refugees. Preserving price stability is likely to increase consumer confidence, strengthen the investment climate, and encourage development partners to continue their support. Economic governance risks overhang the efficiency of public financial management and the assistance of development partners, and are hampering a more attractive business climate. Weath- er-related shocks pose a serious risk to agricultural production, and this threat could be intensified over time by global warming. Finally, any further decline in global gold or cotton prices could destabilize the external accounts, as these commodities represent the bulk of Mali’s export revenues. COUNTRY ECONOMIC FOCUS 57 TABLE 4: SELECTED ECONOMIC AND FINANCIAL INDICATORS, 2014-19   2014 2015 2016 2017 2018 2019 (Annual change in percentage) National Income and Prices Real GDP 7.0 6.0 5.3 5.2 4.8 4.7 GDP deflator 1.6 2.8 1.9 0.9 0.1 -0.1 Consumer price inflation (average) 0.9 1.4 1.0 1.3 1.7 2.1 Money and Credit (contribution to broad money growth) Credit to the government 0.8 1.6 8.7 6.3 4.0 1.3 Credit to the economy 12.4 14.6 7.9 5.6 5.3 3.3 Broad money (M2) 7.1 13.2 12.6 11.1 10.1 5.3 (In % of GDP, unless otherwise indicated) National Accounts Private consumption 76.2 72.5 69.6 69.4 67.6 66.2 Public consumption 19.1 11.8 11.6 11.7 11.7 11.7 Private investment 11.2 10.1 10.1 10.1 10.1 10.1 Public investment 6.5 7.3 9.3 9.5 9.2 9.0 Exports of goods and services 22.5 21.4 19.9 19.4 17.8 17.4 Imports of goods and services 38.0 36.9 35.6 35.0 33.7 33.3 Central Government Finance Overall balance (payment order basis) -2.9 -1.8 -4.3 -4.0 -3.5 -3.0 Overall balance (cash basis) -2.4 -3.2 -4.3 -4.0 -3.6 -3.1 Domestic debt (end period) 6.3 7.2 6.8 7.0 7.0 7.0 Total debt 27.3 31.3 30.4 31.1 32.1 33.3 External Sector Current external balance, including official transfers -4.7 -5.1 -6.5 -6.7 -6.9 -6.8 Current external balance, excluding official transfers -12.7 -13.4 -14.1 -14.1 -14.0 -13.7 Exports of goods and services 22.5 21.4 19.9 19.4 17.8 17.4 Imports of goods and services 38.0 36.9 35.6 35.0 33.7 33.3 Debt service to exports of goods and services 3.5 6.5 4.4 4.4 4.9 5.2 External debt (end period) 21.0 24.1 23.6 24.1 25.1 26.3 Nominal GDP (FCFA billion) 7,114 7,748 8,312 8,816 9,245 9,673 Sources: Ministry of Finance, IMF and Bank staff estimates (2014-15) and projections (2016-19), June 2016. COUNTRY ECONOMIC FOCUS 58 GUINEA The post-Ebola effect is causing Guinea’s economic activity to rebound despite low commodity prices. In 2016, Real GDP growth is projected at 4 percent, fueled by dynamic growth in bauxite and gold production and a resumption of services. Although monetary policy remains tight, inflation may not fall below 8.3 percent due to strong domestic private demand and high imported food prices and other pass-through effects linked to a steady 15 percent depreciation in the Guinean Franc since 2014. Growth would be higher had the Rio Tinto Simandou iron ore project not been suspended and had hit had no ripple effects on the Guinean economy as the move may send negative signals to the international mining community. Public sector balances will reach very low levels, approaching -1.1 percent of GDP due to strong revenue performance and tight expenditure management. Tax revenue is increasing due to stronger public administration efforts and new tax measures. There has been an improvement in the collection of taxes on companies, VAT receipts, and other indirect taxes that have rebounded in the wake of the Ebola pandemic. New measures taken in 2016, including an increase in VAT from 16 to 18 percent and the introduction of a new cellphone tax on July 1, 2015, have resulted in budgeted current expenditure being cut by more than 2 percent of GDP to 15.5 percent, capital expenditure shrinking to 9.1 percent of GDP, and significant cuts being made to spending on goods and services (other than healthcare) and subsidies of more than 1.5 percent of GDP. Other core programs in the post-Ebola recovery plan have been cut or downsized due to scarcity of resources with which to finance them. Despite prudent monetary policy at the Central Bank and an expected decrease in the price of food imports, the inflation rate should approach 8.2 percent in 2016. Downside risks are low commodity prices, especially of iron ore and bauxite, and uncertainty about mining investment in the aftermath of the suspension of the Rio