Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-6785-CD

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 20.20 MILLION (US$ 30 MILLION EQUIVALENT)

TO THE

REPUBLIC OF CHAD

FOR A

STRUCTURAL ADJUSTMENT PROGRAM

January 22, 1996

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EOUIVALENTS

The CFA franc (CFAF) is pegged to the French Franc at the rate of FF1 = 100 CFAF

Year US$ I = CFAF199c" 272.261991 282.111992 264.691993 283.161994 555.201995 506.50

METRIC SYSTEM WEIGHTS AND MEASURES

Metric US Equivalent1 meter (m) 3.28 feet (ft)1 kilometer (km) 0.62 miles (mi)1 hectare (ha) 2.47 acres (a)1 kilogram (kg) 2.21 pounds (lb)

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS

BCC Banque Commerciale du Chari (commercial bank)BDT Banque de Developpement du Tchad (development bank)BEAC Banque Centrale de l'Afrique Centrale (central bank)BICIT Banque Internationale de Commerce et de l'Industrie (commercial

bank)BIEP Bureau Interministeriel d'Etudes et de la Planification (public

consulting Firm)BMBT Banque Meridien BIAO du Tchad (commercial bank)BTCD Banque Tchadienne de Credit et des Dep6ts (commercial bank)CAA Caisse Autonome d'Amortissement (debt management agency)CAEMC Central Africa Economic and Monetary CommunityCFAF Currency of the CFA ZoneCAS Country Assistance StrategyCOBAC Commission Bancaire de l'Afrique Centrale (CAEMC Bank

Regulation/Supervisory Agency)

FOR OFFICIAL USE ONLY

COTONTCHAD Societe Cotoniere du Tchad (Cotton Processing and MarketingCompany )

CNPS Caisse Nationale de Prevoyance Sociale (Social Security Agency)CNRT Caisse Nationale de Retraite du Tchad (Retirement/Pension Fund)ERC Economic Recovery CreditESAF Enhanced Structural Adjustment FacilityFIP Fonds d'Intervention Petrolier (Petroleum Fund)IDA International Development AssociationIMF International Monetary FundINT Imprimerie Nationale du Tchad (publishing company)MCT Manufacture des Cigarettes du Tchad (cigarette company)OFCA Office des Carrieres (quarries)OFNAR Office Nationale des Routes (Road Agency)OHADA Organisation pour l'Harmonisation des Droits en Afrique

(Organization to Harmonize Laws)OMVSD Office de Mise en Valeur de Sategui Deressia (Irrigation Office)ONHPV Office National de l'Hydraulique Pastorale et Villageoise (Rural Water

Supply Agency)ONPT Office National des Postes et des Telecommunications

(posts and telecommunications company)OPIT Office de Promotion Industrielle du Tchad (Industrial Promotion

Agency)PHARMAT Centrale Phamarceutique du Tchad (phamarceuticals company)PFP Policy Framework PaperSAC Structural Adjustment CreditSAPROVET Societe Anonyme de Produits Veterinaires (State Veterinary Products

Company)SOE Statement of ExpendituresSONACOT Societe Nationale de Commercialisation du Tchad (trading company)SONAPA Societe Nationale de Produits Animaux (livestock products company)SONASUT Societe Nationale Sucriere du Tchad (sugar company)SSA sub-Saharan AfricaSOTEC Societe d'Exploitation des Carrieres (quarries)SOTERA Societe d'Exploitation des Ressources Animales (livestock products

company)STAR NATIONALE National Insurance CompanySTEE Societe Tchadienne d'Eau et d'Electricite (water and electricity

company)UNDP United Nations Development Program

This document has a restricted distribution and may be used by recipients only in the performance of theirI official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

REPUBLIC OF CHADSTRUCTURAL ADJUSTMENT CREDIT

Table of Contents

Credit and Program Summary ........................................................ i

Part I. Political and Economic Background ......................................................... 1

A. Political Background ................................................... 1

B. Economic and Social Background .................... .............................. 2

C. Past Experience with Adjustment .................................................... 4

D. Country Potential, Vision and Strategy .................................................... 5

Part II. The Proposed Reform Program ......................................................... 6A. Restoring Critical Public Sector Capacity and Improving its Finances ......... ..... 6a. Civil Service Reformn ........................................................ 7b. Rehabilitation of Public Finances ............................. ............................ 7

B. Increasing the Poverty Alleviation Impact of Public Expenditures ........... ......... 8a. Demobilization .................................................... 8b. Improved Public Expenditure Management .................................................... 9c. Increasing Resources Allocated to Priority Sectors ......................... .............. 10

C. Creating a Favorable Environment for Private Sector Growth ......... . ............. 10a. Judicial and Regulatory environment ....................................... ............ 10b. Restructuring the Financial System ................................................... 10c. State Enterprise Divestiture ................................................... 11d. Cotton Sector Reform ................................................... 11

D. Client Consultation and Participation ................................................... 13

E. Medium-term Prospects and Financing Requirements .................... .............. 14

Part IIL The Proposed Credit ..................................... 15A. The Credit ..................................... 15B. Rationale of the Proposed Approach ..................................... 18C. Financing and Management of the Program .................. ................... 18D. Agreements Reached and Conditionality ..................................... 20E. Benefits and Risks ..................................... 21

This document has a restricted distribution and may be used by recipients only in the performance of theirofricial duties. Its contents may not otherwise be disclosed wiihout World Bank authorization.

Part IV. Bank Operations .......................... ................. ........... 22A. Bank Assistance and Portfolio ...................................... 22B. IFC and MIGA Activities ................................... ... 23

Part V. Collaboration with IMIF and Other Donors .. .................................... 23

Part VL Recommendation ...................................... 23

TE.XT TABLES...............................................................................................................

Table 1: Chad - Key Macroeconomic Indicators, 1991-98 ...................................... 3Table 2: Chad - External Financing Plan ...................................... 15

ANNEXES

I. Economic IndicatorsII. Status of Bank Operations111. Supplementary Credit Dat3 SheetI ̀ . Matrix of ActionsV. Letter of Development Policy

REPUBLIC OF CHAD

STRUCTURAL ADJUSTMENT CREDIT

CREDIT AND PROGRAM SUMMARY

Borrower: Republic of Chad

Amount: IDA Credit: SDR 20.20 million (US$ 30 million)

Tenns: Standard IDA terms with 40-year maturity

Progra= Description: The program aims to restore the state's capacity to govern (includingcreating an environment of security and enforceable contracts); enablethe administraticn to function (provide essential public services and payfor them); and facilitate the operation of the private sector. The latterinclude pursuit of the on-going program of state enterprise divestitureand financial system reform, as well as the initiation of the reform of thecotton sector. Specific objectives include keeping the civil serviceworking while it is reformed to make it more effective; demobilizing asignificant number of soldiers who would settle in active, civilianeconomic life; restructure expenditures and increasing the shareallocated to essential development services such as primary education,health and basic public support to private sector activities.

Benefits: This operation would support the first phase of a multi-year programconceived by Chad to help it: (i) focus the public sector on its corefunctions and improve the capacity to finance them, while makinggreater use of community provision of public services; and (ii) create abusiness environment free of arbitrariness, in which more areas areopen to the private sector than before, and where support systems suchas a healthy financial system enable it to respond to new opportunities.The benefits include more reliable public services (including health andeducation) and stronger growth performance, both with direct impacton poverty reduction.

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RiAkh: The operation is subject to two risks. The first is a risk that politicalunrest could resume and halt the implementation of the program,and/or a new government assuming power after the mid- 1996 electionscould disown the program and end it. The second relates to thepossibility that the country's institutional capacity could beoverwhelmed, causing program implementation to stall. Given Chad'shistory, a return to general unrest cannot be totally ruled out.Nevertheless, this risk has been considerably reduced by thegovernment's reconciliation efforts which have brought most of therepresentatives of previously warring groups into the transitiongovernment. Similarly, the chances of a new government disowningthe program have been minimized through the involvement ofParliamentarians and representatives of private sector and the unions inthe preparation of the program. The risk from weak institutionalcapacity has also been reduced to manageable proportions by focusingthe SAC exclusively on key policy actions and putting in place aCapacity Building project to help implement the 1996-98 phases of theprogram and build local capacity.

Poverty Category: Poverty-focused operation, supports measures which would: (i) sustainand expand the coverage of public services (health and education, inparticular) which are of great importance to the poor; (ii) reduce thesize of the army by at least 30 percent and strengthen the judicialsystem, thereby increasing the sense of security in the private sector,which is important for the poor, most of whom operate in the small-scale informal sector; (iii) and improve cotton producer pricing and theoperations of the social security and retirement funds, which all wouldhave a positive impact on the incomes of the poor.

Apraisal Report: No separate Staff Appraisal Report.

EstimatedDisbursements: The credit will be disbursed in one tranche following credit

effectiveness.

Product Il ITD-35605 -- SAC

REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATIONTO THE EXECUTIVE DIRECTORS ON A

PROPOSED STRUCTURAL ADJUSTMENT CREDIT TO THEREPUBLIC OF CHAD

1. I submit for your approval the following report and recommendation on a proposeddevelopment credit to the Republic of Chad for SDR 20.20 million, the equivalent of US$30million. The credit would be on standard IDA terms, with a maturity of 40 years. It wouldsupport Chad's structural adjustment program, described in the third Policy Framework Paper(1995-98) and the Letter of Development Policy, and provide critical financing to theeconomy and enable the public sector to sustain a core set of essential development-orientedservices, improve the efficiency of their delivery and expand their coverage. In parallel, thegovernment is expected to continue to take action towards establishing an institutionalenvironment and policy framework to spur the development of the private sector.

2. The proposed SAC is a key element in the implementation of the country assistancestrategy (CAS) which aims to help Chad emerge from three decades of socio-economicstagnation. The CAS has four objectives: (i) restore critical public sector capacity; (ii) focuspublic expenditures on poverty reduction; (iii) create a favorable environment for privatesector development; and (iv) promote sustainable use of natural resources. The proposedSAC is the first of a series of quick-disbursing operations to suppoit the strategy and effectthe resource transfers needed by the economy to facilitate the implementation of the program.It is complemented by the Capacity Building Project, which would both provide the assistanceto carry out the activities required by the policy changes (including improved resourcemobilization, civil service reform, restructuring of the public enterprise sector) and build upnational competence in a variety of areas.

L. POLITICAL AND ECONOMIC BACKGROUND

A. Political Background

3. Background Chad has had a troubled political history, based in a large part on long-standing differences between the north and the south of the country, which becameaccentuated after independence in 1960. The two geographical regions differ culturally -- thesouth being made up mostly of settled cultivators and the north comprising mainly nomadicand semi-nomadic herders. The cultural differences between the two blocks deepened overthe years following the formal annexation of the territory by France, which contributed to therelatively faster economic and social progress of the south in comparison to the north. Thedifferences developed into open conflict in the early 1960s, when the post-independence

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administration (manned mainly by southerners) began to levy high taxes on livestock (mainvocation of the north). This was followed in the ensuing twenty-five years by repeatedepisodes of civil war, sometimes with the opposing sides being from the same region.

4. Recent Developments. With the accession to power in December 1990 of thegovernment of President Idriss Deby began a period which could end Chad's chronic politicalinstability. Since then, the government has pursued a program of national reconciliation, andfollowed a timetable to return the country to pluralistic rule. In 1993, a National Conferencedrafted a new multiparty constitution, established an interim legislature, the Higher Council ofTransition, and appointed a Prime Minister to lead an interim government. The constitutionwill be submitted to a referendum in early 1996. Presidential and legislative elections arescheduled for mid-1996.

B. Economic and Social Background

5. Background. Chad's turbulent political life has prevented the country from evolvingand implementing a coherent develoment strategy. The country is now at the ',ery initialstages of development. With a per capita income US$190 in 1994 -- barely above what it wasat independence in 1960 -- Chad is among the ten poorest countries in the world. Itseconomic and social infrastructure is poorly developed. About 90 percent of the populationlives and works in rural areas, but productivity in agriculture (42 percent of GDP) is low,transport costs are high, and cash crops account for only a small proportion agriculturaloutput. Industry (18 percent of GDP), which besides utilities and construction ( 2 percent),consists mainly of a few agroindustrial plants, generates little employment. The export base isnarrow, made up of essentially three items: cotton (50-60 percent of total), livestock (20percent) and arabic gum (9 percent). Chad ranks 168th out of 173 countries on the UNDP'sHuman Development Index. This is borne out by its poor social indicators: life expectancy is48 years (52 years sub-Saharan Africa --SSA--average); the infant mortality rate is 120 perthousand (93 per thousand average for SSA); the primary school enrollment rate is 65 percent(SSA average of 67 percent); and less than 30 percent of children have been immunizedagainst the deadly childhood diseases (55 percent average for SSA). Chad is a member of theCentral Africa Economic and Monetary Community (CAEMC) and shares a commoncurrency, the CFA franc, with the other members.

6. Recent Developments. Notwithstanding gains in political stability since 1990, Chad'spoor growth performance has persisted and GDP growth has not kept up with populationgrowth -- real GDP per capita in 1994 was 8 percent below the 1992 level. This growthperformance was the result of adverse external shocks and delayed adjustment in domesticpolicies, which reduced the competitiveness of the economy. During 1990-93, the worldmarket price for cotton fell by 30 percent and the CFA franc depreciated by 20 percent in realeffective terms only because of the sharp deflation suffered by the economy. As a member ofthe CFA zone, Chad had to wait till January 1994 to devalue the CFA franc in concert withother members of the zone. Compounded by management and liquidity problems in thecotton processing and marketing parastatal, COTONTCHAD, the falling world market pricesled the authorities to cut producer prices. This, in turn, led to reduced production and further

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financial losses for COTONTCHAD. The loss of competitiveness resulting from theappreciation of the exchange rate also weakened the performance of livestock, otheragricultural exports and local manufactures.

Table 1: Chad - Key Macroeconomic Indicators, 1991-98

.l99~~ 19~,Z..1...... .... . . ......

