Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 37969-ML

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED FIRST POVERTY REDUCTION SUPPORT CREDIT (PRSC-1)

IN THE AMOUNT OF SDR 30 MILLION

(US$45 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MALI

February 7,2007

Poverty Reduction and Economic Management 4 Country Management Unit Francophone Western 2 A h c a Region

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

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MALI - GOVERNMENT FISCAL YEAR January I -December 31

AAP ADB AfDB AFD AFRITAC AGETIC

ANPE

BCEAO BHM BIM BRVM

BSI

CARB

CARFIP

CAS CCSJSFD

CFAA CFAF CMDT

CP AR CPIA CRM CSCOM CSREF DAF

DPC DGMP DNR DNTCP

CURRENCY EQUIVALENTS (Exchange Rate Effective as of August 25,2006)

Currency Unit CFAF US$1 .OO CFAF 5 10

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

HIPC Expenditure Tracking Assessment and Action Plans Asian Development Bank African Development Bank Agence Fran~aise de Ddveloppement Africa Regional Technical Assistance Center (of the IMF) Information and Communication Technology Agency (Agence des Technologies de I'Information et de la Communication) National Employment Promotion Agency (Agence nationale pour la promotion de I'emploi) Central Bank of (Francophone) West African States Malian Housing Bank (Banque de ['Habitat du Mali) International Bank for Mali (Banque Internationale pour le Mali) Regional Stock Exchange of francophone West Afi-ica (Bourse rkgionale des valeurs mobilidres) Special (annual) Investment Budget (Budget Special dlInvestissement)

Budget reform support unit (Cellule d'appui la reforme budgdaire)

Public Finance Reform Support Unit (Cellule d 'appui a la reforme des finances publiques) Country Assistance Strategy MFI control and supervision unit (Cellule de contr6le et de suivi des systgmes financiers dkcentralisks) Country Financial Accountability Assessment Franc of the French Community of Africa Mali Textile Development Company (Compagnie Maliennepour le Ddveloppement des Textiles) National Center for Promotion of Artisanal Activities (Centre Nationale de Promotion de I 'Artisanat)

MFI Promotion and Support Unit (Cellule depromotion et d'appui des systt?mes$nanciers dkceniralisds)

Country Procurement Assessment Report Country Policy and Institutional Assessment Mali Retirement Fund (Caisse de Retraite du Mali) Community Health center (Centres de sante communautaire) Health Referral Center (Centre de santd de rdfdrence) Administrative and Financial Department in each Ministry (Division Administrative et FinanciGre) Development Policy Credit (the Bank's budget support instrument) General Procurement Department (Direction Gdnkrale des Marchds Publics) National Roads Department National Treasury and Public Accounting Department (Direcfion Nationale du

FOR OFFICIAL USE ONLY

Trksor et de la Comptabilitk Publique) DNT DRB DSA EDM EMCES

EMEP

EPPFMC ESW EU GDP GNP GPRSF HIPC HIVtAIDS IBRD IDA IFC IMF rNPS ISDS JSAN Km LDP MAD MDGs MDEAF

MDRI MDS MEN MEF MFI MIC

MOH MTEF MTBF MS MSIPC

NWSP OCDE OHADA ON PACR PAGAM

PAS AOP

PCDA

PDSF PEFA

National Transportation Department Regional Budget Departments (Direction Regional du Budget) Debt Sustainability Analysis Mali Electricity and Water utility company (Endrgie du Mali) Mali Economic and Social Surveyof 1994 (EnquEte Malienne de Conjoncture Economique et Sociale) Poverty Assessment Survey of 2001 (EnquEte Malienne sur I'Evaluation de la Pauvrete? Economic Policy and Public Finance Management Credit (the first DPC) Economic and Sector Work European Union Gross Domestic Product Gross National Product Growth and Poverty Reduction Strategy Framework (the 2"d PRSF) Heavily Indebted Poor Countries Human Immunodeficiency VirusIAcquired Immune Deficiency Syndrome International Bank for Reconstruction and Development International Development Association International Finance Corporation International Monetary Fund National Security Agency (Institut Nationalpour la Prkvoyance Sociale) Integrated Safeguards Datasheet Joint Staff Assessment Note Kilometres Letter of Development Policy Customs bonded warehouse (Magasin sous Aire de dkdouanement) Millennium Development Goals Ministry for Public Domain and Land Affairs (Ministkre des Domaines de I'Etat et des Affaires Foncidres) Multilateral Debt Relief Initiative Social Development Ministry (Ministdre de Dkveloppement Social) Ministry of Education (Ministgre de I'Education Nationale) Ministry of Economy and Finance Micro-Finance Institution Ministry of Industry and Commerce (Ministgre de I'Industrie et du Commerce) Ministry of Health Medium-Tern Expenditure Framework (sectors) Medium-Term Budget Framework Health Ministry (Ministkre de Santk) Ministry for Domestic Security and Civil Protection (Ministgre de la Securitk Intkrieure et de la Protection Civile) National Water and Sanitation Program Organization of Economic Cooperation and Development Organization to Harmonize Business Law in Africa Office du Niger Rural Community Support Project (Projet d 'Appui aux Comitks Rurales) Action Plan for Modernizing and Strengthening Public Finance Management (Plan d 'Action Gouvernementalepour la Modernization et le Renforcement de la Gestion des Finances Publiques) Agricultural and Producer Organization Project (Projet d 'appui aux services agricoles et aux organisations paysannes) Agricultural Competitiveness and Diversification Project (Projet de compktitivitk et de diversification agricole) Financial Sector Development Project Public Expenditure and Financial Accountability

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

PEMFAR PER PFM PHRD PRED

PRSC PRSF PSIA PTF PTI RWSS ROSC S A SAC SAC IV SDR SFD SGI TRIE UEMOA

UNDP USAID WAEMU

Public Expenditure and Financial Accountability Review Public Expenditure Review Public Finance Management Japan Policy and Human Resources Development Trust Fund Economic Reform Program for Development (Programme de Rkfome Economique pour le Dkveloppernent) Poverty Reduction Support Credit Poverty Reduction Strategy Framework Poverty and Social Impact Analysis Donor group (Partenairesfinanciers et techniques) Triennial Investment Program Rural Water Supply And Sanitation Report on the Observance of Standards and Codes Limited liability company (Socibti Anonyme) Structural Adjustment Credit Fourth Structural Adjustment Credit Special Drawing Rights Microfinance System (Systimesfinanciers d6centralis6s) An investment bankhroker (Sociktk de Gestion d'Interm6diation) Interstate Road Transit Facilitation System (Transit Routier Inter-Etat) West African Economic and Monetary Union (Union Economique et Monttaire Ouest Afiicaine) United Nations Development Programme United States Agency for International Development West African Economic and Monetary Union (a.s.a UEMOA)

Vice President: Hartwig Schafer (Acting) Country Director: James P. Bond

Sector Director: Sudhir Shetty Sector Manager: Jacques Morisset (Acting)

Task Team Leader: Christina A. Wood

REPUBLIC OF MALI FIRST POVERTY REDUCTION SUPPORT CREDIT (PRSC-1)

TABLE OF CONTENTS

1 . INTRODUCTION ........................................................................................................................................ 1 2 . COUNTRY CONTEXT ............................................................................................................................... 1

RECENT ECONOMIC DEVELOPMENTS IN MALI ............................................................................................ 3 Poverty Dynamics and the MDGs .......................................................................................................... 4

MACROECONOMIC OUTLOOK AND DEBT SUSTAINABIL~TY ........................................................................ 6 3 . THE GOVERNMENT'S PROGRAM ....................................................................................................... 8 4 . BANK SUPPORT TO THE GOWRNMENT STRATEGY .............................................................. 9

LINK TO CAS ............................................................................................................................................. 9 ELATIONS SHIP TO OTHER BANK OPERATIONS .......................................................................................... 10 COLLABORATION WITH THE IMF AND OTHER DONORS .......................................................................... 10 LESSONS LEARNED .................................................................................................................................. 11 ANALYTICAL UNDERPINNINGS ................................................................................................................. 11

5 . THE PROPOSED MALI PRSC-1 ........................................................................................................ 16 OPERATION DESCRIPTION ..................................................................................................................... 1 6

............................................................................................................................................ POLICY AREA 18 Component 1: Budget framework. poverty reduction strategy. and PFM ............................................ 19

1A . Macroeconomic framework and public expenditure management ........................................................... 19 . 1 B Procurement .............................................................................................................................................. 22

Component 2: Support to Growth ........................................................................................................ 23 2A . Financial Sector ........................................................................................................................................ 24 2B . Private Sector Developement ................................................................................................................... 29

....................................................................................................... 2C . Transportation and transit facilitation 33 2D . Energy Sector ........................................................................................................................................... 38 2E . Cotton Sector ............................................................................................................................................ 43 2F . Ofice du Niger Irrigation Zone ................................................................................................................ 47