Tinto Simandou project in July, 2016. RECENT DEVELOPMENTS The economic outlook for 2016 is positive, in the aftermath of the Ebola pandemic of 2014-2015. The economy is slowly recovering, despite low commodity prices. Growth is projected at 3.8 percent, driven by vigorous bauxite and gold production and an improvement in services. The low commodity prices are hampering recovery. Compared to their peak values of recent years, the prices of Guinea’s four top mining exports— bauxite, diamond, gold, and iron ore—have fallen between 30 and 60 percent in the last two years. Low gold prices have hurt gold production, mostly artisanal, and lower iron ore prices have created uncertainty for the Simandou iron ore project. In 2016, the iron ore price is US$48 ($/MT), compared with $128 in 2012. Similarly, bauxite is at US$50 ($/T) in 2016, compared with $68.9 ($/ton) in 2014. Nevertheless, agriculture continues to be resilient and has performed steadily. Electricity production has improved following the start of operations at the new Kaleta hydropower plant and new thermal generators. The suspension of the $20 billion Simandou project in July 2016 presents a particularly difficult challenge for Guinea. This ambitious project, involving Rio Tinto and others, was expected to bring high-quality iron ore to the international market and create 50,000 jobs in Guinea. However, due to low iron ore prices and high infrastructure costs, Rio has not started investment or production. In July 2016, Rio Tinto’s management announced scaling down its presence in Conakry, laying off some of its staff, and not renewing the lease on its buildings, which suggests further delays. As Simandou also sends signals to the international mining community, the suspension of this project will have ripple effects on the Guinean economy. COUNTRY ECONOMIC FOCUS 59 The fiscal situation has improved significantly in 2016, with better revenue mobilization and expenditure control. Revenue in relation to GDP is projected to increase from 17.5 percent in 2015 to 19.3 percent in 2016. Tax revenue is increasing due to stronger administration efforts and new tax measures. There has been an improvement in the collection of corporate taxes, VAT receipts, and other indirect taxes, which have rebounded in the wake of the Ebola pandemic. New measures include the increase in the VAT rate to 18 percent and the introduction of a new cellphone tax on July 1 2015. As a sign of fiscal adjustment, budgeted current expenditure in 2016 has been cut by more than 2 percent of GDP, from 18.1 to 15.5 percent, while capital expenditure has also been reduced, from 9.7 to 9.1 percent of GDP. There have also been significant cuts to spending on goods and services (other than an increase in health spending) and subsidies of more than 1.5 percent of GDP. Some of the core actions of the post-Ebola recovery plan have been cut or downsized due to the scarcity of resources to finance them. There remain concerns about the post-Ebola recovery plan. Aid inflows that have helped cushion the fiscal shocks during Ebola are uncertain to be maintained at a high level during the post-Ebola recovery process, given donor fatigue and competing demands on aid resources. The IMF’s Sixth and Seventh Reviews have been finalized and were approved by the Executive Board in July 22 2016. Monetary policy has been tight in the first half of 2016, reflecting greater prudence on the part of the central bank compared to 2015. The official exchange rate stabilized after the reform of the exchange rate determination mechanism, which led to a 12 percent depreciation in early 2016. The large spread between the official and parallel exchange rates has narrowed to less than 3 percent. The exchange rate has lost more than 15 percent of its value against the US dollar since 2014. The central bank’s net international reserve buffer increased to 2.6 months of imports in June, reversing the losses of 2014-2015, when a central bank scheme to provide guarantees to private investors led to an erosion of the reserve position. In 2016, Guinea continues to face a moderate risk of debt distress according to a recent joint IMF-World Bank DSA, with the debt-to-GDP ratio projected to reach 31 percent of GDP in 2015. The headcount poverty rate was estimated at 53 percent in 2012, compared with more than 60 percent in the 1990s. Ebola has led to a worsening of poverty and life quality. A