Real growth rate (% p.a.).GDP 8.3 6.2 -15.9 5.2 5.5 4.9GDP per capita 5.6 35 -18.0 2.5 2.9 2.3Exports (G2TS) 5, -3.8 6.9 i-13.Z 26.2 5.7..Irnports (GNFS) 7 1 -1.5 -4.3 -28.6 25.5 5.4

Ratios (% of GDP):.FixedInvestment 7.3 :8.3 11.0 15.1 15.4 17.8

,:'Public 6.9 7.9 10.2 14.0 14.0 13.2Private 0.4 0.5. 0.8 1.1 . 1.4 4.5

Gbross Domestic Savings -10.3 -11.1. -11.8 -5.5 -3.4 -1.4Gross National Savings -7.5 -6.2 -10.4 -3.7 -1.4 1.0Government Revenue:: 8.7 11.3 12.0 7.4 9.0 11.5i,tGovernment Expenditure.- 21.5 27.4 28.8 29.1 27.0 26.9,Trimaxy Balance -5.0 -2.8 -4.5 -6.3 -2.4 1.0ODverall Budget Balance '. -12.9 -16.1 -16.8 -21.8 -18.1 -14.9External Current Account: -14-9 -14.5 -21.3 -18.8 -16.8 -16.6

DebtServiceratio 4.7 5.1 6.0 13.5 12.0 12.4GDP Deflator 3.7 -11,4 -1.3 38.2 6.6' 3.3

7. Chad's overall financial situation deteriorated over the period 1990-93 (Table 1). Themain difficulty was with public finance. During the period, government revenues averagedbarely 11 percent of GDP while current expenditure rose from 15 percent of GDP in 1990 to18 percent in 1993. Private (including parastatal) savings averaged 0.4 percent, makingdomestic savings average negative 11 percent over the period. As Chad did not have a reformprogram under implementation during this period, aid flows were substantially reduced. Thus,while investment averaged only of 9 percent of GDP, transfers from abroad did not cover thefull resource gap. Partly as a result, external arrears accumulated (US$49 million at end-1993); international reserves fell from the equivalent of 2.9 months of imports in 1990 to 1.2months in 1993 (2.7 months in 1995); and Chad exceeded its credit position at the commoncentral bank of Central Afiican States, BEAC. Nevertheless, a significant share of investmentfinancing available continued to be on grant basis, and Chad remains not heavily indebted.While the external debt stands at 93 percent of GDP in 1995, it is on highly concessionalterms (average maturity of 40 years and average interest of 1 percent) and the debt service-exports ratio is modest, amounting to 14 percent in 1995. However, owing to low revenue

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mobilization, the debt service burden (principal and interest) amounts to 44 percent ofgovernment revenues.

C. Past Experience with Adjustment

8. The devaluation of the CFA franc in January 1994 presented the Chadian authoritiesan opportunity to reinvigorate the economy and lay the basis for accelerating growth. Theauthorities prepared a new reform program comprising principally: (i) prudent demandmanagement, through measures to reduce absorption by the public sector, so as to secure alasting improvement in the economy's competitiveness; (ii) increase in the producer price ofcotton to elicit higher supply response from this key activity; and (iii) measures to attenuatethe negative effects of the parity change on the vulnerable population. The program wassupported by a Stand-by arrangement with the IMF and an Economic Recovery Credit (ERC)from IDA, the first macroeconomic adjustment operation in Chad. Program implementationsuffered, however, from capacity weaknesses, which were themselves accentuated by civilservice strikes triggered by the irregularity of salary payments. As a consequence, the resultswere mixed.

9. The production of traded goods responded favorably, aided in part by an increase inworld cotton prices and satisfactory rainfalls Real GDP growth was 5.2 percent in 1994 andthe inflation rate was 41 percent, a shade below the target of 43 percent. In contrast, fiscalperformance was below expectations. Revenues were only 7.4 percent of GDP as against 9.5percent in the program, leading to a weaker public savings performance than expected and theinability to meet targets on payments of arrears to suppliers. The program was essentially off-track by end-June 1994.

10. In order to turn the situation around and establish a more positive record of policyreform, the Chadian authorities canceled the Stand-by arrangement and replaced it with astaff-monitored program covering the period October 1994-June 1995. IDA providedsupport to the implementation of both the staff-monitored program and the ERC through therestructuring of the Economic and Financial Management Project (FY88). In particular, theproject helped finance capacity building at the two customs posts, which handle 90 percent ofthe country's trade, and the privatization of the collection of petroleum import taxes.Following these actions, customs receipts increased from a monthly average of US$1 millionin mid-1994 (at the beginning of the assistance) to a monthly average of US$2.4 million in1995, in spite of a 45 percent average reduction in import taxes as part of the CAEMC zone-wide tariff reforms.

11. This stronger commitment on the part of the authorities and the IDA-financedtechnical assistance project helped achieve the desired turnaround in performance under therevised program. A strong improvement in revenue collection reversed the deterioration inthe primary deficit, which would have reached 9 percent of GDP, on the basis of performancein the first half of 1994, instead of the 6 percent ultimately achieved. The increase inrevenues also allowed for the resumption of critical government spending and permitted thepartial settlement of payments arrears to suppliers and civil servants. Similarly, full

implementation of the structural measures advanced fiscal reform, supported competitivenessand reduced the need for subsidies to certain public enterprises. In recognition of the progressmade since mid-1994, Chad's Paris Club creditors granted it in February 1995 a reschedulingof the eligible stock of debt service arrears at end-March 1994 and debt service payments forthe period April 1994-March 1995 (total of US$30 million equivalent).

12. The government has taken a number of important measures since March 1994. In thearea of tax and budget policy, the authorities replaced five indirect taxes (single tax, domesticproduction tax, domestic turnover tax, import turnover tax and complementary tax) withvarying rates by a single turnover tax with only two rates; introduced excise taxes on a limitednumber of luxuries and "harmful goods" (alcohol and tobacco); introduced a single taxpayercode and file for all revenue departments; removed paramilitary forces from Customs;privatized the collection of petroleum import taxes through hiring a preshipment inspectionagency while making monitoring improvements including computerizing records; andintegrated the debt management office (CAA) into the Ministry of Finance.

13. In the area of trade and competition policy, the government simplified and reducedtariffs to a common external tariff with 4 rates ranging from 5 to 30 percent, in line withgeneral CAEMC reforms; eliminated export taxes on agricultural goods and livestock;eliminated export and import licensing; liberalized all prices except for electricity, gasoline andselected medicines; increased the producer price for first grade cotton from CFAF 80 per kiloto CFAF 120 per kilo for the 1994/95 season; increased prices for petroleum products (by anaverage of 30 percent); and electricity (by an average of 20 percent). In addition, in order toend the economic losses imposed by parastatals, the government liquidated 7 public

1 ~~~~~~~~~2enterprises; and privatized of 5 others.

D. Country Potential, Vision and Strategy

14. Potential. In spite of its slow progress to date, Chad's long-term developmentprospects are promising. The territory is vast, with adequate rainfall in normal years, whichmakes for a high agricultural potential. There is a possibility that oil deposits in thesouthwestern portion of the country may attract significant amounts of private investment fortheir development for export. In November 1995, the government organized in N'Djamenabroad discussions on the mineral sector. Private sector mining companies in attendanceindicated their strong interest in prospecting and exploring Chad's mineral resources, with aview to assisting in the development of commercially viable projects. In addition, there arepositive legacies from Chad's turbulent past which are favorable for future development: the

OMVSD (Sategui-Deressia Development Project -- irrigation), CSPC (cotton stabilization fund), andSOTERA (livestock), OFCA (quarries), SHT (hotels), OPIT (industrial promotion), OFNAR (roadmaintenance).

2

SAPROVET (veterinary products), MCT (cigarettes), SIMAT (agricultural tools), PHARMAT(phamarceuticals); STAR Nationale (insurance).

public sector is small; the economy is relatively unregulated; and the Chadian people havedeveloped a capacity for self reliance and the community organization for the provision ofpublic services.

15. Vision for Growth and Poverty Reduction. The Chadian authorities' vision is toimplement policy reforms that would kindle and sustain rapid growth in the economy; ensurethe equitable distribution of the benefits of growth; and improve public services so as toachieve a stronger poverty reduction impact over and above what growth delivers. Their goalis to sustain real per capita GDP growth averaging at least 2 percent annually over themedium-to-long term. This would allow Chad to double its real per capita income within thenext generation, or even do better still if its oil resources are developed as envisaged. Theauthorities' poverty reduction strategy includes reinforcing the effect of growing incomes withexpanded and better quality public services to achieve rapid improvement in social indicators.

16. Key Constraints. Chad's policy framework is relatively free of the deep distortionscharacteristic of most other developing economies at the inception of reforms. With itsunsettled history, Chad was not able to formulate and implement a clear-cut developmentstrategy. One consequence of this is that the country has escaped the public sector-ledstrategy with inward-looking import-substitution policies which were popular in other sub-Saharan African countries during the 1 960-70s. No extensive tax-cum-subsidy schemes havebeen put in place, nor are there significant price distortions. The key constraints to growthand social progress have been political instability; the disadvantages of being landlocked --1800 km from the nearest port -- with a vast (and, paradoxically, seasonally flooded) territory,both of which make for high transport costs; highly variable weather with frequent droughts;and inadequate levels and quality of essential public goods and services.

11. THE PROPOSED REFORM PROGRAM

17. The Reform Agenda. The process of reconciliation and restoration of politicalpluralism (para. 4) have begun to address the issue of instability. The effect of thedisadvantages of physical location will be progressively attenuated as the economystrengthens. What is critical now is the need to restore the state's capacity to govern(including creating an environment of security and enforceable contracts); enable theadministration to function (provide the minimum essential services and pay for them); andfacilitate the operation of the private sector. In view of these, the proposed reform programaims at: (i) restoring the government's capacity to provide essential public goods and services,and improving its finances; (ii) focusing public expenditure on development activities andpoverty alleviation; and (iii) creating a favorable environment for private sector growth.

A. Restoring Critical Public Sector Capacity and Improving its Finances

18. Background. As a result of its past political instability, Chad does not have the criticalminimum capacity required for the delivery of essential public goods and services, and theability to finance it. The civil service (about 27,000 people) is not yet an established

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institution with a clear code of conduct; it is unable to function properly owing to lack ofresources; and it is often on strikes because of the irregularity of salary payments. Thegovernment would like to overcome these impediments to growth and development by: (i)rehabilitating the civil service and clarifying its functions; and (ii) rehabilitating the publicfinances.

19. a Civil Service Reform. The government intends to rehabilitate its administrationaround a civil service of modest size with a clear focus on core public sector functions and inwhich recruitment, career progress, training and management and incentives elicit dedicationand efficiency from its staff. To achieve this, a census has been conducted to establish e newinformation base for managing and controlling the size of the new civil service. Newstandards for recruitment, career planning, training and career management will be establishedwith support from the proposed Capacity Building Project.

20. b. Rehabilitatict of Public Finances. The low capacity to mobilize revenues remainsa major handicap. In 1995 for instance, the government's own revenues barely covered 80percent of non-debt recurrent (non-military) expenditures. Thus, even with external sourcescovering all investment expenditures, many current needs go unfinanced and payments todomestic suppliers are irregular. The inability to pay civil servant wages regularly led tostrikes and a disruption of the administration, including revenue collection agencies. Whilethe civil service reform and the military demobilization are expected to lead to fiscal savings,the authorities propose to tackle the structural fiscal weakness more directly by: (i) reducing,over time, the scope of public sector activities to the provision of minimum essential publicgoods and services; and (ii) rehabilitating and strengthening the tax administration, whileextending the tax base.

21. Further Reforms. The government has prepared the policy changes required toachieve the above goals, with the implementation of change taken up by various instruments.In civil service reform, the decision has been made to maintain a cap on total personnel; thewage bill will be limited to CFAF 28.6 billion in 1996, CFAF 29.9 billion in 1997 and CFAF31.1 billion in 1998; work is under way towards the adoption (end-1996) of neworganizational charts, including a civil service census (of which the first phase was concludedin November 1995) to prepare a reliable personnel database; and automatic wage increaseswill be abolished and replaced with a system of selective increases based on performance oncethe new organigrams are in place.

22. In terms of additional action to deal with the structural fiscal imbalance, thegovernment will make a push during 1996-98 towards greater use of burden-sharing withlocal communities in the funding of public services, and the reinforcement of revenuemobilization. In preparation for progressive reduction of the budgetary burden, a study willbe carried out in 1996 on ways to extend community finance efficiently to some publicservices still covered by the budget. The implementation of the recommendations wouldbegin in 1997. In the area of revenue mobilization, the authorities' focus is on improvedadministration through the inter-agency coordination of efforts and the elimination ofloopholes. This began in September 1995 with the centralization at the Customs Department

of the collection of international trade taxes formerly handled by four separate agencies.Future plans include effective use of the single taxpayer code and file to enhance tax payeridentification, assessment and enforcement. In addition, loopholes created by para-fiscalprovisions are being eliminated. The special enterprise regimes of businesses are beingrenegotiated, and those that lapse will not be renewed; the special tax and customs treatmentaccorded public enterprises (COTONTCHAD-cotton, MCT-cigarettes, and SONASUT-sugar) have been renegotiated to reduce the privileges; and, in order to limit abuse, quotashave been established on imports undertaken by diplomats with duty exoneration under theVienna Convention.

23. To support these efforts, the proposed credit would also transfer balance of paymentsresources, whose CFAF counterparts -- together with input from other donors -- would helpclose th? fiscal gap during the interim period. The overall strategy is to help Chad to financeits essential public goods and services during the period it needs to achieve public financeviability (possibly throtugh 1998-99) through building up its revenue capacity and also cuttingback on the scope of public sector activity to the essential minimum. Continuing supportunder subsequent single-tranche operations would be based on overall satisfactoryperformance under the preceding operations, including progress acceptable to IDA oneliminating the structural fiscal imbalances.

B. Increasing the Poverty Alleviation Impact of Public Expenditures

24. Background. One result of the past turbulence is that the composition of publicexpenditures has been biased against critical development expenditures (defense and internalsecurity share of current expenditure, average of 30 percent during 1992-94, as comparedwith education, health and social affairs combined, at 22 percent). The Chadian army had47,000 people in 1990, when all combatants in previous conflicts were enumerated. Asreconciliation proceeded, the army was reduced to some 32,000 people through a first phaseof demobilization, which was assisted by France. The government considers the current sizeof the army still too large, for both budgetary reasons as well as from the standpoint of thethreat to stability from having a large armed force that is not paid regularly. Chad's publicexpenditures also suffer from shortcomings of their management. The budget has generallybeen formulated without reference to expenditure ceilings derived from a soundmacroeconomic framework; the current/capital budget relation is distorted, with many currentitems covered by the capital budget; and some items (such as utilities) are chronicallyunderbudgeted.

25. Further Reforms. The authorities' reform plans include the internal restructuring ofthe budget to privilege development expenditures (including poverty reduction) over non-development expenditures; the creation of a stronger link between the budget and themacroeconomic framework (basing each year's budget circular, hearings and final decisionson explicit fiscal elements of a macroeconomic framework); and the institution of improvedbudget management procedures including the realistic budgeting of items hithertounderbudgeted.

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26. a. Demobilization. In order to reduce the weight of the military in the economy, theauthorities plan to demobilize a further 7,000 people in 1996, and progressively integrate theminto active civilian economic life. Working in close consultation with all concerned, theMinistry of the Army has prepared a first proposal (September 1995) for a demobilizationprogram that would cover the critical phases of identification of eligible candidates, armsretrieval, facilitation of settlement and successful reintegration. The government is seekingexternal assistance to refine the proposal and fund its implementation. The intention is todemobilize and settle upwards of 11,000 people over 1996-98, assuming sufficient donorsupport would be forthcoming. The program is scheduled to begin implementation in early1996. The government will use part of the CFAF counterpart of IDA's financing to supportthe early but critical 1996 phase of this exercise (7,000 departures). The authorities plan tofinalize the demobilization plan and submit it to a Donors' Round Table envisaged for mid-1996.