Component 3: Access to Basic Social Services ................................................................................... 50 3A . Health and Social Development ............................................................................................................... 50 3B . Potable water supply program (outside the EDM area) ............................................................................ 55

......................................................................................................... INDICATIVE TRIGGERS FOR PRSC-2 57 ....................................................................................................... 6 . OPERATION IMPLEMENTATION 59

............................................................................................................... POVERTY AND SOCIAL IMPACTS 59 IMPLEMENTATION. MONITORING AND EVALUATION .............................................................................. 59

................................................................................................................................ FIDUCIARY ASPECTS 59 ................................................................................................................ DISBURSEMENT AND AUDITING 60

ENVIRONMENTAL ASPECTS ...................................................................................................................... 60 NSKS AND RISK MITIGATION ................................................................................................................. 6 1

ANNEXES ANNEX 1 : LETTER OF DEVELOPMENT POLICY ......................................................................................... 63 ANNEX 2: EVALUATION OF TRIGGERS FOR THE PRSC-1 ...................................................................... 105 ANNEX 3: MATRIX OF POLICY ACTIONS ................................................................................................... 108 ANNEX 4: DONOR HARMONIZATION PROCESS .................................................................................... 118 ANNEX 5: PUBLIC EXPENDITURE AND FINANCIAL ACCOUNTABILITY (PEFA) .............................. 121 ANNEX 6: FUND RELATIONS NOTE ............................................................................................................. 122 ANNEX 7: PROGRESS ON THE MDGs ........................................................................................................... 125 ANNEX 8: MALI COTTON SECTOR REFORMS: CURRENT STATUS, ISSUES AND

RECOMMENDATIONS ...................................................................................................................... 128

.............................................. ANNEX 9: COTTON PRODUCTION, MALI'S ECONOMY AND POVERTY 135 ANNEX 10: SIMULATING THE EFFECTS OF AN OIL PRICE SHOCK: A SOCIAL ACCOUNTING

MATRIX FRAMEWORK .................................................................................................................... 137 ANNEX 1 1 : COUNTRY AT A GLANCE .......................................................................................................... 140

COUNTRY MAP # IBRD 33443

BOXES Box 4.1 : Mali's Growth determinants and prospects4EM findings ......................................................... 14 Box 5.1 : Prior Actions for the Mali PRSC-1. ................................................................................................ 18 Box 5.2: Good Practice Principles for Conditionality .................................................................................. 19 Box 5.3: Indicative Triggers for the Mali PRSC-2 ........................................................................................ 59

TABLES Table 2.1: Mali: Selected Economic Inhcators and Medium-Term Economic Outlook, 2004-10 ................. 4

................................................... Table 2.2: Trend in poverty using per capita consumption data, 1989-2001 5 Table 2.3 : Trend in poverty/inequality after the devaluation, Mali 1994-200 1 .............................................. -6

................................................................. Table 2.4: Estimated External Debt Buden Indicators (in percent) 8 Table 4.1 : Summary of Relevant Lending Operations and Key Analytical Underpinnings .......................... 15

The Mali First Poverty Reduction Support Credit (PRSC-1) was prepared by an IDA team comprising Christina A. Wood (TTL), Abdoulaye Konate (public finance management), Alain Catalan (public finance management), Boulel Tourt (debt sustainability analysis), Andre Ryba (financial sector), Djibrilla A. Issa (financial sector), Fran~ois Nankobogo (private sector), D. Youssouf Thiarn (private sector), Abdoulaye Tour6 (cotton and Ofice du Niger), YCyandC Sangho (cotton and Office du Niger), Alain Ballereau (transport and transit facilitation), Siele Silue (transport), Fabio Galli (transit facilitation), Cheick TraorC (procurement), Asha Ayoung (procurement), Mahine Diop (water supply and sanitation, and electricity), Christophe Prevost (rural water supply and sanitation), Tonia Marek (health), Kofi Ekouevi (electricity), Jeff Ramin (results framework assistance), Glaucia Ferreira (team assistant), Safiatou Dicko Ba (team assistant), Sameena Dost (lawyer), and Renee Desclaux (disbursement). Peer reviewers were Alessandro Magnoli Bocchi (EASPR) and Neeta Sirur (LCCGT). Advisors included Nils 0. Tcheyan (Regional Operations Director), James P. Bond (Country Director), Alassane Diawara (Country Manager), and Robert R. Blake (Sector Manager). The PRSC-1 team worked closely with the IMF team headed by Jean-Pierre Chauffour and with EU and bilateral donors in the budget support group for Mali.

REPUBLIC OF MALI FIRST POVERTY REDUCTION SUPPORT CREDIT (PRSC-1)

CREDIT AND PROGRAM SUMMARY

vii

Borrower

Implementing Agency

Amount

Terms

Tranching

Description

Benefits

1

Government of Mali

Ministry of Economy and Finance (MEF) coordinates the implementation in close association with several line ministries. SDR 30 million (US$45 million equivalent).

Standard IDA terms (40-year maturity & 10-year grace period).

Single tranche, to be released upon effectiveness, expected in March 2007. The proposed First Poverty Reduction Support Credit (PRSC-1) is the first in a series of operations supporting implementation of Mali's Growth and Poverty Reduction Strategy Framework (GPRSF), through the following three components:

The first component focuses on strengthening the links between the GPRSF and the macroeconomic and budget frameworks, and strengthening public finance management (including procurenient).

The second component comprises growth-enhancing measures in the financial sector, private sector, transport and transit facilitation, electricity, cotton, and the Office du Niger irrigation zone.

The third component focuses on improving access to basic social services, notably health and social development and rural water supply and sanitation.

The proposed operation is an integral part of the Bank's Country Assistance Strategy (CAS) to Mali. The proposed operation would contribute to financing the Government's 2007 budget aimed at pursuing the objectives of the GPRSF. The operation would provide the incentive to implement key economic, social and institutional reform to strengthen overall economy performance, growth and poverty alleviation. Implementation of the PRSC-I program would also contribute to strengthening oversight of public finances and the procurement system, thereby enhancing efficiency and effectiveness of public sector spending.

The operation would contribute to enhancing shared private-sector- led growth, by lowering administrative and financial costs of doing business, by easing restrictions and costs of starting a business, and easing export-related costs on handicraft products. In agriculture, the operation would contribute to laying the foundations for

Risks

enhanced performance and growth in the medium term of the cotton sector and the Ofice du Niger irrigation zone.

As regards the basic social services (health and rural water supply), the operation will strengthen the links between the sector strategy and the budget, and lay the foundations for improved quality of service delivery.

Over the medium term, the operation would contribute to reducing transport and transit costs, by ensuring regular road maintenance and lowering the cost burden (in money and time) on the private sector of customs administration. The Credit would lower the costs of financial services (and therefore enhance access to credit) through cleaning up non-performing loans fi-om bank balance sheets. It would also improve access to longer term resources vitally needed to stimulate private sector led growth, through strengthening the prospects of institutions with long term assets whether financial (pension funds, housing bank, insurance companies) or physical (leasing companies).

The operation faces external, political and budget risks. External risk sterns mainly from Mali's vulnerability to climatic/natural shocks (drought, avian flu), exchange rate and commodity price fluctuations (cotton, oil) and regional developments (persistent C6te d'Ivoire crisis). Mitigating these risks over the horizon of the proposed operation remains a challenge: it depends on the economy's capacity to adjust in the wake of the shocks, and the Government's continued ability to manage the impact of the shocks. The operation would help strengthen both these capacities, through policy measures that contribute to economic growth and diversification, and further strengthen public finance management within a sound macroeconomic framework. Additionally, the overall country dialogue would allow for some budget flexibility to address crisis-related expenses within the context of a prudently managed budget that supported priority growth and poverty reduction programs. The introduction of predictable and timely support through the PRSC series, and continued progress with donor coordination, will also be important elements for mitigating the external risks.

Political risk, linked to the upcoming presidential elections in April 2007, is that the pace of program implementation could slow or that the Government's current commitment to some reforms (such as bank restructuring, social security reform, cotton) could wane as the election approaches. This risk, which is low to moderate, is mitigated by the front loading of the policy measures, to be completed before submission of the Credit to the Board. The country team is monitoring this risk on a continual basis in order to detect problem areas early on, so as to be able to adjust the Bank's response as needed.

Budget risk stems from ongoing financial crises in the cotton and

Operation ID Number

electricity parastatal companies (CMDT, EDM) which could potentially require government transfers to cover the large projected deficits in those sectors. Although this risk is moderate to high, the 2007 budget includes no provision for possible transfers to these two companies: for cotton, the Government indicates that the required recapitalization of CMDT (equivalent to 1.3 percent of GDP) will be covered through debt conversion rather than cash transfer (and thus with no treasury impact); while for electricity the Government has not yet formally acknowledged the company's need for a cash infusion during 2007 (amounting to about 0.2 percent of GDP at least, and 0.8 percent of government expenditures) in order to remain viable. It is thus possible that actual implementation of the government budget during 2007 could be significantly different from the afiproved budget. This risk is being mitigated through the strengthened financial management in both companies and close monitoring of their respective financial and cash positions. Additionally, a financial evaluation of the CMDT will be undertaken in the first half of 2007 to better understand the nature of the losses and devise corrective measures.