new mobile phone survey of more than 2,500 households conducted in September 2015 revealed the adverse effects of Ebola on poverty and negative impact on employment and welfare. OUTLOOK Real GDP growth is projected to be 3.8 percent in 2016, and above 4 percent in 2017 and 2018 as the country moves into post-Ebola recovery, activity returns to the mining sector, agriculture displays continued resilience, and the services sector recovers. Downside risks are low commodity prices, especially of iron ore and bauxite, and uncertainty about mining investment in the aftermath of the suspension of Rio Tinto’s Simandou work in July 2016. The inflation rate should drop further to around 8 percent in 2017 and 2018 due to prudent monetary policy at the central bank and an expected decrease in the price of food imports. COUNTRY ECONOMIC FOCUS 60 CHALLENGES Guinea is recovering in 2016 but still has to deal with the challenges of the post-Ebola recovery and low commodity prices. It requires continuing strong support from the international community. The mining sec- tor has considerable potential, but it depends on the outlook for commodity prices. Positive trends in gold and bauxite prices may help Guinea, but downside risks include weak investor confidence and negative spillovers from the suspension of the Simandou project. Fiscal policy in 2016 is prudent and supportive of preserving the macroeconomic stability gained in recent years while increasing pro-poor expenditures in an environment of reduced aid post-Ebola. COUNTRY ECONOMIC FOCUS 61 TABLE 5: GUINEA ECONOMIC INDICATORS--2012-18   2011 2012 2013 2014 2015 2016 2017 2018   Est Proj Proj (annual change in percent) National Accounts and Prices GDP at constant prices 3.9 3.8 2.3 0.4 0.1 4.0 4.4 4.5 GDP at current prices 24.4 17.3 8.7 7.9 7.6 13.4 12.7 11.0 GDP deflator 19.7 13.0 6.3 7.5 7.5 9.2 9.6 7.9 Consumer Prices Annual average 21.4 15.2 11.9 9.7 8.2 8.2 8.0 8.1 End of period 19.0 12.8 10.5 9.1 7.3 8.8 7.5 6.0 External Sector Exports, (f.o.b.; in US$ terms) 11.8 -1.4 -5.4 0.7 -15.3 22.8 5.4 14.4 Imports (f.o.b.; in US$ terms) 50.1 6.7 -6.7 -4.9 -6.8 1.2 4.9 8.8 Money and Credit Net foreign assets 40.1 -3.5 -0.3 -11.0 7.9 4.0 12.7 6.6 Net domestic assets -30.7 4.5 14.4 20.6 31.2 3.1 6.7 4.3 Net claims on government -44.8 12.9 10.2 5.9 17.2 -0.9 1.8 -1.0 Credit to non-government sector 15.0 -1.1 9.7 9.5 10.8 4.0 4.9 5.3 Broad money 9.4 1.0 14.1 13.1 20.3 11.1 19.4 10.9 Reserve money -4.9 -3.1 15.7 1.6 2.6 11.6 21.7 10.1 Central Government Finances (percent of GDP) Total revenue and grants 20.2 22.9 20.2 21.9 19.0 22.9 23.3 23.7 Revenue 16.8 20.1 18.3 17.9 17.5 19.2 19.4 19.6 Grants 3.4 2.7 1.9 4.0 1.5 3.7 4.0 4.1 Total expenditure and net lending 21.5 26.1 25.8 26.1 27.8 24.0 24.2 24.3 Current expenditure 16.3 15.9 16.5 17.6 18.1 15.5 14.9 14.8 Capital expenditure 5.2 10.2 8.9 8.3 9.7 9.1 9.2 9.4 Overall budget balance Excluding grants -4.7 -6.0 -7.5 -8.2 -10.3 -4.8 -4.8 -4.7 Including grants -1.3 -3.3 -5.6 -4.1 -8.7 -1.1 -0.8 -0.6 Current Account Balance Including official transfers -19.3 -25.9 -21.1 -18.2 -18.7 -13.2 -24.8 -13.6 Excluding official transfers -21.5 -26.9 -21.5 -19.7 -18.9 -14.5 -12.5 -14.9 Overall balance of payments 10.2 -5.8 0.5 -0.2 -5.1 1.0 3.3 1.8 Gross official reserves (months of imports) 4.4 3.4 3.6 4.2 2.1 3.0 3.2 3.4 External public debt 67.5 23.0 25.3 25.5 25.4 28.3 30.5 31.0 Total public debt 77.5 35.4 39.1 42.5 49.1 48.5 47.8 46.0 Nominal GDP (GNF billions) 33,739 39,591 43,048 46,463 51,315 58,201 65,583 73,948 Source: International Monetary Fund; Bank staff estimates and projections. COUNTRY ECONOMIC FOCUS 62 NIGER The outlook for Niger remains fairly positive. Real GDP growth is projected to be 5.2 percent, supported by strong agriculture and steady recovery to near past output levels in the oil sector as the Soraz refinery returns to normal production. Inflation is expected to remain subdued at 1.6 percent. However, the current account deficit should remain close to -17.8 percent of GDP as the impact of lower oil prices is offset by both lower government investment spending and delays in constructing the Niger–Chad pipeline. The overall fiscal deficit should decrease to -6.3 percent of GDP thanks to modestly improved revenue, somewhat higher taxes from natural resource projects as they come on-stream, and strengthened administrative capacity. With current spending declining