27. b. Improved Fxpenditure Management. The government intends to use regularconsultations with the Bank on public expenditures, along with the assistance being providedto it under the Capacity Building project, to improve the efficiency with which it mobilizes andallocates public resources. Each year, the government and IDA will agree on the draft budgetfor the next year before it is presented to Parliament. As a beginning, and as a condition ofBoard presentation of the SAC, IDA and the government have agreed on the 1996 budget inwhich wages and salaries are the equivalent of 5.7 percent of GDP; goods and services are 2.6percent of GDP; within goods and services, the allocations for education, health and womenand social affairs are 26 percent higher than in 1995 (21 percent increase in real terms); overallcurrent expenditure stands at 13.5 percent of GDP; and capital expenditure equals 14 percentof GDP. These targets were agreed earlier with the Bank and the IMF in the 1995-98 PFP.Further targeting of critical development expenditures, within a severely constrained overallenvelope, will continue under the second and third SACs in this series.

28. Chad's PIP needs continuing work to reduce the number of projects (now almost300), identify and move current expenditures into the current budget, and make the PIP lessdonor-driven. As a first step towards these goals, the government and IDA have agreed onthe size and composition of the 1996 tranche of the 1996-98 PIP and exchanged preliminaryviews on the remainder. During the remainder of the program period, the government willagree with IDA on the rolling three-year PIP. With the drive to improve the realism of thePIP and the efficiency of its implementation, in each year overall programmed expenditureswould not exceed the level judged consistent with the capacity to finance and implement byabout 10 percent. Further, in order to ensure that the PIP fully supports the developmentimpact and poverty reduction objectives of the program, each project would be reviewed forconsistency with sector strategies and economic and financial viability. In terms of economicviability, projects amenable to quantitative analysis would be expected to meet a minimumacceptance criterion of 10 percent rate of return. Others would be subjected to least costcriterion.

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29. c. Increasing Resources Allocated to Priority Sectors. In line with the povertyalleviation strategy, the authorities are increasing resource availability to priority activities ofhealth and nutrition, education, agricultural extension, and infrastructure maintenance. Thusin 1994, additional recruitment was allowed for the social sectors (280 teachers and 90 healthworkers) when a general freeze was in effect. The budgets for health and education wereincreased by 10 percent in 1995 and again by 26 percent in 1996. Similar attention is beingpaid to road maintenance, for which budget outlays are increased annually in line with amedium-term schedule agreed with IDA. They were raised by 16 percent in 1995 and by 40percent in 1996. Throughout the program, the needs and allocations of the priority sectorswill be a key area of focus during the regular consultations between the government and IDAon pubiic expenditure management.

C. Creating a Favorable Environment for Private Sector Growth

30. Background. he Chadian authorities believe that the private sector should be thedriving force in the economy, generating growing incomes and providing employment. Theysee the public sector's role as creating the conditions permitting the emergence of new formalsmall and medium-scale enterprises while those in existence expand and diversify theiractivities. The government realizes this will require public sector withdrawal from activitiesthat can be handled by the private sector; the provision of supportive infrastructure; and theremoval of obstacles to the creation of an open and competitive business environment. Tothis end, the authorities propose to: (i) create a business-friendly judicial and regulatorysystem; (ii) restructure the financial system to make it more supportive of private sectorinvestment and trade; (iii) accelerate the divestiture process through which the remainingcommercial/productive state enterprises are transferred to the private sector; (iv) undertakemarket and institutional reforms in the cotton sector so as to spur production.

31. a. Improving the Judicial and Regulatory Environment. As part of creating aminimum, dependable government capacity, Chad needs to generally rehabilitate the judicialsystem and courts, and update legal texts where they already exist. From the standpoint ofencouraging private sector growth, this includes renovating the apparatus in charge ofbusiness law, helping instill flexibility in factor markets, and facilitating the entry and exit ofbusiness firms into activities.

32. b. Restructuring the Financial System. Chad's financial system comprises fourcommercial banks; one development bank; one insurance company; two social securityinstitutions; a postal savings bank; and a number of savings and loans cooperatives. Three ofthe commercial banks (Banque Tchadienne de Credit et des Dep6ts -- BTCD, Financial Bankof Tchad -- FBT, and Banque Commerciale du Chari -- BCC) are in relatively good shape,with low ratios of expenses to net banking product, and registering profits. The fourthcommercial bank, Banque Meridien du Chad -- BMBT, is suffering from an important non-performing portfolio and from loss of deposits with the parent company in Luxembourg,Frankfurt and the Bahamas. The development bank, Banque du Developpement du Chad(BDT), which was restructured in 1992, could face some difficulty in the near future when themoratorium on the withdrawal of deposits expires in 1996. Bank regulation and supervision

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are handled by the regional supervisory agency, COBAC, which has ensured the observanceof zone-wide prudential ratios.

33. The private sector worker insurance and retirement fund, CNPS, has an outstandingloan to the government, and its Board and management are dominated by the public sector.The former condition threatens the viability of the CNPS and the latter limits its independence.The public sector retirement fund, CNRT, started off with obligations but no assets. Workercontributions still go to the Treasury and retirement benefits are paid through advances madeto it by the Treasury. At end-1994, the CNRT had a claim of some CFAF 3.5 billion on thegovernment, representing mainly benefit arrears. Keeping the CNPS and CNRT solvent andimproving their management would enable them to play their social insurance roles which areessential for the success of the civil service reform, demobilization and parastatal restructuringefforts.

34. c State Enterp-ise Divestiture. In 1990, Chad's state enterprises (including mixedpublic-private entities and autonomous, commercially-oriented agencies) numbered aboutforty. The twenty-eight largest together had assets totaling CFAF 180 billion (equivalent to56 percent of GDP) and employed some 8,000 people (about 25 percent of modern sectoremployment). In 1992, the decision was taken to divest the state of most of these enterprisesin order to reduce the scope of public sector activity and create room for private sectorgrowth. In that year, a Presidential Ordinance established a list of enterprises to be liquidatedor privatized, and spelled out the procedure for doing so. Considerable progress has beenachieved in the first phase of implementation. By end- 1994, seven enterprises were liquidatedand five were privatized (para. 13).

35. d Colton Sector Reform. The organization of the cotton sector follows the model ofan integrated vertical structure led by a public monopoly, which has been used in mostfrancophone African cotton producing countries. COTONTCHAD is an integrated operation(input supply, purchase of grain cotton, ginning and marketing), with considerable financialand economic clout vis-a-vis the cotton farmers grouped in some 4,000 small villageassociations. COTONTCHAD is also highly centralized, while its ginneries are scatteredover a large area. This makes it impossible to achieve efficiency by focusing on sourcesimprovements at the plant level. The absence of local qualified personnel is anothershortcoming. One consequence is high reliance on expensive foreign expertise contracted ona cost-plus, not results-based terms, at all technical and managerial levels, and lack of capacityto elaborate and implement a nationally-conceived development program for the sector.

36. Producer pricing follows world market prices, subject to the profitability ofCOTONTCHAD. Over the last four crop years (1989/90-1992/93), COTONTCHAD made anet loss of CFAF 9.8 billion. A profit of CFAF 5 billion was realized in 1993/94, aided largelyby the devaluation of the CFA franc. The preliminary results for 1994/95 show a continuationof the improving trend. One result of inefficiencies in the sector is that Chad's cottonproducers generally receive a low but variable share of world market prices. During the five-year period 1989/90-1993/94, the share of the fob export price received by the cottonproducer varied between 32 and 68 percent. A permanent improvement in the financial

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performance of the sector and the adoption of a pricing scheme more favorable to the farmerscould lead to stronger supply response.

37. Further Reforms. In the area of judicial and regulatory framework, during 1994-95, the authorities strengthened the staffing and technical of the Ministry of Justice, andcreated a liberal trade environment by suppressing export and import licenses and abolishingprice controls and most state monopolies. As further deepening of the process, they proposeto amend the Labor Code (to free wage determination and encourage consultation amongeconomic partners); revise the Investment Code (for simplicity and neutrality in the treatmentof investors); and ratify the treaty creating the Organization for the Harmonization of BusinessLaw in Africa (OHADA), including the provision for standardized company and bankruptcylaws.

38. While mindful of the fact that the valuable role played by current organization of thecotton sector in keepirg cotton going even in the most troubled times, the authorities wouldlike to address some of the sector's shortcomings. In order to avoid disruptive action and stillachieve the goal of increasing the contribution of the cotton sector to the growth objectives,the authorities have decided on a phased reform program, beginning with the organizationalstructure, personnel and producer incentives. A program of gradual decentralization will beintroduced in 1996. Its ultimate goal is to put decision-making close to the ginneries andestablish accounts by plant so as to arrive at a better gauge of performance by entity. In themeantime, since the 230,000 tons of ginning capacity suffices for the needs of the immediatefuture, all new investment will be on hold. A human resource development program to fast-track the development of senior Chadian managers will also be initiated on the basis of a studyby industry specialists in 1996. Finally, a new producer-pricing mechanism will be introducedwith effect from 1996/97 crop season. Under it, producers will receive an initial paymentlinked to projected world prices, at the time of sale of field (unginned) cotton, with anadditional payment after the export sales have been made. The producer price announced forfield cotton in the 1995/96 crop year (CFAF 140 per kilo) would be equivalent, in terns ofginned cotton, to about 46 percent of the projected fob export price. When they switch to atwo-part pricing system in the 1996/97 crop year, the authorities intend to start paying theproducer at least 50 percent of the fob export price, and to increase this share progressively asthe overall sector operations become more efficient.

39. While the situation of the banks is not alarming, there is a need for greater privatesector presence to soften the public sector's hand and improve the responsiveness of the banksto the market (case of BTCD); fill a void left by a previous private sector partner (as withBM[BT); or strengthen the balance sheet (case of BDT). In parallel, there is need torehabilitate the CNPS and CNRT, both of which are critical for the financial integrity of theeconomy and the success of the reform efforts. In recognition of this, the government's near-term objectives are to: (i) introduce private partners into the BTCD and the BDT; (ii) find areplacement for the Meridien in the BMBT; and (iii) initiate action towards restructuring theCNPS and CNRT. An additional objective with slightly longer-term perspective is to spurthe development of cooperative finance.

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40. The BTCD and the BMBT each have received proposals of entry from prospectivenew partners. While resolved to reduce the public sector share of the capital in each bankbelow 25 percent, the authorities will remain pragmatic and only conclude deals with partnersof the highest integrity and who would bring additional professional competence to themanagement of the banks. This consideration may mean an interim position where the publicsector share does not go all the way below 25 percent. In the case of the BMBT, thediscussions with the prospective partner center on the restoration of the capital base which hasbeen weakened by an estimated CFAF 2 billion in losses. The authorities propose to handlethis through the revaluation of assets. No such issue applies to the rest. The governmentintends to conclude the transactions for all the three banks by June 1996. In addition to these,studies will be carried out on how to restructure the CNRT and further develop cooperativefinance. The studies will be launched in February 1996.

41. In 1995, in continuation of the parastatal sector reforms, the government liquidatedan additional 4 enterpri-es (SONACOT-trading), BICIT-commercial bank, Caisse Sucre-sugarstabilization fund, and FIP-petroleum products price equalization fund); and brought another 4to the point of sale (Air Chad, INT-printing and publishing, SONAPA-animal products,SOTEC-quarries). The authorities also initiated the design of a divestiture program for thefive largest enterprises -- STEE (water and electricity), ONPT (posts), TIT(telecommunications), COTONTCHAD (cotton processing and marketing), and SONASUT(sugar). During 1992-94, the financial losses of these five enterprises amounted to CFAF 7billion, or about 2 percent of GDP, the bulk of the losses of the public enterprises sector. Thediagnostic phases of the necessary studies were concluded in December 1995 for SONASUT,TIT and ONPT and the follow-up analysis of options will be launched by February 1996.Terms of reference have been agreed for the others, and their studies will get under way byend-January 1996. The divestiture strategies agreed for these enterprises will be implementedover 1996-98.

D. National Consultation and Participation

42. The economic reform program to be supported by the proposed credit was elaboratedon the basis of wide-ranging discussions with various segments of the society. Theseconsultations took place in seminars and workshops held in N'Djamena and provincialcapitals. Given their strong belief in inclusiveness as the way to break with their country'shistory of instability based on sectionalisrn, the authorities worked closely with the businesscommunity, unions, community leaders, the army as well as legislators on the design of thepolicy measures as well as the timetable for their implementation. A standing private sectorgroup which advises the government on policy actively participated in the preparation of thereforms. In view of the general elections in mid-1996, the meetings with legislators wereconsidered particularly important in order to ensure that the program would be seen as anational endeavor to be carried through regardless of which party comes to power. Thisprocess has created a strong sense of broad-based local ownership of the reform program.

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E. Medium-Term Prospects and Financing Requirements

43. The medium-term objectives of the reform process include sustaining the improvedGDP growth performance initiated in 1994 (at just above 5 percent) and extending it throughthe period 1995-98 and beyond. These objectives are reflected in the macroeconomicframework of the 1995-98 PFP concluded in August 1995. Following the variable sectoralperformance in 1994, it is expected that all sectors will settle into a rhythm of solid growth,assisted by the increased overall competitiveness of the economy, improved delivery of publicservices and the reinforcement of the environment for private initiative. The agriculturalsector is expected to go from a 1994 recovery of 14 percent (attained mainly by recoveringground lost in 1993) to an average of some 4.7 percent over 1995-98; industry would recoverfrom its decline in 1994 (when it regressed by 5 percent owing to adjustment to higher inputcosts following the devaluation), to attain an average growth of 4.9 percent; and the tertiarysector would go from the stagnation in 1994 (0.8 percent) to an annual average growth of 5.1percent.

44. The above outlook is expected to be supported by investment averaging about 17percent of GDP. The bulk of the financing will be from external sources, as domestic savingswill likely remain negative through 1998. Nevertheless, with tax policy reform and improvedadministration as well as budgetary austerity, public finances are expected to begin theirrecovery, with revenues increasing from 7.4 percent of GDP in 1994 to 11.5 percent by 1998;the share of personnel expenditures would decline from 6.1 percent of GDP in 1994 to 5.1percent in 1998; and security-related expenditures would fall from 3.2 percent of GDP in 1994to 1.7 percent in 1998. Under these influences, the current fiscal deficit would be expected todecline from 7.8 percent in 1994 to less than 1 percent in 1998, setting the stage for theemergence and growth of local contribution to the financing investment expenditure from1999 onwards. Supported by prudent monetary policies pursued in collaboration with theregional monetary authorities (BEAC), these trends should minimize inflationary pressuresand enable the inflation rate to fall from 41 percent in 1994 to 4.5 percent in 1996 andstabilize at about 3 percent thereafter.