PO83803

INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A

PROPOSED FIRST POVERTY REDUCTION SUPPORT CREDIT (PRSC-1) TO THE REPUBLIC OF MALI

1 INTRODUCTION

1.1 The First Poverty Reduction Support Credit (PRSC-1) is a single-tranche operation of U S 4 5 million, ensuring budget support for the 2007 component of the Government's medium-term program. The PRSC-1 initiates programmatic support by the Bank to Mali's Growth and Poverty Reduction Strategy Framework (GPRSF), consistent with the Bank's Country Assistance Strategy (cAs)'. The PRSC-1 is the first in a programmatic series of annual loans supporting Mali's poverty reducing efforts outlined in the GPRSF~, building on the program in the Economic Policy and Public Finance Management Credit (EPPFMC, approved by the Board in January 2006).

1.2 Mali's current economic trends are broadly favorable. While 2004 and early 2005 were a difficult period due to a terms of trade shock and the effects of drought and locust invasion, the outlook began to improve during the second half of 2005. As a result, Mali's real GDP grew by about 6 percent in 2005-reflecting a favorable cereals harvest and improving terms of trade-and is projected to grow 5 percent in 2006. However, Mali's economy remains vulnerable to inadequate rainfall impacting on agriculture sector performance. Furthermore, the high cost of doing business in Mali (reflected in elevated cost of transport, transit, electricity and compliance with regulations) negatively impacts domestic and foreign direct investment prospects.

1.3 The PRSC-1 comprises the following three key issue areas: (i) strengthening of the links between the GPRSF and the macroeconomic and budget frameworks, and strengthening public finance management (including procurement); (ii) growth-enhancing measures in the financial sector, private sector, electricity, transport and transit facilitation, cotton, and the Office du Niger imgation zone; and (iii) improving access to basic social services, notably health and social development and rural water supply and sanitation. The Credit is an integral part of the 2003 CAS base case comprising annual policy-based lending, complemented by specific sector operations and initiation of programmatic lending in the final year of the CAS. The Credit will be fully integrated into the next CAS, currently under preparation.

2. COUNTRY CONTEXT

2.1 Mali's recent economic and policy performance has been solid and the country achieved important gains in the fight against poverty; it also received substantial

' The current CAS was discussed by the Board in FY04 and the next CAS, under preparation, is scheduled to be discussed by the Board in FY08.

The first PRSF (adopted in 2002) presents a general framework for the Government's policies during 2002- 2006, and the second PRSF (the GPRSF, adopted in December 2006), covers the period 2007-201 1. The second annual progress report covering 2003-2004 period accompanied by a Joint Staff Advisory Note was distributed to the Executive Board for information in early 2006.

amounts of aid. Despite being battered by exogenous shocks, real growth averaged 5.7 percent over the past decade and a half, and poverty declined from about 73 percent in 1989 to 68.3 percent in 2001 .3 Overall, policy performance has been good and gradually improving so that, currently, Mali stands among the better African performers on a broad range of economic policies (Mali's 2005 CPIA was 3.7 against the Sub-Saharan Africa average of 3.2). As a result, Mali has been receiving substantial amounts of external assistance averaging about 15 percent of gross national income a year over the past decade. The Bank has been closely coordinating with other donors, providing the Government in recent years with annual support of US$25 million. The PRSC-1 would increase the Bank's budget support to Mali to US$45 million.

2.2 Mali favorable economic performance has been due to progressive market- oriented economic reforms and broad-based political reforms over the last 25 years that spurred private sector development and enhanced civil society participation. Mali benefits fiom a stable and inclusive political environment, having successfully concluded four successive presidential elections since 1990 and two sub-national elections since 1997. The next set of presidential and parliamentary elections is scheduled during the period end-April through July 2007.

2.3 Despite the achievements over the past decade and half, Mali faces significant economic and social challenges. Over 60 percent of Mali's population lived below the poverty line in 2001, and Mali's social indicators remain among the lowest in the world-it is ranked 175 out of 177 countries in the Human Development Index compiled by the United Nations Development Programme (UNDP). This partly reflects the fact that Mali is a vast landlocked country with a relatively narrow natural resource and human capital base. It is the largest country in West Africa (1.22 million square kilometers), covering twice the size of Texas. With a population of about 12 million, population density is very low (10 persons per square kilometer4) resulting in high cost of public service delivery, difficulty in accessing nomadic communities as well as some segments of the rural population, and high transportation costs for agricultural inputs and other goods. Gross national income per capita (atlas method) increased fiom US$240 in 1994 to US$380 in 2005, a 4.0 percent average annual increase, translating into reductions in poverty (paragraph 2.9) and inequality (paragraph 2.1 0).

2.4 Mali's economy remains fragile in view of the economy's vulnerability to climatic conditions and commodity price fluctuations (primarily of cotton, oil, gold). The economy is dependent on agriculture and gold production, and exports are highly concentrated, with gold and cotton together comprising over 90 percent of export revenues. As a land-locked country, Mali faces challenges due to weak development of infrastructure and transportation services, and to economic and political conditions in neighboring countries. The business environment-notably road transportation but also investment prospects--continues to suffer from the protracted socio-political crisis in CBte d'Ivoire. As with other low income countries, administrative capacity is also weak.

3 The last national household expenditure survey was completed in 2001. A new survey was undertaken in 2006. The next largest West African country by land area, Nigeria, covers 0.9 million square km. With a population of

129 million people, its population density is 142 persons per km2.

2

2.5 A significant social, structural and macroeconomic agenda remains for Mali to consolidate the gains of the past to sustain broad-based growth, further entrench market- oriented forces in the country, and advance the poverty reduction program. The PRSC-1 contributes to that agenda.

2.6 Following adverse shocks during 2004 and an economic rebound in 2005, Mali had a respectable economic during 2006. There was continued GDP growth (at 5 percent following 6.1 percent in 2005), due to favorable rainfall levels which enabled a good cereal harvest, higher gold production and increased services sector growth. Adequate cereal supplies enabled inflation to fall fi-om 6.4 to 2 percent. The terms of trade continued to improve during 2006, reflecting continued increase in international gold prices and slightly moderating oil prices. The lower inflation contributed to a depreciating real effective exchange rate and improving external trade and current account balances.

2.7 Fiscal performance in 2006 was solid. Early in 2006, fiscal revenues were initially under pressure of weaker customs revenues, but the authorities took steps to combat evasion, improve customs valuation, and strengthen exemption controls. Also, they increasingly enabled greater links between local pricing of petroleum products and world prices, which helped increase excise revenues from these products. Compared with the Government's program targets, the overall fiscal deficit (excluding grants) of 8.5 percent of GDP was lower by 1 percentage point of GDP, largely due to better-than-anticipated revenue performance and under-execution of capital expenditures. Similarly, the overall fiscal cash balance (including grants) improved. Buoyant customs duty revenues (including unexpected compensation from WAEMU for lost customs revenues fiom previous years) and higher payments fiom the mining sector resulted in higher overall fiscal revenues. Overall current expenditures were kept within the program levels.

2.8 Progress with structural reforms, however, is mixed. On the positive side, the restructuring of banks and key public enterprises continue, despite some delays. In the cotton sector, the new timetable for privatization of CMDT was agreed among the shareholders, and preparations are underway to split the CMDT into four regional cotton companies. The new, improved cotton pricing formula approved under the Mali SAC IV program continues to be applied satisfactorily: in April 2006 the cotton price setting committee (with concurrence of sector stakeholders) set the 2006-07 initial purchase price at CFAF 165/kg, a level consistent with a small, manageable loss of the CMDT (about 0.1 percent of GDP) based on contemporaneous projections of cotton prices and exchange rates. On the less positive side however, the CMDT's losses for 2006 are now projected to be thrice the initial estimate, about 0.3% of GDP (or US$22 million equivalent). To stem the losses and minimize the potential risk to the public treasury, CMDT's cash position is reviewed monthly by a committee chaired by the Ministry of Economy and Finance, and an evaluation of CMDT's accounting and financial situation will be undertaken in the first half of 2007.