slightly and assuming a gradual decline in external funding, capital spending will remain in excess of 10 percent of GDP per year as critical infrastructure gaps are addressed. Key risks are both external and domestic. On the upside, a rebound in uranium and oil prices would significantly increase Niger’s exports and fiscal space. However, further falls in oil and uranium prices may delay implementation of the above-mentioned projects and, consequently, projected government revenue. In addition, droughts or floods may compound food insecurity and social instability, and the persistence or intensification of armed hostilities may aggravate fiscal pressures and hamper trade. RECENT DEVELOPMENTS Niger’s economy is recovering from a significant economic deceleration in 2015. Real GDP growth slowed to 3.5 percent in 2015 from 7 percent in 2014. The fall in commodity prices and in production of both oil and uranium led to a significant contraction in the extractive industry of 8 percent in real terms in 2015. Agriculture (42 percent of GDP) grew by only 1.5 percent as a result of a drought and deteriorating security, compared to an average growth rate of 7.7 percent during the last three years. Spillovers from the economic downturn in Nigeria, Niger’s main regional trading partner, and terrorist activities along the southeastern border led exports to decline by 9 percent. Average annual inflation was contained at below 1 percent in 2015. The fiscal situation deteriorated in 2015 owing to a high level of expenditures and lower-than-projected tax revenue. The overall fiscal deficit (including grants, commitment basis) increased from 8 percent in 2014 to 9.1 percent in 2015, missing the WAEMU fiscal convergence criterion for second year in a row. Total revenue increased by 0.6 percent of GDP, reflecting reforms at the tax and custom administrations since the beginning of 2015 and a larger contribution by the telecommunications sector. Overall expenditures increased by 1.7 percent of GDP in 2015 due to additional payments to security forces and some new hiring of teachers (+0.5 percent of GDP) as well as additional capital spending (+0.7 percent of GDP). The external sector deficit started to widen in 2015, reflecting a deterioration in the terms of trade. Commodity price shocks and large investment projects resulted in a wide current account deficit, estimated at 17.7 percent of GDP in 2015, up from 15.1 percent of GDP in 2014. Both refined petroleum products and uranium exports declined, while imports increased due to new armament for security purposes and infrastructure investment. Exports of oil products decreased by 51 percent in 2015, while uranium exports slowed down as a result of the fall in world prices. Uranium represented only 34 percent of total exports in 2015, compared with 53 percent in 2013. The current account deficit has been almost entirely financed by official aid, which is projected to increase from 10.4 percent of GDP in 2015 to 11.2 percent in 2016, and FDI, which is forecast to rise from 6 percent of GDP in 2015 to 8 percent in 2016. External reserves declined but remained at comfortable levels, equivalent to 4.4 months of imports of goods and services. COUNTRY ECONOMIC FOCUS 63 Estimates from the latest 2014 household budget surveys indicate that the headcount rate at the national poverty line declined by 4.4 percentage points from 48.9 percent in 2011 to 44.5 percent in 2014. Poverty declined in rural and urban areas, but the reduction in poverty was more substantive in the capital city of Niamey and other urban areas, where it declined from 16 percent in 2011 to 8.7 percent in 2014. Similarly, based on the international poverty line (US$1.90 a day, PPP terms), Niger’s poverty rate dropped from 50.3 percent in 2011 to 45.7 percent in 2014. Poverty tends to be sensitive to broad-based economic growth but particularly to production in the agricultural sector, which is highly susceptible to drought, floods, and pests. OUTLOOK Niger’s medium-term outlook remains favorable. GDP is expected to grow by 5 percent in 2016 and inflation should remain below 1 percent again. Growth is expected to gradually return to a high rate, under the assumption that production in the oil sector promptly returns towards past levels (as the Soraz fuel refinery returns to normal production) and non-extractive sectors expand (as the security situation improves). Real GDP is