45. Under these conditions, the external current account deficit should decline from 18.8percent of GDP in 1994 to 16 percent in 1998. Taking into account the need for additions toreserves, external financing requirements (excluding debt relief) are projected at someUS$926 million over the period 1995-98. This amount also is the financing requirement ofthe budget (of which US$690 million during 1996-98, Table 2). Loan and grantdisbursements for projects would amount to US$576 million, and other (private) capital flowsare projected at US$14 million. Out of the residual gap of US$336 million, disbursementsunder the IMF's ESAF arrangement would cover an amount of US$75 million over theperiod; three successive IDA SACs would provide another US$70 million (21 percent); andbilateral donors (notably France), the European Union and debt relief would cover theremainder (57 percent).

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Table 2: Chad - External Financing Plan, 1995-98

, : ,: ~~~~~~. -. ..... .K*(USS million):

External Financing Requirements 233 - 245 233 227 690:current Account Deficit 158 170 181. :196 547-Amortization1(incL lIM Repurchases) 19 25 29: - 29: 83

:-PRed6ction n Extemnal Arrears: 42 15 0 .0 -creasein:-.--n:serves 14 35. 25 - .3 63

Sources of Financing:- 233 245 233 227 690-Offcial&Grants 89 73 92- 96 261--Project-related Disbursements 40 66 58 64 187: -;Debt Relief 36 0-OtherCavital -8 1 7 11 19-Adjustment Financing 76 :105 77 56 219

IDA 0 30 20 20 70:F . - -13 ..25 25 13 - 63Other 63 50 32 23 86

II. THE PROPOSED CREDIT

A. The Credit

46. The proposed credit is a single tranche operation, with the proceeds to be disbursedagainst reform measures taken up-front. Its counterpart funds would provide budgetarysupport (in concert with other donors) to assist in funding essential public services, paying offthe government's debt to local businesses, meeting payment arrears to external creditors andpaying severance to soldiers scheduled to depart in 1996. This would help the authoritiesavoid civil service strikes, inject some needed liquidity into the business community, normalizeChad's felations with foreign creditors and kick-off the second phase of the militarydemobilization.

47. In parallel, the government would continue the implementation of its reform programsummarized in the reform policy agenda for 1995-98. Continuing support under an FY97SAC will be conditional upon satisfactory progress on the overall reform program, includingthe implementation of the measures for outline for 1996 and the maintenance of the agreedmacroeconomic framework, as well as the preparation of the detailed 1997 program in linewith the three-year policy framework.

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- 18 -

disbursing resources to support macroeconomic frameworks that already incorporate theimpact of up-front actions, thereby removing the element of negotiations over multipletranches from what should be sustained, non-contentious and predictable support to thegovernment's reform efforts. The measures taken so far by the government are consideredequivalent to those that would normally be required for the second tranche in a two-trancheadjustment operation. Similar subsequent single tranche operations are envisaged, each to bejustified on the progress achieved in the previous year on growth and on poverty reductionindicators. In the case of the latter, a system for monitoring progress on poverty reductionindicators is being developed jointly with the government and the communities for use inassessing progress (para. 56).

B. Rationale of the Proposed Approach

49. The idea behind the proposed approach is to finance on a temporary basis a coherentset of reforms that will ultimately promote improved economic performance. The creditwould help Chad finance adjustments (such as demobilization, civil service reform) that areinitially costly to carry out, but over time would lead to reduced expenditure, improved civilservice performance and fiscal sustainability. Along with the support from other donors, itwould help make the payment of civil service salaries regular and keep public servicesworking (including the revenue agencies), while the authorities establish a more effective civilservice. It is part of a realistic effort to achieve public finance viability in Chad, including taxsystem and administration reform towards a stronger capacity to mobilize revenues, Finally,it is underpinned by a scenario under which Chad's need for budgetary transfers decreasesover time.

50. The fiscal viability of the approach may be illustrated with the impact ofdemobilization for which reasonably firm numbers are available for 1996. In 1994, the currentbudget deficit was 7.8 percent of GDP. With the departure of 7,000 soldiers in 1996, thecurrent budget deficit would rise temporarily by 0.2 percent. The ultimate effect, however,would be a current budget deficit of 0.8 percent in 1998 instead of 1.5 percent withoutdemobilization. The planned demobilization of at least a further 4,000 men during 1997-98(for which details are now being worked out) would result in a faster elimination of thecurrent budget deficit.

C. Financing and Management of the Program

51. Borrower and Credit Amount. The borrower will be the government of Chad. AnIDA credit in the amount of US$30 million is proposed, which is commnensurate with thebalance of payments needs and the expected burden sharing among Chad's major donors.The proposed SAC is complemented by a three-year (1995-97) ESAF arrangement with theIMF, for an amount of SDR 49.56 million. Additional financial support for the program ishas been extended by France and the European Union.

52. Disbursements. The proceeds of the credit would be released upon effectiveness (nospecial effectiveness conditions are foreseen beyond those described in section 12.01 of the

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close Chad's external financing gap, while the counterpart CFAF equivalent would go tosupport the budget. The credit would reimburse 100 percent of the foreign exchange cost ofeligible imports subject to a negative list. Goods financed under other development assistanceprograms or imported goods purchased locally will not be eligible for financing. Retroactivefinancing of up to 20 percent of the credit would be made available for payments made foreligible imports no more than four months prior to credit signing. Imports will be subject topre-shipment inspection.

53. Disbursement of the credit would be made in the form of reimbursement upon receiptof relevant application and documentation. On an exceptional basis, to allow for timelydisbursements, no limitation is placed on petroleum or food imports. The minimumapplication size would be US$0.5 million. Contracts valued less than US$2,000 would not beeligible for financing under the credit. Disbursements would be made against Statement ofExpenditures (SOEs) for eligible contracts valued at less than US$1 million equivalent. TheBorrower would retain all supporting documents, which would be made available for scrutinyby Bank staff and external auditors. All other disbursements would be made against fulldocumentation submitted to IDA. An audit report, conforming to internationally acceptedstandards and prepared by independent auditors acceptable to IDA, will be submitted withinsix months after the end of the fiscal year of the borrower.

54. Procurement. Procurement procedures have been designed to permit rapid use of thefunds while ensuring efficiency and accountability in the process. It is proposed that eligibleimports by public agencies and by the private sector costing the equivalent of US$ 2 million ormore would be subject to simplified international competitive bidding. Procurement by publicagencies for items below the threshold would follow standard government practices found tobe acceptable in the past. Eligible imports below the threshold by private entities would beprocured in accordance with normal commercial practices, and wherever possible, quotationswould be sought from at least two countries. Single source purchasing would be permittedfor proprietary equipment or where compatibility with existing equipment requiresstandardization. Contracts for US$10 million and above would be subject to prior review.For all others, procurement documentation would be retained for ex-post review by theAssociation. The documentation may consist of: (i) a brief description of procurementprocedures; (ii) evaluation summary giving numbers of bids received; (iii) a comparativestatement of prices received; (iv) dates of contracts and payments; (v) a copy of the invoice;and (vi) any other documentation required by disbursements.

55. Management and Monitoring of the Program. The program will be implementedunder the supervision of a High Intermninisterial Committee, composed of 10 ministers,established in June 1994 and charged with the responsibility of overseeing the design andimplementation of reform programs over the medium term. It will be assisted by a TechnicalCommittee responsible for the day-to-day implementation and monitoring. This TechnicalCommittee will be supported in terms of technical expertise and logistics by the proposedCapacity Building Project. Supervision of the credit will be carried out by regular missions inclose coordination with the IMF. The Resident Mission in N'Djamena will assist thegovernment with the implementation of the program on a continuing basis.

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56. Monitoring of Results. In order to continuously evaluate the effectiveness of thepolicy changes and the use of resources, a monitoring system will be introduced to trackresults beyond those normally available in macroeconomic statistics. Both the Chadianauthorities and IDA have agreed that the system should emphasize human resourcedevelopment and poverty alleviation. The system envisages that: (i) the focus will be onhealth, nutrition and education; (ii) the conditions of the centers providing services will bemonitored in repeated surveys, as will the client assessment of the quality and coverage ofservice received; (iii) a survey frame will be established, covering all of Chad's accessibleprovinces; (iv) the service centers will be grouped in clusters, and centers will be randomlyselected at each round of the survey; and (v) there will be no prior announcements before thevisits of the survey teams.

57. For education, the surveys will focus on the following variables: (i) condition ofclassrooms; (ii) number of students per classroom; (iii) number of girls in school; (iv) numberof girls per grade; (v) percentage of enrolled students actually present in class; (vi) pupil-teacher ratios; (vii) nui.1bers of government-supplied versus community-supported teachers;and (viii) supply of school materials (chalkboard, teaching aids, schoolbooks). In the case ofhealth and family welfare institutions, the variables of interest will be: (i) conditions of healthpost/clinic/welfare post; (ii) number of clients served per month; (iii) number and qualificationof attendants; (iv) range of services provided; and (v) level of supplies. The system will be inoperation by mid-1996. The results of these surveys of real outcomes will be used togetherwith the record on policy reform and the attainment of macroeconomic objectives, indetermining whether or not there is a basis for the continuation of IDA support to the reformprogram.

D. Agreements Reached and Conditionality

58. On January 17, 1996, the government transmitted to IDA copies of laws adopted andexecutive administrative instruments (ministerial circulars, calls for bids, notices ofadjudication) put in place to implement the measures agreed as conditions for Boardpresentation of the SAC. In the area of tax and budget policy, these measures include:restructuring of special enterprise regimes, to reduce their tax exemptions in line with regional(CAEMC) agreements; (ii) renegotiation of special customs treatment (special conventions)for private companies and public enterprises (COTONTCHAD, MCT, SONASUT); (iii)centralization of collection of international trade taxes at Customs Department; (iv)establishment of exoneration quotas for imports by diplomats; (v) abolition of off-budgetoperations; and (vi) the 1996 budget and 1996-98 PIP, as agreed with IDA.

59. In parastatal sector reform and private sector promotion, the following have beenaccomplished: (i) adoption of the law on a new membership structure for the Board of theprivate sector worker insurance and social security institution, CNPS, leading to a reduction inpublic sector presence; (ii) preparation of an action plan to settle government's debt to CNPSand CNRT; (iii) launching a study on the further development of cooperative finance; (iv)initiation of disengagement strategy study for ONPT (posts), TIT (telecommunications); (v)launching of cotton sector human resource development strategy study; (vi) liquidation of 4enterprises: SONACOT (trading), BICIT (commercial bank), Caisse Sucre (sugar stabilization

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fund); and FIP (petroleum price equalization fund); and (vii) increase in the producer price forfirst grade cotton from CFAF 120 per kilo to CFAF 140 per kilo.

E. Benefits and Risks

60. Benefits. The main justification of this operation is that it would support the firstphase of a multi-year program conceived by Chad to help it: (i) focus the public sector on itscore functions and improving the capacity to finance them, while making greater use ofcommunity provision of public services; and (ii) create a business environment free ofarbitrariness in which more areas are open to the private sector than before and where supportsystems such as a healthy financial system enable it to respond to new opportunities. Thebenefits include more reliable public services (including health and education) and strongergrowth performance, both with direct impact on rapid poverty reduction.

61. Risks: The operation is subject to two risks. The first is political -- a risk that politicalunrest could resume and halt the implementation of the program, and/or that a newgovernment assuming power after the mid-1996 elections could disown the program and endit. The second relates to the weak institutional capacity, which could be overwhelmed andcause program implementation to stall. With regard to the political instability, given Chad'shistory, a return to general unrest cannot be totally ruled out. Nevertheless, the risk of thishappening has been considerably reduced by the government's successful reconciliation effortswhich have brought most of the representatives of previously warring groups into thetransition government. As to the possibility of a new government disowning the program, thechances of this happening have been minimized through the direct association of theParliamentarians as well as representatives of the private sector and the unions with thepreparation of the program.

62. The risk from weak institutional capacity has also been reduced to manageableproportions in two ways. First, by focusing the SAC exclusively on key policy actions, theoperation economnizes on the government's implementation capacity. Second, a CapacityBuilding project is being put in place in parallel with the SAC to help implement the remainder(1996-98 tranches) of the program while building local capacity. The experience of thesuccessful use of the Economic and Financial Management Technical Assistance Project tosupport the Economnic Recovery Program shows that this is a viable approach to managing thecapacity risk.

IV. BANK OPERATIONS

A. Bank Assistance and Portfolio

63. Past IDA Lending. Since joining the World Bank Group in 1963, Chad has received37 IDA credits totaling US$540 mnillion. The credits are distributed as follows: 25 percent foreducation, health and population; 25 percent for infrastructure and energy; 34 percent foragriculture and rural development; and 16 percent for economic reform and capacity building.

- 22 -

The currently active portfolio consists of 11 projects. An Agricultural Services Project and aPopulation and AIDS Prevention Project were approved in FY95.

64. Portfolio Management. Chad has managed very well its portfolio of Bank-assistedprojects, despite severe fiscal and capacity constraints. In FY93, the portfolio had threeproblem projects out of a total of eight projects. Measures taken to deal with the problemsnoted were successful. A CPPR organized in May 1995 noted that there were no problemprojects. Two of the projects (Health and Transport) were singled out as particularly well-managed. These results place Chad among the best performers in the region. To maintain thisperformance, there is need to pay attention to careful management of counterpart funds in anenvironment of general scarcity of resources, and the husbanding of the limited experience ofproject managers, particularly in the fields of procurement, accounting and auditing.

65. Proposed Strategy and Assistance Program. As described in the CountryAssistance Strategy which accompanies this report, the main objective of the Bank Groupover the medium-to-long term is to assist Chad in overcoming its key development constraint-- the chronic insufficiency of essential public services needed to sustain rapid growth andpoverty reduction. Given its limited resources, Chad needs to mobilize a steady level ofexternal financial support to supplement its own resources. In order to maximize theirdevelopment impact, such resources would be best pooled and used to finance well-conceivedprograms. This approach would explicitly recognize the fungibility of resources and spotlightthe need for continuing judicious choices among activities, and also save on the authorities'limited implementation capacity. In parallel, Chad would strengthen its own resourcemobilization capacity in order to progressively reduce dependence on external assistance.

66. The proposed strategy covers an interim period during which the grounds are preparedfor the switch to financing country programs focused on clear and attainable social andeconomic objectives. This interim strategy has as its specific objectives: (i) restore criticalpublic sector capacity; (ii) focus public expenditures on key social services in conjunction withcommunity resources; (iii) create an environment favorable to private sector development; and(iv) protect the environment. In non-lending support, it would provide ESW to preparecountry expenditure programs. In terms of lending, it would combine a series of singletranche, quick-disbursing operations (possibly three) to initiate program-oriented budgetarysupport with selected traditional projects aimed at specific near-term goals.