Table 2.1: Mali: Selected Economic Indicators and Medium-Term Economic Outlook, 2004-10

Prel. Proiections

(Annual percentage changes, unless otherwise indicated)

National income andprices Real GDP 4.7 2.2 6.1 5.1 5.4 5.6 5.2 Consumer price index (annual average) 1.4 -3.1 6.4 1.9 2.5 1.9 2.5

Terms of trade

Investment and saving Gross domestic investment

Government Non-government

Gross national saving Gross domestic saving

Government Non-government

(In percent of GDP, unless otherwise indicated)

Central governmentfinance Total revenue and grants 19.3 21.4 22.0 56.9 22.4 21.5 21.1 Total expenditure and net lending 22.1 24.0 25.2 25.6 26.0 25.3 24.9

Current expenditure 11.9 13.4 13.3 13.1 13.5 13.0 12.8 Capital expenditure 9.1 9.3 9.5 11.4 12.6 11.2 11.1

Overall balance (payment order basis, -7.1 -6.6 -7.3 -8.5 -8.9 -7.8 -7.7 excluding grants)

f i te rna l sector Current external balance, including official -7.5 -8.3 -8.8 -7.2 -5.9 -6.1 -5.5 transfers Current external balance, excluding official -9.4 -10.3 -10.9 -8.7 -7.5 -7.0 -6.4 transfers Debt-service to export ratio after debt relief 8.5 6.4 5.8 4.4 3.6 3.5 3.6

Gross international reserves (in millions of US$) 455.0 861 942. 1,182 1,267 1,327 1,388 (in months of next year's imports) 4.9 6.5 6.0 6.0 6.1 6.5 6.9

External public debt 86.2 63.1 65.4 27.1 28.4 30.4 31.8 Sources: Malian authorities; and IMF staff estimates and projections. Note: 2006-10 data is after adjustment for MDRI. (IMF, IDA, and AfDB).

Poverty Dynamics and the MDGs

2.9 Poverty has clearly fallen in Mali irrespective of the methodology used. Two household surveys were used to estimate the measures of poverty shown in Table 2.2: the Enquite Budget Consommation for 1988-1 989 and the Enquite Malienne sur 1 'Evaluation de la Pauvretk (EMEP) for 2001.

Poverty levels and trend: Table 2.2 suggests that according to the food energy intake method applied by the National Statistics Department (DNSI)~, the share of the population in poverty in Mali in 2001 was 68.3 percent, a decrease of about four percentage points versus the level observed in 1989. With the cost of basic needs method6 the share of the population in poverty in 2001 is lower than the DNSI estimate (at 56.5 percent), and the decline versus 1989 is somewhat larger (at around 7

Under this methodology, households not meeting minimum daily nutritional requirement of 2450 kilo-calories a day are considered poor. 6 This method which estimates the price o f a bundle of goods that meets pre-determined basic needs, is itself based on a caloric requirement.

percentage points). The share of the population declaring having difficulties to meet food needs correlates with the poverty level.

Geomaphic characteristics: As expected, poverty is much higher in rural than in urban areas. There are also large differences between regions, and one surprise in this respect-the Sikasso area appears to be very poor. This is surprising given that the region benefits from better climatic conditions than other areas which permit, among many other crops, the cultivation of cotton. One hypothesis for this outcome is that the region may be attractive for migrants, thereby resulting in population inflows that reduce standards of living per capita. Also, at least in 2001, cotton prices were low and cotton farmers produced less than in previous and immediate subsequent years, which may have resulted in higher poverty in the survey year. Still, the situation of Sikasso warrants further investigation, especially considering that according to the subjective poverty indicator presented in Table 2.2 (last column), households seem to be better able to meet food needs there than in other regions (but again, research has shown that child malnutrition rates in the Sikasso region are relatively high, which adds to the puzzle).

Table 2.2: Trend in poverty using per capita consumption data, 1989-2001

DNSI method World Bank method Subjective poverty (food energy intake) (cost of basic needs) (insufficient food)

1989* 2001 1989 200 1 200 1 National 72.8% 68.3% 63.8% 56.5% 57.5% Urban 40.6% 32.8% 32.5% 24.6% 54.5% Rural 79.5% 80.9% 74.9% 67.9% 58.6% Kayes 60.1 % 67.9% 64.8% 60.0% 68.5% Koulikoro 61.7% 83.5% 77.2% 70.3% 64.8% Sikasso 84.1 % 81.8% 84.0% 77.8% 47.2% Segou 83.9% 65.2% 58.5% 48.6% 48.2% Mopti 90.0% 78.5% 67.0% 60.4% 55.8% Timbuktu 74.8% 54.4% 43.9% 33.4% 90.6% Gao 66.9% 48.2% 41.3% 29.5% 70.0% Nidal 37.2% 34.0% 39.9% 34.0% 76.1 % Bamako 72.8% 27.5% 28.9% 22.5% 47.6% Source: World Bank staff.

2.10 The reduction in poverty has been larger since the 1994 devaluation than during the 1990s as a whole. Table 2.3 provides estimates of poverty and inequality using per capita consumption data from the 1994 Enquete Malienne de Conjoncture Economique et Sociale (EMCES) and the 2001 EMEP. These estimates are based on the cost of basic needs method. In addition, measures of asset-based poverty are provided on the basis of the 1996 and 2001 Demographic and Health ~ u r v e ~ s . ~ The first row in Table 2.3 suggests a decrease in poverty of close to 15 percentage points between 1994 and 2001, which is due in part to an apparent decrease in inequality. The second row shows the expected decline in poverty since 1994,

There, the methodology entails pooling together data from the two DHS in order to use a common weighting system to construct an asset index. Because asset ownership is much higher in urban than in rural areas, we construct separate indices for each, and use an asset-base poverty line that provides levels of poverty in urban and rural areas similar to those observed using per capita consumption in the 2001 EMEP. National poverty measures are obtained by pooling together the urban and rural DHS data and rescaling the latter by the ratio of the urban and rural asset poverty lines.

solely on the basis of growth observed in the National Accounts and assuming no change in inequality. In this case, the share of the population in poverty decreases by more than 11 percentage points. Finally, the asset-based measures of poverty in the last row also suggests a decline in inequality and a reduction of poverty of about 12 percentage points, which is again large. Data on household assets tend to confirm a general improvement in standards of living.

Table 2.3: Trend in povertylinequality after the devaluation, Mali 1994-2001

Source: World Bank staff using 1994 EMCES, 1996 DHS, 2001 EMEP, and 2001 DHS.

National, per capita consumption (1 994 and 200 1) National, consumption adjusted for growth (1994 and 2001) National, asset index (1996 and 2001)

2.11 Despite rapid progress since the devaluation, it will still be difficult to achieve the MDG target of reducing poverty by half in 2015 versus the 1990 baseline. As noted in the November 2004 report Rapport de suivi de la mise en oeuvre des Objectifs du Millbnaire pour le Dkveloppement (OMD) prepared with support from UNDP, the rate of progress in reducing poverty since the early 1990s is insufficient to reduce poverty by half in 2015, and it is unclear whether Mali will be able in fbture years to reap similar benefits as those obtained since the 1994 devaluation. In rural areas, faster poverty reduction will require improving productivity, diversifying rural activities, breaking the isolation of certain production areas, and developing commercial trade. In urban areas, the focus should be on promoting earnings and creating employment, among others, through good governance and higher productivity in the private sector. Poverty reduction also requires the strengthening of social networks supporting the most vulnerable and attacking social exclusion. The magnitude of the challenge represented by poverty can be illustrated with the following statistics: in 2001, according to the DNSI method for estimating poverty, the cost of eradicating poverty (i-e. the value of a transfer ensuring that all households have a level of consumption at least equal the poverty line) has been estimated as CFAF 462.5 billion in 2001 (US$873 million), or 32 percent of the total consumption of the private households. Further information on progress toward the MDGs is in Annex 7.

2.12 Mali's macroeconomic outlook appears favorable; but there are risks of lower rainfall, unfavorable terms of trade, and slow implementation of structural reforms. Based on the latest Bank and Fund assessments, Mali could average a broad-based 5.5 percent annual growth in the medium term, assuming broadly unchanged terms of trade, no major extended supply shocks (e.g., droughts, avian flu) and continued, solid policy performance (Table 1 .I). All key sectors-agriculture, mining, and services-are expected to contribute to medium-term growth. Broadly balanced growth in domestic and external demand is also anticipated. Strong performance of gold mining and granting of debt relief have recently strengthened the medium-term outlook. On the policy front, this scenario assumes progress with structural reforms, especially in the performance of infrastructure utilities (electricity, water, telecommunications) needed to support higher investments and growth. High gold

Poverty (Headcount index)

1994196 2001 71.1 56.5 66.9 56.5 69.0 57.0

Inequality (Gini index)

1994196

45.4

24.0

2001 40.1 40.1 22.0

prices bode well for Mali's export earnings and fiscal revenues, but because of its enclave nature the gold sector alone is unlikely to contribute significantly to poverty reduction.

2.13 The 2007 budget suggest continued fiscal prudence. For 2007, the authorities currently aim for the same fiscal balance share of GDP, excluding grants, as in 2006. Revenues are expected to increase due to higher gold earnings. And the authorities reached an agreement with the civil service unions on a fiscally prudent level of inflation adjustment of salaries (2.6 percent in January 2007). The fiscal deficit in 2007 is expected to be financed from committed external sources, implying zero net domestic financing. Moreover, consistent with Paris Declaration on Aid Effectiveness, the authorities made progress in strengthening aid predictability and harmonization with key donors by signing a framework agreement in March 2006 on financing and evaluation, and improving the public finance information systems. Discussions are underway to align the Bank's budget support with the harmonization process (starting with the PRSC-2 if possible), as discussed in Annex 4. To support monitoring of the PFM reforms, a Public Expenditure and Financial Accountability Study (PEFA) was undertaken in November 2006, to establish baseline values of the monitoring indicators, presented in Annex 5.