projected to average 5.4 percent during 2016-2018. This projected increase assumes strong average growth in the non-extractive sectors of 5.3 percent, while activities (and prices) in the oil sector recover gradually. The current-account balance (including grants) is projected to improve to an average of 17.1 percent of GDP during 2016-2018 mainly as a result of stronger exports and lower capital expenditure- related imports. Improvements in security, transportation, and trade policies are expected support agricultural exports, with an annual average rate of 6 percent. Fiscal consolidation will be gradual. Budget execution during the first half of 2016 was subject to typical pressures (mainly explained by security), which led to a revision on June 9 2016. A mid-year budget revision increased expenditure by 0.3 percent of GDP. The poverty outlook for the period 2016-18 is also expected to improve slightly. CHALLENGES Mitigating the impact of the external shocks to which Niger is exposed remains the main downside risk. Another key risk is the persistence or intensification of armed hostilities, which could still aggravate budget pressures and divert spending priorities away from development projects. Further spillovers of regional se- curity threats will not only affect growth but pose a further burden on government finances through lower customs revenue as a result of lower trade volumes and increasing security expenditures. The economy is also vulnerable to weather shocks and commodity price volatility, which affect the main sources of growth, namely agriculture and the extractive industry (uranium and oil), respectively. Lifting the efficiency of public investment management is required as capital spending is expected to decrease over the medium term. Last but not least, a further key risk resides in the gradual diversification of the economy with a view to reducing its exposure to the prices of primary commodities and to ensuring a sustainable growth pattern that creates jobs in a country with the highest population growth rate (3.9 percent) in the world. COUNTRY ECONOMIC FOCUS 64 TABLE 6: KEY MACROECONOMIC AND FINANCIAL INDICATORS, 2012-2019 2012 2013 2014 2015 2016 (p) 2017 (p) 2018 (p) 2019 (p) National Income and Prices GDP at constant prices 11.9 5.3 7.0 3.5 5.2 5.0 5.3 8.6 Non-resources GDP at constant prices 8.8 4.8 7.9 4.1 4.9 4.9 5.3 5.8 Oil production (thousand barrels per day) 13.0 18.0 17.0 13.0 16.0 17.0 18.0 37.0 GDP deflator 4.8 2.4 -0.5 0.5 2.0 2.4 2.2 1.8 Consumer price index (Annual average) 0.5 2.3 -0.9 1.0 1.6 2.0 2.1 2.0 External Sector Exports, f.o.b. (CFA francs) 22.8 6.5 -8.8 -9.1 -7.2 7.7 15.1 26.5 Of which: non-uranium exports 40.8 21.0 -1.5 -13.3 5.8 4.6 16.3 36.7 Imports, f.o.b (CFA francs) -6.1 2.6 7.0 4.8 1.5 5.7 8.8 9.0 Terms of trade (deterioration -) 2.7 -3.1 -19.4 -3.1 -7.2 2.4 1.9 -4.7 Money and Credit Domestic credit 5.9 -2.7 7.2 17.2 11.1 6.0 4.5 7.2 Credit to the government (net) -10.0 -5.2 1.1 10.4 3.6 1.9 0.3 1.5 Credit to the economy 15.9 2.5 6.1 6.8 7.5 4.2 4.1 5.7 Net domestic assets 3.8 -2.7 5.2 15.9 10.3 6.3 4.7 7.4 Broad money (percent) 31.2 10.1 25.7 3.6 13.7 10.6 8.9 11.6 Government Finances Total revenue 15.2 16.6 17.5 18.1 17.7 17.8 18.0 19.3 Total expenditure and net lending 22.3 27.2 31.0 32.7 30.1 27.6 26.3 25.4 Of which: current expenditure 11.3 13.5 14.6 15.6 15.4 15.3 15.1 14.6 Of which: capital expenditure 11.0 13.7 16.4 17.1 14.7 12.3 11.1 10.8 Gross Investment 40.1 40.2 39.3 41.8 42.4 41.8 41.2 37.8 Of which: non-govnerment investment 29.0 26.5 22.9 24.7 27.7 29.6 30.1 27.1 Of which government 11 13.7 16.4 17.1 14.7 12.3 11.1 10.8 Gross national savings 25.5 25.2 24.2 24.3 24.7 24.4 24.1 22.9 Of which: Non-government 18.3 20.0 19.0 20.1 20.4 20.2 19.7 17.1 Domestic savings 22.7 23.7 21.4 21.4 21.4 21.4 21.4 20.7 External Current Account Balance (including grants) -14.8 -15.0 -15.1 -17.5 -17.8 -17.5 -17.2 -14.9 Debt-service as percent of: Export of goods and services 3.6 3.3 4.2 5.5 7.3 6.8 6.5 5.4 Governemnt revenue 5.2 4.5 5.0 5.7 7.0 6.4 6.4 5.6 Total Public and Publically Guaranteed External Debt 26.0 27.2 35.3 44.7 53.0 54.7 55.1 52.9 Public domestic debt 5.0 5.2 8.7 11.5 11.6 11.8 11.5 10.3 Foreign aid 8.5 11.1 8.9 10.4 11.2 9.1 8.2 7.2 GDP at current market prices 3,544 3,788 4,077 4,242 4,458 4,790 5,153 5,695 Source: Nigerien authorities; IMF and Bank staff estimates. COUNTRY ECONOMIC FOCUS 65