B. IFC and MIGA Activities

67. Chad has just applied for membership in IFC and MIGA, both of which haveexpressed interest in participating in the financing plan of the proposed Doba Oil Project. IFCenvisages a lead role in coordinating financing from commercial banks and export creditagencies. IDA, IFC and MIGA are closely coordinating their activities on this proposedproject.

- 23 -

V. COLLABORATION WITH THE IMF AND OTHER DONORS

68. The Bank has worked closely with the IMF and other donors (mainly France and theEuropean Union) in helping Chad design and prepare its program as well as in mobilizingquick-disbursing assistance and debt relief to finance it. The Bank and the IMF collaboratedwith the Chadian authorities on the preparation of the PFP, and the IMF approved an ESAFto support a three-year program based on it. A UNDP-sponsored Round Table scheduled formid-1996 is expected to secure financial support for other components of Chad's medium-term reform program, including the demobilization of the military.

VL RECOMMENDATION

69. I am satisfied that the proposed credit would comply with the Articles of Agreementof the Association and recommend that the Executive Directors approve it.

James D. WolfensohnPresident

Washington, D.C.January 22, 1996

Annex I

Chad Page 1 of 6Maest 5rpe/liHeeuew gru NIV&

Lnt singkyaw rce s5- higherUnr of sau S Low iwoms

Infdicaor m--flWWK 1970.75 1980i. 19U.f3 Afrca incomw groupPriority Poverty Indicators

POVERTYUpper poverty line locw c. .. ..cuffHe-count index % of pop. .. .. .. .. 19

Lower poverty line local cur. .. ..

Headcount index % of pop. .. ..

GNPpercapita USS 160 120 210 520 380 1.590SHORT TERM lNCOME INDICATORSUnskilled urban wage local cwr. .. .. .. _Unskilled nral wagesRunl tms of tadcConsumer pnceindex 19S7=100 .. 122 110Lower incomeFoodaUrbanRunrl

SOCAL INDICATORSPublic expenadiuw On basic socdl serviCe * of GDP .. . 5.5 _ _GM"i eruoim~anoemPriary * school a pop. 35 43 65 67 108 104Male 5t 63 39 74 116Feal"e * I8 24 41 60 101

Inft mortaLity per t live birds 166.0 143.0 120.0 93.1 63.1 39.0Undc 5 moortity .. .. 206.0 172.3 101.4 61.5

Imm~unztonMeasles *a goup .. 8.0 28.0 49.9 87.3 77.6DP* .. 1.0 1I.0 51.9 89.9 82.2

Child manunuiion (under-5) .. 35.0 _ .. 403Lif expectncyTotal yes 39 43 48 52 62 67Female advantage 3.1 3.2 3.2 3.3 2.1 5.9

Total ferdlity nta births per n 6.0 5.9 5.S 6.2 3.6 2.9Maternal mortaity raw per 100.000 live birdn 858 700 - _ .

Supplementary Poverty IndicatorsExparditas on social secunty % of vtoa Ov't sxp. .. _ Social se=ty coverm * scorn. ave pop. .. ..

Acos to safe wauw tot . of pop. 26.0 29.4 _ _ 67.0Urban 43.0 27.0 _ .. 78.7Runl * 23.0 30.0 _ _ 62.0

Access to health cam .. 30.0 2.0.

Populaion growth rate GNP per capita growth rate | Deropmnt diamond b

6: (annual av*g. psetw 10r (aul avop pet| s)

4S

0 -5~~~~~~~~~~~

I~ 1C I r, ,I I 'I -

.21 .101970-75 19808 1938-93 1970-75 1980t85 19811-9

CaChd 'h_- Low-inome - LOW-inom

a. See the technical lo . p387. b. Th dedlopmda bsed on four kay b_ s owd -t lvd otVefh d.W counrycompared with its knome gnup. Sae to incoductoe.

Annex I

Chad Page 2 of 6bJost 5e a e /* rreB NCO

Latest single year recent - llicim Unit of tsimae Sahw Lho igher

Indicaor Measrw 1970.75 198085 1988-93 Afrik &aome gmup

Resources and ExpendituresHUMAN RESOURCESPopulation (mrnel993) ihousnds 4,030 5.01S 6,010 558.978 3.09.764 1.096,665Age dependency ratio a.o 0.83 0.85 0.89 0.94 0.67 0.69Urban % o(pop. 15.6 19.6 21.0 29.8 27.6 54.7Populanon gowth rae annual % 2.0 2.3 2.5 2.9 1.9 1.6Urban ' 7.0 3.2 3.3 5.0 3.9 2.9

Labor force (15-64) thousans 1.496 1.790 2.096 229,480 1.442.452 459.196AgncuInue % of lao force 17 83 ..

Induscy 4 5 .. 3Female 23 22 21 36 33 31Females per 100 mabaUrban aumbee .. .. ..Rural

NATURAL RESOURCESArea thou. sq. in 1.2B4.00 1,284.00 1,2U.00 24273.63 39,091.96 40.682,67Density pop. persq.kz 3.14 3.91 4.57 22.37 77.60 2652Agicultunl land *of lind as 38.12 38.24 38.32 52.4 5212 39.61Changepn ag2Gcialand annuais 0.17 0.01 0.11 0.06. 0.03. -0.13Ag.culolul land te iudmp 0.01 0.02 0.03 0.83 1S.02 12.66Fomut andwoodland thou.sq.kza .. 0.12 0.11 5.32 1.15 5.95Deforestaton (et) annual .. .. 0.74 .

INCOMEHousehold incomeSham of top 20% of households ofine .. .. .... -Shame of borcei 40% of household *.Sha of bottom 20* of hosbokls ' . .sShare of bonoin 20% of households .. .. ..,

EXPENDrJRXFood of CDP .. .. 55.Icsples *. .. 21.5Mem, fish milk, cheese. ' .. .. 22.6 .

Ceral impors thou. mesic corn. 10 101 59 13.157 34.420 66.21'Food aid in cals 20 163 3 5.079 S334 5,477Foodproducuonpercapita 1987-100 107 98 105 101 113 101Ferulizer consumption kla 0.1 0.2 0.2 4.6 59.9 41.0ShameofagnculWruinGDP of GDP 43.1 43.2 41.3 16.3 263 15.7Housing ofGDP .. .. 7.8Averge household size pesons per household .. ..

Urban .. ..Fixedinvesonenthousing *ofGDP .. .. 2.1 ..Ful andpower *ofGDP .. .. 6.0 .. -Ener coanswnpoo pr capta kgofoihqa*v. 20 19 16 2S7 364 1395Households wuh HdycusatyUrban So(bouaoll .. .. .. .. _Rura* .. .. .. _ _

Trnsport an comnimt of GDP .. .. 9.8 .. _Fixed in sm ur spw u eqipm _ 1.2 _ Towlrmad tengc h d bou. 31 27 27 _

r VESTMO4T IN HUMAN CAPTALHealIkPopulaton r physician p 6189S .. 29.412 3- _ _ ."Populadon per nuns *.021 ..

Populadon per hopital bed 763 - 1.345 1.269 1.016 60Oral rhydyrmcon thrp (undep(3) ofcases - 15 37 38EducadonGross enroileat radoSecodary % of sduo. pq 3 6 7 18 41 3MFemale 0 2 3 -34

Pupil-chr d: pn pupils perw SO 71 64 40 39Pupil-ehecr rdo: seco5dwy 35 _ 35 _ 20Pupihszaclsing rad4 * of oht _ _ 71 _ _Repeater rwpmy . of tlso mol 37 .. 33

iti y *of pp(APl5+) . 77 70 50 41 19Femle * of fL (ASP ) *- 88 82 62 53

Newsp ciuLan:on per .ou. p. 0 0 0 12 _'World klanji LnWaaCOn Xcnif0MS D _ePsu un APn IY

Chad - Key Economic Indicators Annex IPage 3 of 6

|Estimate Projectionst991 1992 1993 1994 19951 1996 1997 1998 1999 2000

Real growth rates (%)Gross domestic product (GDPmp) 8.3 6.2 -15.9 5.2 5.5 5.3 5.1 4.9 5.0 5.1Gross domestic income (GDY) 8.5 5.1 -17.6 5.5 6.6 5.1 4.2 5.1 6.0 5.2

Real per capita growth rates (%)Gross domestic product 5.6 3.5 -18.0 2.5 2.9 2.7 2.5 2.3 2.4 2.5Gross domestic income 3.3 2.0 -6.8 2.1 2.6 2.0 1.6 2.0 2.3 2.0Total consumption 12.5 2.3 -19.5 -5.7 3.4 2.1 1.2 1.7 2.1 2.2Private consumption 13.4 2.6 -22.9 0.5 5.4 2.2 1.4 1.9 2.3 2.4

Debt and debt servicine (MT & LT)Total DOD (US$ million) 610 710 757 '97 875 939 983 1014 1005 1005DOD/GDP (%) 46.1 53.6 73.7 104.7 93.2 90.9 89.3 85.7 79.2 73.8Debt service (USS million) I1 12 12 26 32 34 39 42 48 51Debt service/Exports GNFS (%) 4.9 5.5 6.2 14.1 12.4 11.6 12.7 12.6 12.8 12.2Debt service/GDP (%) 0.8 0.9 1.2 3.4 3.4 3.3 3.5 3.6 3.8 3.7

Domestic savings/GDP (%/6) -10.3 -11.1 -1 1.8 -5.5 -3.4 -2.7 -2.2 -1.4 0.5 0.8National savings/GDP (%) -7.5 -6.2 -10.4 -3.7 -1.4 -0.4 0.7 1.0 4.8 5.5Marginal national savings rate 1/ 388.3 -233.8 105.9 -453.0 687.4 3431.8 774.9 5253.4 279.2

Govemment investment/GDP (%) 6.9 7.9 10.2 14.0 14.0 13.4 13.5 13.2 13.0 12.6Govemment savings/GDP (%) -6.0 -3.7 -5.8 -7.8 -4.1 -3.4 -2.6 -0.9 0.0 0.6Private investment/GDP (%) 0.4 0.5 0.8 1.1 1.4 2.6 3.6 4.5 4.5 4.3Private savings/GDP (%) 4.4 -7.4 -6.0 2.3 0.9 0.9 0.4 -0.5 0.5 0.2Ratio of public to private investment 18.2 15.3 12.9 13.2 9.9 5.1 3.8 2.9 2.9 2.9

(On commitment basis)Govemment revenues (excl. grantsyGDP('/6) 8.7 11.3 12.0 7.4 9.0 9.7 10.4 11.5 11.9 12.2Govemment expenditures (inc. net lending)/GDP(%) 21.6 27.4 28.8 29.1 27.0 26.9 27.0 26.4 25.0 24.2Budget balance/GDP (%) -12.9 -16.1 -16.8 -21.8 -18.0 -17.2 -16.6 -14.9 -13.1 -12.0

GDP deflator, p.a. (%) 3.7 -11.4 -1.3 38.2 6.6 4.3 2.5 3.3 3.0 3.0

Exports of GNFS volume (% change) -3.5 -3.8 6.9 -13.5 26.2 13.3 5.9 5.7 6.0 6.8

Export of GNFS/GDP (%) 17.0 15.8 19.0 24.3 27.7 28.7 27.6 28.3 29.9 30.5Exports of GNFS/Imports of GNFS (%/6) 49.0 44.7 45.5 54.2 59.6 60.5 58.9 59.8 63.7 65.5

Import of GNFS Volume (% change) -7.1 -1.5 -4.3 -28.6 25.5 11.5 3.9 5.4 4.6 4.5

Imports of GNFS/GDP (%/6) 34.7 35.3 41.8 44.8 46.4 47.4 46.9 47.2 46.9 46.6

BOP current balance (incl. curr. grants, USS millions) -196 -192 -219 -143 -158 -170 -181 -196 -161 -155

BOP current balance (incl. curr. grants)/GDP(%) -14.9 -14.5 -21.3 -18.8 -16.8 -16.5 -16.4 -16.6 -12.7 -11.4

Sources: Govemment of CHAD, IMF, and World Bank staff estimates.Notes: 1/ Annual change in GNS relative to annual change in GNP.

c:\chad\rmsm\sacI295.xls 1/19/96 3:24 PM

Chad - Balance of Payments (US$ million) Annex IPage 4 of 6

Estimate Projections1991 1992 1993 19941 19951 1996 1997 1998 1999 2000

Exnorts of GNFS 224 209 195 185 260 296 304 334 379 416Merchandise (FOB) 194 182 152 148 205 234 235 259 296 323Non-factor services 31 27 43 37 55 62 69 76 83 93

Im Lorts of GNFS 458 467 429 341 436 490 517 559 595 635Merchandise (FOB) 250 243 205 189 228 259 272 300 323 349Non-factor services 208 224 224 152 208 231 244 259 272 286

Resource balance -234 -258 -234 -157 -176 -194 -212 -225 -216 -219

Net factor income -2 3 -12 -8 -13 -19 -17 -25 -13 -6Factor receipts 9 17 4 7 7 6 8 8 7 8Factor payments 11 15 16 15 21 26 25 32 21 15LT interest 11 12 13 12 16 21 21 22 23 24

Net private current transfers -19 -34 -35 -8 -9 -7 0 5 7 9Current receipts 20 13 13 19 18 9 15 20 21 23Current payments 40 48 48 27 27 16 15 15 14 14

Net official current transfers 59 97 62 30 41 50 49 49 62 61

Current account balance -196 -192 -219 -143 -158 -170 -181 -196 -161 -155

L4.ne-term capital 165 216 164 129 116 123 140 154 170 166Direct investment 6 3 21 7 1 2 6 10 14 15Capital grants 77 76 95 80 89 73 92 96 99 99Net LT borrowing 82 137 48 43 27 48 42 49 57 52Disbursements 92 148 58 57 40 66 58 64 71 67Repayments 10 12 10 14 13 18 16 16 14 15

Principal on arears rescheduled

Other LT inflows (net) 0 0 0 0 0 0 0 0 0 0

QObritems -41 -93 1 14 19 0 1 1 0 0Net short-term capital -52 -38 -83 0 0 0 0 0 0 0Capital flows, n.e.i. I/ 11 -56 83 14 19 0 1 1 0 0

Overall balance -73 -70 -55 1 -23 -47 -40 -41 9 11

Financine 73 70 55 -1 23 22 13 17 -9 -11Change in net reserves 8 27 32 -72 -7 -16 -12 -3 -9 -11Net credit from IMF 0 0 -2 13 7 19 13 0 -5 -1Reserve changes, n.e.i. 8 27 34 -85 -14 -35 -25 -3 -4 -10

Change in arrears 11 10 10 12 -42 -15 0 0 0 0Debt relief 0 0 0 8 36 0 0 0 0 0Exceptional financing 54 34 13 52 36 54 25 20 0 0Residual financing gap 0 0 0 0 0 25 27 24 0 0

1 1/19196 3:25 PM

Chad - Balance of Payments (US$ million) Annex IPage 5 of 6

Estimate Projections1991 1992 1993 19941 19951 1996 1997 1998 1999 2000

Memorandum items

(as percent of GDP)

Resource balance -17.7 -19.5 -22.8 -20.6 -18.8 -18.8 -19.3 -19.0 -17.0 -16.1

Interest payments (LT+IMF+ST) 0.9 1.1 1.5 2.0 2.2 2.5 2.3 2.7 1.6 1.1

Current account balance (incl. official transfers) -14.9 -14.5 -21.3 -18.8 -16.8 -16.5 -16.4 -16.6 -12.7 -11.4

LT Capital inflows 12.5 16.3 15.9 17.0 12.4 11.9 12.7 13.0 13.4 12.2

Net credit from the IMF 0.0 0.0 -0.2 1.7 0.8 1.8 1.1 0.0 -0.4 -0.1

Foreign exchange reserves (US$ million)

Gross reserves minus gold 120 80 39 85 99 135 159 162 166 152

Gross reserves incl. gold 124 84 43 89 103 139 163 166 170 180

Gross reserves incl. gold, months of imports (G&S) 3.2 2.1 1.2 3.0 2.7 3.2 3.6 3.4 3.3 3.3

Nominal Exchange Rate (CFAF/USS) 282.1 264.7 283.2 555.2 506.5 505.6 510.7 515.1 519.5 523.9

Real effective exchange rate (1987=100) 92 86 72 51

Gross domestic product (US$ million) 1321 1325 1027 762 939 1033 1102 1183 1269 1362

Sources: Govemment of CHAD, IMF, and World Bank staff estimates.