2.14 While the balance of risks is currently favorable, Mali faces potential downside risks of exogenous shocks (e.g., drought and avian flu). Vulnerability to rainfalls is a constant threat to Mali's agriculture, which is not expected to change. A potentially more serious threat in the short term is the avian flu (which has been registered in neighboring CBte d71voire and Burkina Faso). The budget does not currently contain provisions for its potentially large social and fiscal impact.

2.15 The last joint IMF-World Bank debt sustainability analysis (DSA), completed in December 2005, shows that external debt sustainability is broadly achieved under baseline projections in relation to the policy dependent debt burden thresholds.' Thus under the IDA 14 criteria Mali is a "green light" country, receiving its entire allocation in the form of credits rather than grants. Adverse external and internal shocks, however, could result in breaching the thresholds over the medium term, despite implementation of sound macroeconomic policies and prudent debt management. Accordingly, Mali is assessed as having a moderate risk of debt distress. The multilateral debt relief under the G8 initiative (MDRI) applicable to Mali in July 2006, reduces Mali's nominal debt and debt service by half in the medium term, but would approach the indicator level in the baseline over the long term. Thus while the risk of debt distress in the MDRI scenario is low over the medium term, it returns toward the moderate risk level assessed in the baseline. Table 2.4 summarizes the debt indicators prior to and post MDRI at the end of 2006. Preliminary results of the 2006 DSA indicate that with the MDRI Mali now has a low risk of debt distress over the full 20-year horizon of the analysis. The 2006 DSA will be circulated soon to the Board once it is finalized.

Mali's CPIA score was 3.7 in 2005, placing it at the top end of the medium performance category (3.75

Table 2.4: Estimated External Debt Burden Indicators (in percent)

Before Post 2005 DSA Post HIPC Low Income HIPC HIPC Baseline MDRI Threshold DSA Threshold

NPV of debt to GDP 41.1 32.6 27 15 40 NPV of debt to exports 152.4 120.6 96 5 1 150 150 Debt service to exnorts 9.0 5.1 7 4 20 20

3. THE GOVERNMENT'S PROGRAM

3.1 Mali's has recently concluded implementation of its last Poverty Reduction Strategy Framework (PRSF) and its record with its implementation is satisfactory although the country may not reach some of the MDG targets. Recent PRSP progress reports outlined the achievements in the past years, with the latest progress report covering 2005.~ The past reports were subject to wide regional consultations and validation by representatives of the Government, civil society, the private sector, and the donor community. The 2005 progress report re-estimated the official 2001 poverty incidence of 68.3 percent and arrived at the poverty rate of 59 percent for 2005, a decline of about 9 percentage points.'0 In large part, this was due to strong albeit volatile GDP growth per capita (averaging about 2.5 percent a year during 2002-2005). While far behind the original poverty objective for 2006 of 47 percent, these poverty reduction gains are not marginal. They also resulted in gains in the indices measuring the depth and severity of poverty compared with the 2001 household survey. Nevertheless, several MDGs remain out of immediate reach."

3.2 Mali's PRSF covering the period 2002-06, provides the foundation for the Government's development and poverty reduction strategy. This document is also the basis for coordination and harmonization with donors. PRSF was endorsed by the Bank and Fund Boards and is broadly supported by the donor community. Mali's economic development and poverty reduction strategy in the PRSF, in addition to recognizing growth as a precondition for poverty reduction, comprises three key pillars: (i) accelerating shared, private-sector led growth; (ii) strengthening institutions, governance and participation; (iii) developing human resources and access to basic services; and (iv) strengthening basic infrastructure and productive economic activities.

3.3 Mali's new poverty strategy, the Growth and Poverty Reduction Strategy Framework (GPRSF), covering the period 2007-11, is similar to the previous strategy but places much greater emphasis on economic growth. The GPRSF, which was submitted to the national assembly in December as an input to discussions of the draft 2007 budget, has two principal objectives: '(i) promotion of rapid growth through wealth and employment

9 Mali: Cadre StratCgique de Lutte contre la PauvretC (2002-2006)-Premier draft du rapport de mise en cpuvre du CSLP, Annte 2005. lo Before that, official numbers suggest slow poverty reduction, from some 72-73% in 1989 to 68% in 2001. But a recent World Bank report (see fn. 1 l), offering alternative estimates based on the cost of basic needs method suggested faster progress, with the poverty headcount reduced from 63.8 percent in 1989 to 56.5 percent in 2001. Irrespective of the method used, however, poverty remains widespread in Mali, especially in rural areas where most people reside. I ' Mali: Millennium Development Goals: Diagnostic and Tools (2004 mimeo), World Bank.

creation in a stable macroeconomic framework, through key growth activities in the rural sector (agriculture, livestock, fisheries, ago-forestry, horticulture), mining, infrastructure (energy, transport), and services (tourism, cultural products, telecommunications); and (ii) strengthening of public sector performance through deepening of ongoing reforms in the following thematic areas-institutional (decentralization and de-concentration of the public sector), governance (democracy, anti-comption, rule of law), economic (financial and private sectors), and social (education, health, HIVIAIDS).

3.4 The GPRSF's programs are grouped under the following three pillars: (i) infrastructure development and strengthening of the productive sectors (including food security, rural development, SME development, and sustainable natural resources management); (ii) strengthening the structural reform agenda (comprising public sector reforms, investment climate, financial sector, governance, capacity of the civil society); and (iii) stringing of social sector services (including promotion of job creation, improved access to basic social services, HIVIAID S).

4. BANK SUPPORT TO THE GOVERNMENT STRATEGY

LINK TO CAS

4.1 The Bank's CAS (July 2003) was designed to support the implementation of the PRSF (2002-06) in concert with other donors. The CAS selectively focuses on (i) promoting growth by combining policy support through development policy operations (formerly structural adjustment operations) aimed at increasing agricultural productivity, diversification and private sector development (supporting the 1st and 4th PRSF pillars); (ii) developing human resources by working with donors to strengthen performance in health and education sectors (supporting the 3rd PRSF pillar), and (iii) improving public finance management and governance by focusing on greater financial accountability, stronger public expenditure management, procurement, and financial management systems (supporting the 2nd PRSF pillar).

4.2 Mali remains firmly in the CAS base-case scenario with main instruments of Bank support combining development policy, community support and traditional investment projects. These include (i) support via development policy credits, including a PRSC in the last CAS year; (ii) community-driven development operations supporting productive sectors and the fight against HIVIAIDS; and (iii) traditional investment operations targeting specific needs in the social sectors, and in transport and private sector development to enhance the competitiveness of Mali's economy. As potentially envisioned in the CAS, the health sector program is now incorporated in the PRSC. The possible incorporation of more sectors in a budget support framework, instead of through investment projects is being addressed in the next CAS.

4.3 The PRSC-1 will be fully integrated into the next CAS under preparation. On October 25-26, 2006 the Bank organized a CAS retreat which was attended by high level government officials and key donors. The meeting provided the platform for a discussion of: the lessons learned in implementing the current CAS; the key findings of the Country Economic Memorandum; the Government's five year GPRSF; key donor activities in Mali;

and the implications of these factors for the new CAS. The emerging next CAS will selectively support the GPRSF strategic objectives and emphasize continued collaboration with other donors and on implementation of the aid effectiveness agenda. It will also build on the Independent Evaluation Group's Country Assistance Evaluation (1995-2005) expected to be finalized in February 2007.

RELATIONSHIP TO OTHER BANK OPERATIONS

4.4 The PRSC-1 is complementary to other Bank operations in agriculture, financial sector, private sector, infrastructure and transportation sectors that support Mali's PRS. In the cotton sector, for example, other Bank rural sector operations (Agricultural and producer organization project, PASAOP, PACR and PCDA) directly support different aspects of the broader cotton sector reforms: The Agricultural and Producer Organization Project (PASAOP), focuses more on producers' capacity building, support to soil rehabilitation and improvement of farm-level productivity, while the Agricultural Competitiveness and Diversification Project (PCDA) facilitates increases in value added in key agricultural sub- sectors, and the Rural Community Support Project (PACR) on collective support to communities. The Sources of Growth Project supports improvement of the investment climate, the mining and telecommunications sectors, and the delivery of services (including partial guarantees) to facilitate financing of small and medium enterprises. The PCDA supports the emergence of diversified agricultural exports, including the strengthening infrastructure for sustained growth and facilitating transport logistics and trade. The Financial Sector Development Project (PDSF) provides technical assistance on the activities included in the PRSC-1's financial sector component.