Notes: 1/ Includes errors and omissions.

2 1/19/96 3:25 PM

Chad - External Financing Requirements (US$ million) Annex IPage 6 of 6

Estimate Projections

1991 1992 1993 19941 19951 1996 1997 1998 1999 2000

fLternal financing requirements 198 177 197 244 236 245 233 227 185 181

Currentaccountdeficit 196 192 219 143 158 170 181 196 161 155

Amortization 10 12 10 14 13 18 16 16 14 15

of which IDA i 1 I I I 1 2 3 5 5

of which principal on arrears rescheduled

Changes in reserves (+ increase) -8 -27 -34 85 14 35 25 3 4 10

IMF repurchases 0 0 2 2 6 7 13 13 5 1

Reduction in extemal arrears 0 0 0 0 46 15 0 0 0 0

Sources.of financing 198 177 197 245 236 z45 233 227 185 181

Disbursements 133 134 175 158 149 141 157 170 184 182

Loan disbursements 92 148 58 57 40 66 58 64 71 67

Existing commitnents (pipeline)

of which IDA 46 33 25 19 23 17 12 14 8 11

Expected commitments

Other capital flows 1/ -36 -90 22 21 20 2 7 11 15 15

Official Capital grants 77 76 95 80 89 73 92 96 99 99

Addition to extemal arrears 11 10 10 12 4 0 0 0 0 0

Debt relief 0 0 0 8 36 0 0 0 0 0

Adjustment financing 54 34 13 68 49 79 50 33 0 0

IMF 0 0 0 15 13 25 25 13

IDA 2 8 0 20 0 30 20 20

Other 52 26 13 33 36 24 5 0 0 0

Residual gap 0 0 0 0 0 25 27 24 0 0

Sources: Govcrnmcnt of Cl-AD, IMF, and World Bank staff estimates.

Notes: 1/ Includes direct investment, trade-related credits, short term capital, and errors and omissions.

1/19/96 3:26 PM

Annex II

REPUBLIC OF CHAD

Status of Bank Group OperationsStatement of IBRD Loans and Credits

Amount in USS miLLion(Less canceLLations)

Loan or Fiscal Undis- ClosingCredit No. Year Borrower Purpose Bank IDA bursed Date

Credits

25 Credits(s) closed 280.39

C18720-TD 1988 CHAD T.A. FOR ECON.&FINAN 12.80 .31 06/30/96(R)C19120-TD 1988 CHAD LIVESTOCK 18.60 4.85 12/31/96(R)C21560-TD 1990 CHAD SOCIAL DEV PRG 13.40 .47 06/30/96C21840-TD 1991 CHAD ENGINEERING 11.00 5.84 12/31/96(R)C25010-TD 1993 CHAD BASIC EDUCATION 19.30 19.37 06/30/99C25200-TD 1993 CHAD TRANSPORT SECT li 37.00 15.52 12131/98C26140-TD 1994 CHAD PUBLIC WORKS AND CAP 17.40 16.22 06/30/99C26260-TD 1994 CHAD HEALTH & SAFE MOTHER 18.50 14.87 06/30/00C21561-TD 1995 CHAD SOCIAL DEV PRG 9.80 9.71 06/30/96C25201-TD 1995 CHAD TRANSPORT SECT II 12.70 13.08 12/31/98C26850-TD 1995 CHAD AG SERVICES 24.53 25.05 03/31/02C26920-TD 1995 CHAD POP. & AIDS CO 20.40 20.03 06/3C/01

TOTAL number Credits = 12 215.43 145.32

TOTAL*** 495.82of which repaid 14.53

TOTAL heLd by Bank & IDA 481.29Amount soLd 6.00

of which repaid 6.00

TOTAL undisbursed 145.32

Notes:

* Not yet;effective* Not yet signed

TotaL Approved, Repayments, and Outstanding balance represent both active and inactive Loans and Credits.(R) indicates formally revised CLosing Date.(S) indicates SAL/SECAL Loans and Credits.

The Net Approved and Bank Repayments are historical value, all others are market value.

The Signing, Effective, and CLosing dates are based upon the Loan Department officaL data and are not takenfrom the Task Budget fiLe.

Annex III

Republic of Chad

Supplementary Credit Data Sheet

A. Timetable of Key Processing Events

a) Time taken to prepare: 7 months

b) Prepared by: Government and IDA

c) First Preparation Mission: May 1995

d) Appraisal Mission: December 1995

e) Negotiations: January 1996

f) Board Presentation: February 1996

g) Planned Date of Effectiveness: February 1996

Expected Project Completion: December 1996

The program was. appraised by a team comprisig Mr. Amadou B. Cisse (AF3C, PrincipaicountryOfficer),: Mr. Emmanuel Akpa (Principal Economist), Mr. Peter Harrold (AFTPS,Fconomic and Financial Advisor) j and Mr. Pierre N (AF3CJ, Economist). AMessrs.Philipped&e Naurois (AF3IN), Alassane; Sow (AF3AE), Michel Layec and Andni- Rba(AF F E)contributed to sectoral issues. T.he team worked closely with the IME team forChad Mr. Andrew Rogerson is the Department Director, and Mr.f Jrdme Chevallier is themanaging Division Chief

ANNEX IVPage I of 5

CHAD - STRUCTURAL ADJUSTMENT CREDITPOLICY MATRIX

A. R&.storing Critical Putblic Sector Capacity and Improving its Finances

I Poliv Area and Objctiv 1 Meusnres AlreaLfaLken _____ Proposed AddizioueI Measures [ Timetablei ___ -, ____ _ _ . __ =_ ___ _ _ __ _ _ _ =___.___. _5. __. _ __................

L Civii Service Reform -

$ Rehabilitate the administration Conclusion ci,i! 5_1i ,cen Cs cuv peil t1iauoiCi nf hi ..Lzion ofv ob-n necw oc,a ai chart. 1996airound a civil service of modest resuhltssize with clear focus on a set of Abohtimon oi autinil vvagt g ,icrc..!,es Snod adopt(ion oi seleciive j 19')6esseniial puiblic sector fulictions. .incrc.tcs li,L.d 0' !ncritReduce wage bill from 5.8 % o.fG3DP in 1995 to 5.1 % in 1998.

b. Rehabilitationi of PublicFinances

Elimination of structujral weakness Replacement ot i-ve indIireci t?a:cssi with varying rates t1erpainuino of diJect tax reflour, 199hof the public finarices through by a sing!e tamiovor tax *ith onl[ two rties |strengthening revenue collectioit iotroduction of excis! taxes o3 l cmiAt; nl'iiber eli 11111nsplita-tio13; of d.:(:i ae- 199_S9and sharpening the fious of pnbhic h,xuries and "Larmti1i goods"sector activities and, h3ence,financial obligatiouis. Increasc Introductioi of single taxpayer code an d file for alireveDne!GDP ratio froii 9% in ieveiiuc depautments1995 to 11.5% in 1998.

Reibrm of special eiiteiprisn re-inies in 1itie Ul wh Continucd eliininaoicn of taui% lcopholb: through ph'ise olut 0 si-mcial 19'96-98regional cu stoms union ("AE.j agreeents Iaterpnise cginats

i Renegotiaiion of speciail cttoois treC3tfmernt si crialc conveio1t,ns) tfr prnvate cronpanies anil p;.bhit

enterprises (C(UT'i-.3C'HA), MC.I,S ASUII).

(='en;:.llizati:inofc31i]e tlar ".-all Intc.rnatio>ial trad-taxes (previouisly io1lcs0ted b-y 4 sc; ,)raic eatities4) ra i 1

Establishmrent Df cxoflra, qlrl fo, i -rts bJdiploiiaits 4

ANNEX IVPage 2 of 5

I -

B. Increasing Development and Poverty Alleviation Impact of Public Expenditures

PolicyArea and Objectives | Previous Measures Proposed Additional Measures ] Timetable

a. Demobilization

Reduction of the army from Reduction of the army by 15,000 people. Departure of an additional 7,000 soldiers from the army. 199647,000 men to 21,000 andassisting those demobilized to Departure of at least an additional 4,000 men 1997-98resettle in civilian, economic life.

Resettlement of the demobilized soldiers. 1996-98b. Public ExpenditureManagement

Improvement of management of Integration of Debt Management Office (CAA) into Elimination of arrears to domestic suppliers. 1996public expenditures with a view to the Ministry of Finance.restoring macroeconomic stability,promoting private-sector led Consolidation of separate accounts held by ministriesgrowth and ameliorating health, in banks.education and nutrition standardsof the population. Abolition of off-budget operations.

c. Public Expenditure Programsfor 1996, and CapitalExpenditure Plans for 1996-98

Adoption of rolling PIP. adoption Adoption of three-year rolling investment Adoption of PIP criteria: size of PIP not to exceed reasonably expected 1996-98of expenditure programs to programming, starting with 1994-97 PIP. financing by more than 10%. minimvim rate of return of 10% forachieve specific goals set as year- projects amenable to quantitative analysis. least cost criterionby-year benchmarks. Agreement with IDA on 1996 budget and 1996-98 elsewhere.

PIP.

In particular, in the 1996 budgct, limiting wagcs andsalaries budget to at most 5.7% of GDP. goods andservices to at least 2.6 percent of GDP. overallcurrent expenditure at no more than 13.5 percent ofGDP. and capital expenditure at no more than 14percent of GDP.

ANNEX IVPage 3 of 5

B. Increasing Development and Poverty Alleviation Impact of Public Expenditures (Continued)

Policy Area andObjectives_ Previous Measures J Proposed Additional Measures I Timetable

d. Improved ResourceAllocation to Social Sectors.

Increase of resources allocated to Increase in budgetary allocation in 1995 for primary Continued switch in public expenditure priorities to bring share ofprimary health, primary education health; primary education; and recruitment of priority secors (education, health and maintenance) to 62% of total byand social welfare of women and additional staff in 1994 for social sectors (280 1998. 1997-98children. and for road teachers and 90 health workers); and for roadmaintenance. maintenance from CFAF 2.4 billion in 1994 to CFAF

2.8 billion in 1995.

In the 1996 budget, within goods and services,increasing allocations to education, health andwomen and social affairs by 26 percent over 1995level (real increase of 20 percent); and for roadmaintenance from CFAF 2.8 billion in 1995 to CFAIl4 billion in 1996. 1 l

C. Creating a Favorable Environment for Private Sector Growth

Policy Area and Objectives Previous Measures ! Proposed Additional MeasurLs [ Timetable

a. Judicial and RegulatoryEnvironment

Creation of a flexible business Re-enforcement of the Ministry of Justice with Strengthening the judicial system in charge of business law. 1996environment with clear and mandate to rapidly re-establish basic judicial Simplification of procedures for licensing of businesses. 1996simplified rules to permit processes, including contracts and case Amendment of Articles 116 and 142 of the Labor Code to grant employers 1996unimpeded entry, operation and resolution. and employees the right to freely detenmine salaries, including theexit of businesses into various minimum wage, at the national or sectoral level.activities. Simplilication of thie Investment Code to instill automaticity in its 1996

operation and neutrality in the treatment of investors.Ratification and initiation of the implementation of treaty on regional 1996hannonization of business law, OHADA

(Continued)

ANNEX IVPage 4 of 5

C. Creating a Favorab!e Environrment for Private Sector Growlh (Continued)

Poiyraand Obecies jPrevious Mesures 7Proposed Additional NMeasures 1 TimetAble

b. T'rade liberalization

Facilitate trade, including flow of Elimination of export taxes on agriculturalgoods, services and factors among goods and livestock. elimination of import.CAEMC mnember states. licensing.liberalization of domestic tradeand harmonization of local Adoption of CAL MC comrmon external tariff,

I busine§s laws witl thiose of the comrprising 5 rates ranging from 5 to 30%S, withCA1EMC. a trade-weighted average of 15%.

Liberalization of all prices except for cotton,gasoline, essential medicines.

c. Restructuring FinancialSystemr

Increase of private sector piesence Offer for sale to the private sector of publicIin banks to soflen public sector's sector shares in BTCD and

hand and improve market BDT, with a view to concluding transaction bylresponsivencss. and rehabilitation June 1996.

of social security institutions.Offer for sale to new private partners of thei Meidien's share in BMBT, with a view toconcludinig the transaction bv June 1996

l

Adoption of law on new membership structure 'Inploincritation ol action plan to repay government debt to CNPS and 1 1996 98for the Board of the private sector worker CNRI.insurance and social security instituition, CNPS,leadiig to a reduction in public sector presence. 1997-98

Restruction of CNPTIPreparation of an action plan to settle

lgovernment's debt to CNPS and the publicworkers retirement fuind. CNRT,

Launching a study on the tfirther development ofcooperative finance.

('Continued)

ANNEX IVPage 5 of 5

F~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

C. Creating a Favorablc Environment for Privatc Sector Growth (Continued)

Policy Area and Objectives Previous Measures Measures l Timetable

d. State Enterprise Divestiture

Reduction of the size of the Liquidation of 11 enterprises: OMVSD Implementation of divestiture program for SONASUT, OPT, TIT, STEE 1997-98parastatal portfolio by liquidating irrigation), SOTERA (livestock), CSPC (cotton and COTONTCHAD.uneconomic enterprises. fund), OFCA (quarries), SHT (hotels), OPITprivatizing others of interest to (industrial promotion), OFNAR (roadprivate investors. and injecting maintenance), SONACOT (trading), BICITprivate capital, management and (commercial bank), Caisse Sucre (sugarknow-how into the large stabilization fund), and FIP (petroleum"strategic" ones. equalization fund). and privatization of 5 others:

MCT (cigarettes), SIMAT (agricultural tools),SAPROVET (veterinary products), PHARMAT(pharmaceuticals), STAR Nationale (insurance).

Privatization (preparation to point-of-sale) of 4enterprises: Air Chad, INT (printing), SONAPA(animal products) and SOTEC (quarries).

Initiation of disengagement strategy study for 5:STEE (water and electricity), ONPT (posts), TIT(telecommunications), COTONTCLIAD (cottonprocessing and marketing), and SONASUT(sugar).

e. Cotton Sector Reform

Gradual decentralization of Freeze of investment in ginuing capacity at Adoption of two-part cotton producer pricing mechanism: first part payableCOlTON ICCHAD, human resource 230,000 tons, pending reforms. at the sale of grain cotton and in relation to world market trends, with thedevelopment, and improved second part payable on the basis of the outcome of export sales, with effect 1996producer pricing. Increase in producer price for first grade cotton from 1996/97 cro0) season.from CFAF 80 per kilo in 1992/93 season toCFAF 120 per kilo in 1994/95. Increase inproducer price for first grade cotton from CFAF120 per kilo to CFAF 140 per kilo. Implementation of COTONTCHAD human resource development strategy 1997-98

Launching COTONTCHAD human resourcedevelopment study.

Annex VPage 1 of 11

ENGLISH TRANSLATION OF ORIGINAL FRENCH TEXT

Embassy of the Republic of Chad2002 R Street N.W.

Washington, D.C. 20009Washington, DCJanuary 17, 1996

Ref. No. 006/ARTW/96

Mr. Edward V. K. JaycoxVice PresidentAfrica RegionWorld Bank1818 H Street NWWashigton, DC 20043

Mr. Vice President

Subject: Letter of Development Policy

On behalf of the Government of Chad, I have the honor to address to you the attachedLetter of Economic and Social Development Policy which sets forth the economic and socialobjectives of the Government for the period 1996-98 and the macroeconomic and structuralpolicies required to attain them. These objectives reflect the determination of the Government ofChad to reinforce the reform process towards reestablishing a competitive economy.

The Government of Chad requests a Structural Adjustment Credit in the amount of twentymillion two hundred Special Drawing Rights (SDR 20,200,000) to support these reinforcedpolicies and objectives.

Yours faithfully,

(Sgd) MAHAMAT SALEH AHMATAmbassador of Chad

for the Minister of Plan and Cooperation

Annex VPage 2ofll

REPUBLIC OF CHADFIRST STRUCTURAL ADJUSTMENT

LETTER OF DEVELOPMENT POLICY

I. INTRODUCTION

1. The Government of Chad has under way a process of national reconciliation anddemocratization. A new Constitution, based on the recommendations of the 1993 NationalConference, will be submitted to a referendum in early 1996. This will be followed by legislativeand presidential elections in 1996 that would determine the political future of the country. Inparallel to these political and institutional changes, the government has initiated a series ofeconomic and social reforms that would lay the basis for sustainable growth whose benefits accrueequitably to all the regions and social categories of the country.

2. Notwithstanding gains in political stability and economic reforms during 1990-93, Chad'seconomic and financial performance remained below expectations as a result of adverse externalshocks and reduced competitiveness of the economy. At end-1993, real GDP was below the 1990level and major public finance difficulties had emerged. External arrears accumulated (US$49million at end-1993); international reserves fell from the equivalent of 2.9 months of imports in1990 to 1.2 months in 1993; and Chad exceeded its credit position at the common central bank ofCentral African States, BEAC.

II. PREVIOUS EXPERIENCE WITH ADJUSTMENT

3. The devaluation of the CFA franc in January 1994 presented an opportunity to respond tothis situation by implementing a vigorous and comprehensive reform program. The new programwas supported by a Stand-by arrangement with the IMF and an Economic Recovery Credit (ERC)from IDA. Program implementation suffered initially from capacity weaknesses, which werethemselves accentuated by civil service strikes triggered by the irregularity of salary payments.For all 1994, although real GDP growth (at 5.2 percent) and inflation (at 41 percent) were betterthan expected, revenues were only 7.4 percent of GDP as against 9.5 percent in the program,leading to a weak public savings performance and inability to meet targets on payments of arrearsto suppliers.

4. In order to turn the situation around, the government reinforced the program yet again forthe period October 1994-June 1995. The strengthened commitment was translated into firm actionon both macroeconomic and structural measures. This included vigorous action to improve taxadministration at the Customs Department, with the support of the World Bank. As a result, therevenue from trade taxes increased sharply in spite of a 45 percent average reduction in importtaxes as part of the CAEMC zone-wide tariff reforms. This allowed for the resumption of criticalgovernment spending and permitted the partial settlement of payments arrears to suppliers and civilservants. These encouraging results are the springboard for the continuation of the reform effort asdescribed below.

III. CHAD'S POTENTIAL, NATIONAL VISION AND STRATEGY

5. Potential. In spite of its slow progress to date, Chad's long-term development prospectsare promising. The territory is vast, with adequate rainfall in normal years, which makes for a

Annex VPage 3 of 11

high agricultural potential. There is a possibility that oil deposits in the southwestern portion ofthe country may attract significant amounts of private investment for their development for export.Following broad mining sector consultations held in N'Djamena during November 26-30, 1995,several private mining companies indicated their interest in prospecting and exploration for mineralresources in Chad. In addition, there are positive legacies from Chad's turbulent past which arefavorable for future development: the public sector is small; the economy is relatively unregulated;and the Chadian people have developed a capacity for self reliance and the community organizationfor the provision of public services.

6. Vision for Growth and Poverty Reduction. The government's vision is to implementpolicy reforms that would kindle and sustain rapid growth in the economy; ensure the equitabledistribution of the benefits of growth; and improve public services so as to achieve a strongerpoverty reduction impact over and above what growth delivers. Their goal is to sustain real percapita GDP growth averaging at least 2 percent annually over the medium-to-long term. Thiswould allow Chad to double its real per capita income within the next generation, or do muchbetter still if its oil losources are developed as envisaged. The authorities' povertv reductionstrategy includes reinforcing the effect of growing incomes with expanded and better quality publicservices to achieve rapid improvement in social indicators.

7. Quantitative Objectives for the Medium Term. To achieve the above goals, thegovernment's medium-term objectives include sustaining the irnproved GDP growth performanceinitiated in 1994 (at just above 5 percent) and extending it through the period 1995-98 and beyond.These objectives are reflected in the macroeconomic framework of the 1995-98 PFP concluded inAugust 1995. Following the variable sectoral performance in 1994, it is expected that all thesectors will settle into a rhythm of strong growth, assisted by the increased overall competitivenessof the economy, improved delivery of public services and the reinforcement of the environment forprivate initiative. The agricultural sector is expected to go from a 1994 recovery of 14 percent(attained mainly by recovering ground lost in 1993) to an average of some 4.7 percent over 1995-98; industry would recover from its decline in 1994 (when it regressed by 5 percent owing toadjustment to higher input costs following the devaluation); to attain an average growsth of 4.9percent; and the tertiary sector would go from the stagnation in 1994 (0.8 percent) to an annualaverage growth of 5.1 percent.

8. Constraints to be Overcome. Chad's policy framework is relatively free of the deepdistortions characteristic of most other developing economies at the inception of reforms. With itsunsettled history, Chad was not able to formulate and implement a clear-cut development strategy.One consequence of this is that the country has escaped the public sector-led strategy wNith inward-looking import-substitution policies which were popular in other sub-Saharan African countriesduring the 1960-70s. No extensive tax-cum-subsidy schemes have been put in place, nor are theresignificant price distortions. The key constraints to growth and social progress have been politicalinstability; the disadvantages of being landlocked --1800 km from the nearest port - with a vast(and, paradoxically, seasonally flooded) territory, both of which make for high transport costs;highly variable weather with frequent droughts; and inadequate levels and quality of essentialpublic goods and services. The authorities seek to respond to this challenge through theimplementation of a reinforced reform program.

Annex VPage 4 of 11

IV. THE PROPOSED REFORM PROGRAM

9. The Reform Agenda. The priority agenda consists of restoring the state's capacity togovern (including creating an environment of security and enforceable contracts); enabling theadministration to function (provide the minimnum essential services and pay for them); andfacilitating the operation of the private sector. In view of these, the proposed reform program aimsat: (i) restoring the government's capacity to provide essential public goods and services, andimproving its finances; (ii) focusing public expenditure on development activities and povertyalleviation; and (iii) creating a favorable environment for private sector growth.

A. Restoring Critical Public Sector Capacity and Improving its Finances

10. Background. As a result of its past political instability, Chad does not have the criticalminimum capacity required for the delivery of essential public goods and services, and the abilityto finance it. The civil service (about 27,000 people) is not yet an established institution with aclear code of conduct; it is unable to function properly owing to lack of resources; and it is oftenon strikes because of the irregularity of salary payments. The governnent would like to overcomethese impediments to growth and development by: (i) restructuring the civil service and clarifyingits functions; and (ii) rehabilitating the public finances.

11. Civil Service. The government intends to rehabilitate its administration around a civilservice of modest size with a clear focus on core public sector functions and in which recruitment,career progress, training and management and incentives elicit dedication and efficiency from itsstaff. To achieve this, a census -- of which the first phase was concluded in November 1995 - willbe used to establish a new database for managing and controlling the size of the new civil service.New standards for recruitment, career planning, training and career management will beestablished with support from the proposed Capacity Building Project.

12. Rehabilitation of Public Finances. In 1995, the government's own revenues barely cover80 percent of non-debt recurrent (non-military) expenditures because of its low capacity tomobilize revenues. Thus, even with external sources covering all investment expenditures, manycurrent needs go unfinanced and payments to domestic suppliers are irregular. Until recently, theinability to pay civil servant wages regularly led to strikes and a disruption of the administration,including revenue collection agencies. While the civil service reform and the militarydemobilization are expected to lead to fiscal savings, the authorities propose to tackle the structuralfiscal weakness more directly by: (i) reducing, over tirne, the scope of public sector activities to theprovision of minimum essential public goods and services; and (ii) rehabilitating and strengtheningthe tax administration, while extending the tax base.

13. Additional Reforms. The government has prepared the policy changes required to achievethe above goals, with the implementation of change taken up by other instruments. In civil servicereform, the plans include institutional decisions of maintaining a cap on total personnel; limitingthe wage bill to levels agreed in the program; abolition of automatic wage increases and adoptionof selective increase based on performance; and the adoption of new organizational charts.

14. In terms of additional action to deal with the structural fiscal imbalance, the governmentwill make a push during 1996-98 towards greater use of burden-sharing with local communities inthe funding of public services, and the reinforcement of revenue mobilization. In preparation forprogressive reduction of the budgetary burden, a study will be carried out in 1996 on ways to

Annex VPage 5 of 11

extend community finance efficiently to some public services still covered by the budget. Theimplementation of the recommendations would begin in 1997. In the area of revenue mobilization,the authorities' plans include improved coordination among revenue departments; effective use ofthe single taxpayer code and file (introduced in September 1995) to enhance tax payeridentification, assessment and enforcement; and the elimination of loopholes created by para-fiscalprovisions (modifications to exonerations, special enterprise rcgimes etc.). The reform of thespecial enterprise regimes has begun, in conformity with the common agreements reached in thisrespect arnong the CAEMC countries.

B. Increasing the Poverty Alleviation Impact of Public Expenditures

15. Background. The Government of Chad is aware of the low level of basic social services.The decay of existing structures, shortage of medicines and teaching material, delays in meeting thesalaries of teachers and medical personnel and the prolonged strikes are some of the factors behindthe recent decline in social indicators.

16. One result of the past turbulence is that the composition of public expenditures has beenbiased against critical development expenditures (the share of defense and intemal security share incurrent expenditure averaged 30 percent during 1992-94, as compared with education, health andsocial affairs combined, at 22 percent). The Chadian army had 47,000 people in 1990, when allcombatants in previous conflicts were enunerated. As reconciliation proceeded, the army wasreduced to some 32,000 people through a first phase of demobilization, which was assisted byFrance. The government considers the current size of the army still too large, for both budgetaryreasons as well as from the standpoint of the threat to stability from having a large armed forcethat is not paid regularly.

17. Chad's public expenditures also suffer from shortcomings of their management. Pastbudgets have generally been formulated without adequate reference to expenditure ceilings derivedfrom a sound macroeconomic framework; the current/capital budget relation is distorted, withmany current items covered by the capital budget; and some items (such as utilities) are chronicallyunderbudgeted.

18. Additional Reforms. The authorities' reform plans include the internal restructuring ofthe budget to privilege development expenditures over non-development expenditures; the creationof a stronger link between the budget and the macroeconomic framework (basing each year'sbudget circular, hearings and final decisions on explicit fiscal elements of a macroeconomicframework); and the institution of improved budget management procedures including the realisticbudgeting of items hitherto underbudgeted.

19. To reduce the weight of the military in the economy, the authorities plan to demobilize afurther 7,000 people in 1996, and progressively integrate them into active civilian economic life.Working in close consultation with all concerned, the Ministry of the Army has prepared a firstproposal (September 1995) for a demobilization program that would cover the critical phases ofidentification of eligible candidates, arms retrieval, facilitation of settlement and successfulreintegration. The government is seeking external assistance to refine the proposal and fund itsimplementation. The intention is to demobilize and settle upwards of 11,000 people over 1996-98,assuming sufficient donor support would be forthcoming. The program is scheduled to beginimplementation in early 1996. The government counts on support from the World Bank for theearly but critical 1996 phase of this exercise (departure of 7,000 men), including technical supportfor finalization of the proposal to submit to a Donors' Round Table envisaged for mid- 1996.

Annex VPage 6 of 11

20. The government intends to use regular consultations with the Bank on public expenditures,along with the assistance being provided to it under the Capacity Building project, to improve theefficiency with which it mobilizes and allocates public resources. Each year, the government andIDA will agree on the draft budget for the next year before it is presented to Parliament. As abeginning, in December 1995, in consultation with the World Bank the government prepared adraft 1996 budget in which wages and salaries are no more than 5.7 percent of GDP; goods andservices are at least 2.6 percent of GDP; within goods and services, the allocations for education,health and women and social affairs increase by 26 percent over the 1995 level (21 percentincrease in real terms); overall current expenditure is at most 13.5 percent of GDP; capitalexpenditure is no higher than 14 percent of GDP. These targets were agreed with the Bank and theIMEF during the preparation of the 1995-98 PFP. Further targeting of critical developmentexpenditures will continue, within severely a constrained overall envelope.