4.5 The Mali SACS III and IV, and the first DPC (the EPPFMC), represented central instruments of the on-going CAS to support the macroeconomic stability and public sector management with annual budget support of US$25 million. Theses adjustment/development- policy programs focused on policy and institutional issues in macro, public finance and selected sector areas. They complemented sector investment operations covering health, education, rural infrastructure, agricultural competitiveness, support to growth, and transport corridors. Table 4.1 below list the lending operations to Mali related to the PRSC-1.

COLLABORATION WITH THE IMF AND OTHER DONORS

4.6 The Bank closely coordinated the work of the EPPFMC, SAC 111 and SAC IV with the IMF team and other bilateral partners, and this collaboration will continue. This is especially so in the area of macroeconomic and fiscal management, cotton, financial sector, Ofice du Niger irrigation reforms, health and education sector programs, as well as efforts to establish a unified donor framework for budget support in 2006. Preliminary findings of the sixth review mission for the three-year PRGF undertaken in November 2006 indicate that the program remains broadly on track. Throughout, the Bank and the Fund coordinated closely on the macroeconomic and structural policy dialogue. Bank technical meetings with the authorities are open to participation by other donors, in line with Government's request, and mission information is shared with other development partners (notably AFD, France, EU, the Netherlands, Canada, Sweden, ADB, USAID) at the beginning and end of each mission. In addition, agreement on key areas of the structural policy dialogue

with the authorities has been reached jointly with the donors, and is jointly monitored (e.g., cotton sector, Office du Niger irrigation reforms). A sector wide approach agreed with all donors has been established for the education and health sectors, and is being established for the rural water supply and sanitation program. The Bank participated in the August 2006 Fund mission to discuss the drafl 2007 budget and finalize the 2007 macroeconomic and fiscal framework to be support by the PRSC-1.

4.7 The recent assessment of implementation of the SAC IV (ICR, 2006) provided the following lessons, which have been integrated in the PRSC-1. They are also consistent with the previous experience and lessons learned from the SAC I11 and more recent work on the EPPFMC:

The need for timely and adequate external budget support for the Government's ongoing budget; Selectivity and simplicity in the thematic focus and realism on what can be achieved in limited, one tranche support instruments; The importance of communication, participation and active coordination with other donors; While bilateraWpolitica1 considerations may change at the last minute, the Bank should focus on technical underpinnings of its operations and should not be swayed by temporary political considerations; One-tranche operation should have a limited number of conditionalities.

4.8 In line with these lessons, the PRSC-1 has a limited policy focus aiming to provide predictable support for the Government's annual reform and budget program. The operation includes only those policy measures that are critical to Mali's economic perfomance, growth and poverty reduction that are either not addressed in other Bank operations or that require a higher profile in the dialogue with Mali. Like the EPPFMC, the PRSC-1 has an uncomplicated structure with three key pillars, and its preparation continued the tradition of participatory collaboration with the authorities, including wide sharing of information and consultation with key donors. Finally, the PRSC-1 features small number of conditionalities (prior actions) comprising the reform measures that are critical to achieving the PRSC objectives.

4.9 The PRSC-1 is built on lessons of previous operations and considerable analytical and fiduciary work undertaken by the Bank, the Government and other partners, especially in the areas of public finance management (PFM) and growth (see Table 4.1). Considerable analytical effort has been conducted in assessing the effectiveness of public spending and public finance management in Mali, including recent reports on the MDGs, CFAA, CPAR, the WB/IMF HlPC AAP report, the IMF ROSC, the EU audit of refonn implementation to improve public finance management procedures, and the study on implementing the decentralization policy based on two pilot regions. These all helped identify the strengths and main shortcomings in Mali's fiduciary system, and served as inputs for

preparation by the authorities of two key reform action plans for that integrate the findings of the various studies-ne on PFM (the Government Action Plan for Modernizing and Strengthening Public Finance Management 2006-2008) and the other on advancing the decentralization agenda to strengthen delivery of basic social services (the Institutional Development Program). These two action plans, supported by all donors, are key instruments toward increased donor harmonization in Mali. In support of the public finance management action plan, the Government commissioned a Public Expenditure and Financial Accountability (PEFA) exercise in November 2006, to establish baseline indicators for the monitoring framework of the PFM reforms supported under the PRSC-1's first component (the PEFA rating are presented in Annex 5). The PEFA will also provide the basis for updating selected issues of the CFAA, to be presented in a Public Expenditure and Financial Accountability Review (PEMFAR) planned for FY08. The PEMFAR will enable refinement of the first component of the 2nd PRSC.

4.10 The PRSC-1 is consistent with the diagnostics and recommendations of a series of studies to identify sources of growth and refine the growth strategy, culminating in the CEM on growth (titled From Sector Diagnostics toward an Integrated Growth Strategy) completed in August 2006 and discussed with the Malian authorities in October. On the basis of retrospective analysis of growth and prospects for future growth, the CEM highlights priority policy measures to sustain and accelerate Mali's economic growth. The CEM articulates an integrated growth strategy combining micro- and macro-level dimensions in a consistent framework, building on previous studies and complemented by new analysis. Previous studies that feed into the CEM include a government-issued 2010 Growth and Development Proposal whose preparation was supported by technical assistance from the Bank and which underpinned the 1998 Mali CAS program. The assessment of success factors of the Bank- supported irrigation reforms, presented in Aw and Diemer (2005), highlight the critical importance of irrigation in overcoming vulnerability to climate shocks and enhancing food security in Mali, and underpin the Office du Niger sub-component of the PRSC program. Supply chain analysis of the textilelgarrnents, leatherwork and handicraft sectors conducted under the Support to Growth project in 2004, revealed regulatory constraints to investment in those sectors, and the Investment Climate Assessment (FY05) highlighted concrete micro- level constraints to Mali's growth, including regulatory and non-price barriers that increase the time and monetary costs of doing business. Lastly, an integrated trade diagnostic study completed in 2004 also highlighted micro-level constraints in addition to cross cutting constraints stemming from the transport, transit facilitation and finance sectors. These issues are assessed in an integrated framework in the CEM, and also integrated into the policy matrix. Box 4.1 summarizes the diagnostics and findings of the Mali growth CEM.

4.1 1 The PRSC-1 is in line with the CEM findings in that it places emphasis on continued improvements in public finance management, and development of financial and private sectors, which were key drivers of Mali's high growth over the past decade. The PRSC-1 also emphasizes policy measures to enhance productivity and efficiency in key growth sectors such as agriculture, infrastructure (transportation, electricity, irrigation), and financial and private sectors. As the quality of human resources is also a key factor for growth in addition to its importance for poverty reduction, the PRSC includes a component on access to basic social services, notably health and water supply. Education is not included in the first PRSC series due to the recently approved education investment project. Subsequent operations in the

PRSC series will deepen the emphasis on the growth enhancing areas as well as reforms to improve access to basic services.

Box 4.1: Mali's Growth determinants and prospects--CEM findings

Mali's average growth improved dramatically over the past twenty years, and its volatility also dropped significantly (Table 1). This performance, a result of steady market-oriented reforms, today puts Mali among the top three highest performing WAEMU countries. Mali's GDP growth improved from -1.3 percent on average during 1980-1986 (early days of the reform transition from socialist to market oriented system), to zero percent on average during 1987-1993 (implementation of agricultural cereal marketing liberalization), and to 5.7 percent on average during 1994-2004 following the intensification of prior reforms as well as devaluation of the CFAF in 1994.

While Mali's economy has become more diversified, the sector composition of past growth raises some concerns for future shared growth. Growth since 1994 has been driven by industry (10.5 percent growth) and services (6.3 percent), dramatically over-performing agriculture sector growth (2.6 percent). Furthermore, the contribution of industry and senices to GDP growth (40 percent each) dominated agriculture's contribution to growth (20 percent), despite agriculture's larger share in the economy (Table 2) and presumed comparative advantage. Particularly puzzling, is that agriculture sector growth after the devaluation (2.6 percent) was lower than it was in the period before the devaluation (3.5 percent). In absence of improved agriculture sector growth, Mali's objective of shared growth would be at risk.

Source: Mali CEM

Industry growth was fueled largely by the dramatic expansion of gold production and exports after 1998, in response to a revision of the mining code. Unlike cotton, gold in Mali is produced in an enclave sector with minimal linkages with the rest of the economy, and thus minimal opportunity to directly reduce poverty. Services growth has been in trade and transport sub-sectors, activities accompanying the export expansion in gold and cotton as well as growth in other sectors such as rice. The non-gold industry sector, including manufacturing, has had minimal growth. Growth of agriculture stemmed from expansion of rice production (7.8 percent) for domestic consumption and cotton (4.5 percent) for export. Of note is that rice sector growth stemmed largely from productivity increases in response to sector reforms, while cotton sector growth was due exclusively to cultivated area expansion.

(...continued on next page).

(Box 4.1 continued).