21. Chad's PIP needs continuing work to reduce the number of projects (now almost 300),identify and move cuirent expenditures into the current budget, and make the PIP less donor-driven. In line with these objectives, annual consultations will take place and agreement toreached between the government and IDA on the size and composition of the rolling three-year PIP;in December 1995, the first of these consultations took place and an agreement was reached on the1996-98 PIP. With the drive to improve the realism of the PIP and the efficiency of itsimplementation, overall programmed expenditures would not exceed the level judged consistentwith the capacity to finance and implement by about 10 percent. Further, in order to ensure thatthe PIP fully supports the development impact and poverty reduction objectives of the program,each project would be reviewed for consistency with sector strategies and economic and financialviability. In terms of economic viability, projects amenable to quantitative analysis would beexpected to meet a minimum acceptance criterion of 10 percent rate of return. Others would besubjected to least cost criterion.

C. Creating a Favorable Environment for Private Sector Growth

22. Background. The modern private sector has been profoundly affected by the political andeconomic crises of the past twenty years, and recently by the accumulation of public sector arrears.On the other hand, the informal sector has done much better in withstanding the difficulties andnow constitute the more dynamic part of the private sector. The Chadian authorities believe thatthe private sector should be the driving force in the economy, generating growing incomes andproviding employment. They see the public sector's role as creating the conditions permitting theemergence of new formal small and medium-scale enterprises while those in existence expand anddiversify their activities.

23. The government realizes this will require public sector withdrawal from activities that canbe handled by the private sector; the provision of supportive infrastructure; and the removal ofobstacles to the creation of an open and competitive business environment. To this end, theauthorities propose to: (i) create a judicial and regulatory system in which businessmen have theconfidence to invest and produce; (ii) restructure the financial system to make it more supportive ofprivate sector investment and trade; (iii) accelerate the divestiture process through which theremaining commercial/productive state enterprises are transferred to the private sector; (iv)undertake market and institutional reforms in the cotton sector so as to spur production.

24. Judicial and Regulatory Environment. As part of creating a minimum, dependablegovernment capacity, Chad needs to generally to rehabilitate the judicial system and courts, and

Annex VPage 7 of 11

update legal texts where they already exist. From the standpoint of encouraging private sectorgrowth, this includes renovating the apparatus in charge of business law, helping instill flexibilityin factor markets, and facilitating the entry and exit of business firms into activities.

25. The Financial System. Chad's financial system comprises four commercial banks; onedevelopment bank; one insurance company; two social securitv institutions; a postal savings bank;and a number of savings and loans cooperatives. Three of the commercial banks (BanqueTchadienne de Credit et de Dep6ts -- BTCD, Financial Bank of Tchad -- FBT, and BanqueCommerciale du Chari-- BCC) are in relatively good shape, with low ratios of expenses to netbanking product and registering profits. The fourth commercial bank, Banque Meridien BIAO duChad -- BMBT, is suffering from an important non-performing portfolio and from loss of depositswith the parent company in Luxembourg, Frankfurt and the Bahamas. The development bank,Banque du Developpement du Chad (BDT), which was restructured in 1992, could face somedifficulty m the near future when the moratorium on the withdrawal of deposits expires in 1996.Bank regulation and supervision are handled by the regional supervisory agency, COBAC, whichhas ensured the observance of zone-wide prudential ratios.

26. The private sector worker insurance and retirement fund, CNPS, has an outstanding loanto the government. In line with its strategy of reducing its role in the economy to the essentialminimum, the government intends to permit the CNPS freer rein in its management. As such, theauthorities will restructure the Board of Directors of the CNPS by reducing the number ofgovernment representatives from the current five to two. In addition, a plan has been prepared(December 1995) to repay the government's debt to the CNPS. The public sector retirement fund,CNRT was created in 1992. Worker contributions still go to the Treasury and retirement benefitsare paid through advances made to it by the Treasury. Owing to the lack of resources, thegovernment has not met its obligations to the CNRT, which stood at some CFAF 3.5 billion(December 1995). An amount of CFAF 700 million was provided in the 1995 budget to beginrepaying this debt. A similar amount plus additional resources equivalent to 8 percent of annualreceipts from taxes on petroleum products will be used to settle this debt to the CNRT. Thiswould help improve the management of the CNRT which, in turn, will permit the successfulimplementation of the civil service reform, the military demobilization and the restructuring of thepublic enterprise sector. The medium-term restructuring of the CNRT is taken up in para. 34.

27. State Enterprise Sector. In 1990, Chad's state enterprises (including mixed public-private entities and autonomous, commercially-oriented agencies) numbered about forty. Thetwenty-eight largest together had assets totaling CFAF 180 billion (equivalent to 56 percent ofGDP) and employed some 8,000 people (about 25 percent of modem sector employment). In1992, the decision was taken to divest the state of most of these enterprises in order to reduce thescope of public sector activity and create room for private sector growth. In that year, aPresidential Ordinance established a list of enterprises to be liquidated or privatized, and spelledout the procedure for doing so. Considerable progress has been achieved since.

28. In 1994, seven enterprises were liquidated and five were privatized. By December 1995,an additional four enterprises were liquidated (Petroleum Fund, FIP, Sugar Stabilization Fund,Caisse Sucre, a commercial bank, BICIT, and a trading company, SONACOT); four others wereprepared for privatization and brought to the point of sale (Air Tchad, INT-printing and publishingcompany, SOTEC-quarries company, and SONAPA-animal products company); and studies werelaunched to design the divestiture/restructuring programs for the five largest enterprises -- STEE(water and electricity), ONPT (posts), TIT (telecommunications), COTONTCHAD (cottonprocessing and marketing), and SONASUT (sugar). During 1992-94, the financial losses of these

Annex VPage 8 of 11

five enterprises (CFAF 7 billion, or about 2 percent of GDP) accounted for the bulk of the lossesof the public enterprises sector. The actions proposed for the large enterprises will be implementedover 1996-98.

29. Cotton Sector. COTONTCHAD is an integrated operation (input supply, purchase ofgrain cotton, ginning and marketing), while the cotton farmers are grouped in some 4,000 smallvillage associations. COTONTCHAD is also highly centralized while its ginneries are scatteredover a large area. It has been difficult to achieve efficiency by focusing on improvements at theplant level. The absence of local qualified personnel is another drawback. There is high relianceon expensive foreign expertise contracted on a cost-plus, not results-based terns, at technical andmanagerial levels. There is lack of capacity to elaborate and implement a nationally-conceiveddevelopment program for the sector. Producer pricing follows world market prices, subject to theprofitability of COTONTCHAD. Over the last four crop years (1989/90-1992/93),COTONTCHAD made a net loss of CFAF 9.8 billion. A profit of CFAF 5 billion was realized in1993/94, aided largely by the devaluation of the CFA franc. The prelimninary results for 1994/95show a continuation of the improving trend. One result of inefficiencies in the sector is that cottonproducers generally receive a low but highly variable share of world market prices. During thefive-year period 1989/90-1993/94, the share of the fob export price received by the cottonproducer varied between 32 and 68 percent.

30. Additional Reforms. In the area of judicial and regulatory framework, during 1994-95,the authorities re-established the Ministry of Justice, created a liberal trade environment bysuppressing export and import licenses and abolishing price controls and state monopolies. Asfurther deepening of the process, they propose to amend the Labor Code (to free wagedetermination and encourage consultation among economic partners); revise the Investmnent Code(for simplicity and neutralitv in the treatment of investors); and ratify the treaty creating theOrganization for the Harmonization of Business Law in Africa (OHADA).

31. To increase the future growth impact of cotton, the authorities have decided to implementa reform program dealing *with the sector's organization, personnel and price incentives. Toimprove the organizational structure, a program of gradual decentralization will be introduced in1996. Its goal is to put decision-making close to the ginneries and establish accounts bv plant soas to arrive at a better gauge of perfornance by entity. In the meantime, since the 230,000 tonsof ginning capacity suffices for the needs of the immediate future, all new investment Will be onhold. Towards relieving the human resource constraint, a human resource development programwill be adopted to fast-track the development of senior Chadian managers. The appropriatestrategy will be based on the results of a study by industry specialists in 1996. Finally, in order toimprove producer incentives, a new producer-pricing mechanism will be introduced with effectfrom 1996/97 crop season. Under it, producers will receive an initial payment linked to projectedworld prices, at the time of sale of unginned cotton, with an additional payment after the exportsales have been made. The objective is to start paying the producer at least 50 percent of the fobexport price as from the 1996/97 crop year (with the producer continuing to pay for inputs), andincrease the share progressively as the overall sector operations become more efficient.

32. In the case of the SONASUT, the government is fully committed to its divestiture, and willbegin by suppressing its import monopoly as from January 1, 1997.

33. Even though the situation of the banks is not alarming, the government recognizes a needfor greater private sector presence to soften the public sector's hand and improve theresponsiveness of the banks to the market (case of BTCD); fill a void left by a previous private

Annex VPage 9 of 11

sector partner (as with BMBT); or strengthen the balance sheet (case of BDT). In parallel, thereis need to rehabilitate the CNPS and CNRT, both of which are critical for the financial integrityof the economy and the success of the reform efforts. In recognition of this, the government'snear-term objectives are to: (i) introduce private partners into the BTCD and the BDT; (ii) find areplacement for the Meridien in the BMBT; and (iii) initiate action towards restructuring theCNPS and CNRT. An additional objective with slightly longer-term perspective is to spur thedevelopment of cooperative finance.

34. The BTCD and the BMBT each have received proposals of entry from prospective newpartners. Firm decisions -- including minority shares in public sector hands -- were made inDecember 1995. In the case of the BMBT, the discussions have been concluded w,ith theprospective partner on the restoration of the capital base which has been weakened by anestimated CFAF 2 billion in losses. This will be done through the revaluation of assets. Thedecision on the capital base and the share ownership of the BDT has also been made (December1995). The authorities intend to conclude the transactions by June 1996. In addition to these,studies will be carried out on how to restructure the CNRT and further develop cooperativefinance. The studies will be launched in early February 1996.

D. Internal Consultation and Participation

35. The economic reform progran described above was elaborated on the basis wide-rangingdiscussions with various segments of the society. These consultations took place in seminars andworkshops held in N'Djamena and provincial capitals. Given the government's strong belief ininclusiveness as the way to break with their country's history of sectionalism, the authoritiesworked closely with the business community, unions, conmnunity leaders, the army as wvell aslegislators on the design of the policy measures as well as the timetable for their implementation.A standing private sector group which advises the government on policy actively participated inthe preparation of the reforms. In view of the general elections in mid-1996, the meetings withlegislators were considered particularly important in order to ensure that the program would beseen as a national endeavor to be carried through regardless of which party comes to power. Thisprocess has created a strong sense of broad-based local ownership of the reform program.

V. FINANCIAL ASPECTS AND MANAGEMENT OF THE PROGRAM

A. Financial Policies and Framework

36. With tax policy reform and improved administration as well as budgetary austerity,public finances are expected to begin their recovery, with revenues increasing from 7.4 percent ofGDP in 1994 to 11.5 percent by 1998; the share of personnel expenditures would decline from 6.1percent of GDP in 1994 to 5.1 percent in 1998; and security-related expenditures would fall from3.2 percent of GDP in 1994 to 1.7 percent in 1998. Under these influences, the current fiscaldeficit would be expected to decline from 7.8 percent in 1994 to less than 1 percent in 1998,setting the stage for the emergence and growth of local contribution to the financing investmentexpenditure from 1999 onwards. Supported by prudent monetary policies pursued incollaboration with the regional monetary authorities (BEAC), these trends should minimizeinflationary pressures and enable the inflation rate to fall from 41 percent in 1994 to 4.5 percentin 1996 and stabilize at about 3 percent thereafter.

Annex VPage 10 of I

B. Financing Needs

37. The growth objectives in para. 7 would require gross investment averaging about 17percent of GDP over the medium term. Even with the macroeconomic progress expected from thepolicy reforms as indicated above, domestic savings will likely remain negative through 1998. Assuch, the bulk of the financing for investment will have to come from external sources. With theimproving financial framework as indicated in para. 36, the external current account deficitshould decline from 18.8 percent of GDP in 1994 to 16 percent in 1998. Taking into account theneed for additions to reserves, external financing requirements (excluding debt relief) are projectedat some US$926 million over the period 1995-98. This amount also is the financing requirementof the budget. Loan and grant disbursements for projects would amount to US$576 million, andother (private) capital flows are projected at US$14 million.

C. Management of the Reform Program

38. The program will be implemented under the supervision of the High InterministerialCommittee, composed of 10 ministers, established in June 1994 and charged with theresponsibility of overseeing the design and implementation of reform programs over the mediumterm. It will be assisted by a Technical Comrnmittee responsible for the day-to-day implementationand monitoring. This Technical Commrittee will be supported in terms of technical expertise andlogistics by the IDA-assisted Capacity Building Project.

D. Monitoring of Results of the Reform Program

39. In order to continuously evaluate the effectiveness of the policy changes and the use ofresources, a monitoring system will be introduced to track results beyond those nornally availablein macroeconomic statistics. The government believes that the system should emphasize humanresource development and poverty alleviation. As such, its essential features are: (i) the focuswill be on health, nutrition and education; (ii) the conditions of the centers providing services willbe monitored in repeated surveys, as will the client assessment of the quality and coverage ofservice received; (iii) a survey frame will be established, covering all accessible provinces; (iv) theservice centers will be grouped in clusters, and centers will be randomly selected at each round ofthe survey; and (v) there will be no prior announcements before the visits of the survey teams.The system will be in operation by mid-1996.

VI. OTHER MAJOR OBJECTIVES

Preparing Chad for its Future with Oil

40. Chad has petroleum reserves which remain undeveloped even though they were discoveredsome twenty years earlier. The recoverable reserves, which are substantial in the south (some 700million barrels) but less so in the north (12-15 million barrels), could be developed in two ways: theDoba project (in the south) would produce for exports, while the Sedigi project (in the north) wouldsupply the local market.

41. The government recognizes that it would take much effort on its part to make these twoprojects a reality. Its first priority is to conclude the negotiations with the petroleum consortiumand the other financiers in order to accelerate the initiation of the two projects. In the case of

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Sedigi in particular, the government is ready to undertake additional studies on how to reduce thecost and optimize the project structure in order to improve its economic and financial justification.The project itself will be sponsored by private investors.

42. The Doba project would procure for Chad additional revenues that would radicallytransform its public finances. The government is aware of the effects -- both positive and negative- that the development of the petroleum resources could have on inflation and the internationalcompetitiveness of the Chadian economy. It will analyze both the positive and negativeexperiences of other countries with oil and other mineral wealth. It will collaborate with the WorldBank on a long-term development strategy which would cover ways to extend into the future theresources of the oilfields and ensure that the additional public revenues are used to promotesustainable development, including the development of the cotntry's human resources.

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