A growth accounting decomposition attributes about half of Mali's GDP growth during 1994-2004 to factors other than physical and quality-adjusted human capital growth or, in other words, to growth in total factor productivity (TFP). Analysis of TFP growth determinants during the same time period indicates that in addition to exogenous factors (notably rainfall) Mali's TFP growth was explained in large part by policy variables, particularly to reforms that (i) strengthened the public expenditure framework, (ii) deepened financial sector development, and (iii) improved the reallocation of resources to more productive economic activities in the private sector. These reforms raised the profitability of investment thereby increasing the growth of private sector investment. Since rainfall prospects are more likely than not to worsen rather then improve (due to cyclical climatic patterns), Mali's future growth can only be assured through deepened policy reforms.

Yet Mali's TFP growth has been slowing since 2002, a result of slowing private sector investment due to a fall in the profitability of investment (Figure I), and an advance sign of possible slowing GDP growth in the near future. This reinforces the critical importance, mentioned above, of deepening the ongoing reform program. Mali's future economic growth depends on reforms to reverse the decline in the profitability (or margnal returns) of private sector investment. The CEM diagnostic highlights that reversing this decline in Mali must be achieved not only through productivity increases but also through measures to reduce the transactions and factor costs faced by the farm and non-farm private sectors.

Figure 1 : Marginal returns and growth of private investment (5-year moving averages)

7..................................................................................

i 0.3 0.25

i0.25 0.2 j

: 0.2 0.15

i0.15 0.1 i j 0.1 0.05 i j0.05 0 i j 0 -0.05: I - - L - - L - - . . - - L - - L - - L - - L ~ - - L - - L - - L ~ - - L - - L N N M N N I

C O ( D ( D ( D U 3 w ( D ( D ( D ( D ( D ( D ( D ( D 0 0 0 0 0 4 I w w w w w ~ w w ~ ( D ( D ~ ~ ( D O O o o o I ; m - J w w O - N W P u l m - 4 m U 3 o - N W P

j +Priute 5year centered MA gross marginal return on inuestment j + 5-year centered MA annual growth rate of primte inustment ....................................................................................

Source: Staff calculations using WB LDB data.

The CEM recommends that Mali's growth strategy include measures to: (i) maintain macroeconomic, budgetary and monetary stability; (ii) deepen financial sector development and the sector's stability; (iii) strengthen the investment climate (issues such as governance, taxation-related market distortions, property rights, infrastructure, labor market flexibility, and human resource quality); (iv) attract experienced investors into Mali; (v) facilitate organization and coordination of private sector participants in product value chains, particularly in economic activities that involve many small economic actors, and using public-private partnerships where warranted.

Table 4.1: Summary of Relevant Lending Operations and Key

Budgetary Framework, Poverty Reduction Strategy, and Public Finance Management

Social Services (Health and RWSS)

1. Economic Policy and Public Finance Management Credit (EPPFMC; FY06)

2. SAC 111 (FY02) 3. SAC IV (FY05) 4. Economic Management Project (FYOO) 5. Household Energy & Universal Access (FY04) 6. Agriculture Services and Producer Organizations (FY02) 7. Rural Community Development Project (FY06) 8. Education Sector Expenditure Project (FYOI) 9. Integrated Health Sector Investment (FY99) 10. Urban Development and Decentralization (FY97) 11. Emergency Locust (FY04) 12. Development Learning Ct LIL (FY04) 13. HIVIAIDS MAP SIL (FY04)

1. Second Transport Sector Project (planned FY07) 2. EPPFMC (FY06) 3. Agricultural Competitiveness and Diversification Project

(FY 06) 4. Agricultural Trading and Processing Promotion Project

(FY 95) 5. Growth Support Project (FY05) 6. Financial Sector Development Project (FYOO) 7. Private Sector Assistance Project (FY92; completed FY03) 8. Transport Corridors Improvement Project (FY04) 9. Transport Sector (FY94) 10. Agriculture Services and Producer Organizations (FY02) 11. Regional Hydropower Development Project (FY97) 12. National Rural Infrastructure Project (FYOO) 13. Pilot Private Irrigation Promotion Project (FY97)

1. Health investment project (FY99) 2. National Rural Infrastructure Project (FYOO)

1. Education Country Status Report (FYO6) 2. Gender Assessment (FY06) 3. Poverty Assessment (FY05) 4. Cotdon PSIA (FY06 5. Oil price increase impact study (FY06) 6. Support to household survey (FYO1) 7. Health Country Status Report (FY04) 8. Health Services Utilization Study (FYO5) 9. PEFA (preliminary results in November 2006) lo. CPAR (FY04) 11. CFAA (FY03) 12. HIPC Assessment and Implementation of Action Plans to Strength

Capacity to Track Poverty Reducing Public Expenditures (FY04) 13. IMF ROSC: Fiscal Transparency Module (FY02) 14. MTEF TA Transport sector (FY04) 15. MTEF TA ~ e a l & sector ( ~ ~ 0 3 ) . 1. Country Economic Memorandum (FY06), covering overall growth

diagnostics and sector assessments on transport and transit facilitation, financial sector, industry, agriculture and energy.

2. Investment Climate Assessment (FY05) 3. Integrated Trade Diagnostic Study: Expanding and Diversifying Trade for

Growth and Poverty Reduction (FY04) 4. Transport Support to Sustainable Economic Growth (FY04) 5. Aw, Djibril and Geert Diemer (2005). Making a Large Irrigation Scheme

Work: A case Studyfiom Mali. World Bank, Directions in Development Series. (this documents the success of the WB support irrigation reforms in Mali's Ofice du Niger zone).

6. Integrated Value Chain Analysis (textileslgarment, cotton, livestock) (2004 background paper for the Growth Support Project)

7. Growth diagnostic IDF (FY97) resulting in the GOM report "Le Mali: Proposition pour une stratkgie de Croissance et Ddveloppement Li llHorizon 201 0, Rapport du Synthkse H (November 1997).

1. Health country status report (FY06) 2. MTEF TA Health sector (FY03)

5. THE PROPOSED MALI PRSC-1

5.1 The proposed First Poverty Reduction Support Credit (PRSC-1) is the first in a programmatic series of operations supporting implementation of Mali's 2"d PRSF, the Growth and Poverty Reduction Strategy Framework (GPRSF).

5.2 The PRSC-1 supports the following three components of policy measures, in complement to ongoing or planned World Bank investment operations:

The first component of the credit focuses on strengthening the macroeconomic and budget frameworks, particularly their links to the poverty reduction strategy, and strengthening public finance management, namely management, accountability and transparency of budget execution as well as procurement.

The second component comprises growth-enhancing measures in the financial sector, private sector, electricity, transport and transit facilitation, Office du Niger irrigation, and cotton sectors.

The third component focuses on improving access to basic social services, notably health and social development, and rural water supply and sanitation.

5.3 These components directly support various aspects of the GPRSF. The first and second PRSC-1 components support aspects of the GPRSF's first two pillars, while the operation's third component supports the poverty strategy's third pillar. The proposed operation's selectivity, emphasis on growth, and limited scope is founded on analytical work, notably the CEM (Box 4.1), and builds on the lessons of Bank involvement in stressing advantages of flexible, graduated operations with simpler, robust design closely aligned with Mali's priorities.

5.4 Box 5.1 summarizes the prior actions completed for the PRSC-1; Annex 2 discusses the links between the prior actions and the previously defined triggers for PRSC-1, and Annex 3 presents the policy matrix for the PRSC-1 (covering 2006) along with the indicative measures for medium term to be supported under the next two operations in the series (covering 2007 and 2008). Design of the policy framework and selection of prior actions are consistent with the good practice principles on conditionality, as outlined in Box 5.2.

Box 5.1: Prior Actions for the Mali PRSC-1

The Government has agreed upon and implemented the following prior actions before the presentation of the credit to the Executive Board:

Component 1 : Strengthening the Macroeconomic Framework and Public Finance Management 1A: Strengthening the Macroeconomic and budgetary frameworks, and PEM

Implement the 2006 measures of the Government's Public Finance Management action plan; and make the CARFIP operational.

1B: Procurement Adopt (by the Council of Ministers) the revised CPAR.

Component 2: Support to Growth 2A: Financial sector

The authorities will: (i) invite the commercial banks to implement the consultant report's recommendations to strengthen loan processing procedures; (ii) facilitate the recovery of bad debts; and (iii) meet with the banks to agree on a strategy to clean up the bad loan portfolios.

2B: Private sector Adoption by the National Assembly of a law confirming that procedures pertaining to the attributing the unique fm ID number supercede previous procedures applied by Statistics, Tax and Treasury, Social security and Employment departments.

2C: Transport and transit facilitation Inscribe a separate line item for the road user fee in the price structure for petroleum product imports.

2E: Cotton sector Continue implementation of the cotton producer price setting mechanism; Validation by the stakeholders (Gov't, DAGRIS, producers) of the definition of the zones (3 or 4) to be privatized; and adoption by the Council of ministers of the final operational plan for the privatization of CMDT. Launch the bidding process for the selection of the privatization advisor.

2F: Ofice du Niger reforms Undertake a complementary study to strengthen the financing aspects of the private irrigation financing mechanism.

Com~onent 3: Access to basic social services 3A: Health and Social development

Provide written con f i i t i on of the modalities for transfer of the additional resources required for the 2007 program of the health and social development ministries.

Box 5.2: Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership

The operation supports implementation of Mali's Growth and Poverty Reduction Strategy Framework (GPRSF) adopted by the Government in December 2006 and reviewed by the parliament in the context of the 2007 budget discussions, following an extended consultation process. The GPRSF, which benefits fiom broad-based consensus, is Mali's third poverty reduction strategy (PRS), the first dating to 1998 and the second to 2002. Mali has an established track record of progressively strengthening implementation of its PRS. Extensive analytical work undertaken through Bank-supported projects (notably on cotton, irrigation and banlung) or managed directly by Bank staff (such as the CEM on growth, Diagnostic trade integrated framework study, transport sector studies, health and education studies) have contributed to the country's strategic framework.

Principle 2: Agree up front with the government and otherfinancialpartners on a coordinated accountability framework

The Bank's budget support is summarized in a brief and focused policy matrix. The Bank has been designated the lead budget support donor, and discussions are advanced toward defining the mechanisms for fully harmonized budget support. The Bank and the six other budget support donors signed an MOU in March 2006 outlining general budget support principles to which they would adhere. A specific agreement, being finalized, will outline a common policy support framework and lending modalities.

Principle 3: Customize the accountability framework and modalities of Bank support to county circumstances

At the Government's request, the Bank's budget support through the PRSC aims to be disbursed early in Mali's fiscal year. The sensitive policy reforms included in the PRSC (bank privatization, cotton sector liberalization, road user fee) reflect the Government's objectives stated in its poverty reduction strategy and comprise a subset of sensitive refonns already under implementation by the Government; as such they reflect country circumstances and priorities as informed by analytical work.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

The Bank's policy matrix comprises a limited set of actions (26 in total), of which only 10 are prior actions focused on policy measures that are critical to achieving program objectives. There are only 9 triggers for PRSC-2.

Principle 5: Conduct transparentprogress reviews conducive to predictable andperformance-based financial support

As agreed with the Government, processing of the PRSC is timed to the country's budget cycle, whch coincides with the calendar year. The PRSC amount is announced to the Government in the course of the preceding year to enable its incorporation in planning the subsequent-year budget. Regular performance reviews are undertaken and are progressively being aligned with Mali's evaluation cycle in the context of the donor harmonization agenda.

5.5 The proposed PRSC-1 would be the first programmatic budget support operation underpinning Mali's Growth and Poverty Reduction Strategy Framework. The PRSC-1 continues the EPPFMC reform agenda, and expands upon the growth support component as possible based on the recent country economic memorandum, with M h e r

deepening of this component expected in the 2nd and 3Td years of the series. The PRSC-1 comprises the following components:

Component 1: Budget framework, poverty reduction strategy, and PFM

5.6 Despite overall good macroeconomic performance over the past decade, maintaining macroeconomic stability continues to be a challenge for Mali that poses considerable risks for budgetary management as well as to priority growth and poverty reducing programs. The PRSC-1 continues the agenda pursued under the EPPFMC to support (i) greater linkage of the budget and poverty strategy with a continued prudent macroeconomic fi-amework, and (ii) strengthening the procurement system.

IA. Macroeconomic framework and public expenditure management

Kev issues and challenges

5.7 Mali's public expenditure management (PEM) is relatively good overall. According to the preliminary report of the recently completed public expenditure and fiduciary assessment (PEFA), Mali is above average on some PFM aspects, notably: (i) budget preparation (which is consistent with international norms) and the quality of information submitted to the national assembly with the draft budget; (ii) budget and accounting classifications; and (iii) established procedures such as quarterly transfer of resources for recurrent expenditures and oversight of the wage bill. Less satisfactory are budget execution regulations and practices for ensuring good resource management and for covering of Mali's financial obligations. Mali's PEM weaknesses are in the area of (i) provisional treasury management; (ii) intra-year monitoring of all four budget execution phases, aggravated by weakly reliable budget information flows among staff involved in the budget execution process; (iii) internal budgetary controls (too many control agencies and lack of coordination among them, and a general audit agency - the accounts section of the supreme court - that is not yet independent); and (iv) consolidation of financial accounts.

5.8 While budget preparation is good, there is room for improvement in linking the budget with the country's growth and poverty reduction strategy. A medium term expenditure framework is most advanced in the health sector but also exists for education and transport sectors, and is being prepared for agriculture and rural water supply and sanitation sectors. Nevertheless, so far there is only limited impact on budget allocations to the concerned sectors or on the quality of the policy dialogue between the finance and sector ministries. This situation persists because the MTEF regularly updated nor is the process well appropriated by sector staff, and the government-wide MTEF produced by the MEF is insufficiently integrated with the PRSF process.

5.9 Mali's PFM reforms thus need to place emphasis on strengthening: (i) the record keeping systems as well as secure sharing of budget information; (ii) internal control capabilities of the concerned institutions and their staff; and (iii) the budget's links to the country's strategic framework.

Government action and medium-tern obiectives

5.10 As regards budget formulation, Mali initiated a process toward results-based budgeting in 1998 with establishment of the program budget annexed to the budget law. With the PRSF 2002-2006, the Government sought to hrther strengthen the links between the budget and poverty reduction policies, through annual program reviews prior to initiating preparation of the next annual budget and through preparation of medium term expenditure framework (MTEF) at government-wide and sectoral levels. This process requires continued appropriation and strengthening, including greater consistency between the overall and sector MTEFs, and between the MTEFs and resource constraints defined by the macroeconomic fi-amework. To this end, a logical framework was established in 2005 and used to formulate the expenditure program under the GPRSF (2007-201 1).

5.1 1 To strengthen management and internal control systems, the Malian authorities:

established an interconnected information system and data base for key departments (budget, treasury, financial controls) of the Ministry of Economy and Finance (MEF) engaged in the budget execution process;

initiated the interconnection process in 2006 at sub-national levels of the central government, building upon existing software and training staff to enable moving beyond shared budget data toward a single shared database within MEF;

established computerized auxiliary accounting capability at the treasury's accounting units;

established a reference price list updated annual to improve cost management during procurement;

established performance indicators by the internal control department and their use to enhance efficiency; and

established and disseminated a classification list for invoice line items to facilitate internal controls and reduce instances of rejected transactions requests.

5.12 As regards budget transparency, MEF made significant progress toward reporting and dissemination of economic and financial information. A quarterly note has been regularly produced by the MEF for a couple years. The note, posted on the internet, integrates budget execution data on priority sectors, made readily available by the now-interconnected information systems. Next steps include web-posting of the overall MTEF and budget execution status of each ministry. As regards accountability, the MEF backlog in preparing the draft budget execution report for submission to the Account Section of the Supreme Court was cleared in 2005, following which MEF has maintained timely preparation and submission of the draft report as required by law.

5.13 The authorities have adopted a medium term action plan to strengthen and modernize Mali's public finance management, drawing on the various diagnostics produced in recent years including the. CFAA, CPAR, RONC, HIPC-AM, and EU expenditure conformity assessment. The action pan, which covers the period 2006-2008 and includes procurement, is

an essential element in the Government's dialogue with donors and lays the groundwork for the shift from project-based aid toward increased use of budget support and harmonized donor assistance.'*

PRSC-1 actions supporting the Government's medium-term promam

5.14 The PRSC-1 emphasizes two aspects of the PFM reforms. The first aspect is to strengthen the links between the growth and poverty strategy and the budget, consistent with maintaining macroeconomic stability, through the process of appropriation and updating of the overall and sectoral MTEFs. The second aspect is to improve the financial management system, through establishment of the institutional framework for monitoring implementation of the Government PFM action plan, improving the reporting on budget execution by making better use of the interconnected budget information system, and building capacity in administrative controls (internal and external departments) as well as jurisdictional controls unit (Accounts Section of the Supreme Court). The specific actions included in the PRSC-1 policy matrix are as follows:

pursue the process of updating the existing sector MTEFs and start the preparation of the MTEF for rural water supply and sanitation;

establish the institutional framework for implementation of the Government PFM action plan, and implement the 2007 phase of the plan;

generalize the improved Economic Reform and Development Program (PRED) software currently used in the budget department, to the treasury and financial control departments; and,

make past year's budget management accounts consistent;

Expected benefits of the PRSC-1 actions

5.15 The PRSC-1 helps Mali make progress on its budget information and reporting system. Over the medium term this process will improve the quality and availability of administrative accounts, the consolidated statement on the Government's financial operations, treasury balance statement and other reports. Improvement of reporting as well as internal controls and ex-post audits, and strengthening the insti