Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 37974-CF

INTERNATIONAL DEVELOPMENT ASSOCIATION

JOINT INTERIM STRATEGY NOTE

FOR

THE CENTRAL AFRICAN REPUBLIC

FOR FISCAL YEARS 2007-2008

November 28,2006

Country Department 7 Africa Region

African Development Bank Country Regional Department, Central 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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CURRENCY EQUIVALENTS (as o f November 10,2006)

Currency Unit: CFAF Franc

1 UA = US$1.4898 1 UA = 762.46 CFAF US$1 = 510.85 CFAF

BUDGET YEAR January 1 - December 3 1

ACRONYMS AND ABBREVIATIONS

AAA AFD AfDB ADF X I AGETIP BADEA BEAC BONUCA BWI CAR CDD CEMAC CFAF CFAA CRN CRS COOP1 CPIA CPIP DRC DSA EDF EITI ENERCA EPCA ESPF ESW EU FACA FOMUC FURGEC GDP GEF HIPC HIV/AIDS HDI IDA IFAD IMF JISN KfW LICUS MAP MDBs MDGs MDRI

Analytical and Advisory Activities French Development Agency African Development Bank African Development Fund X I Small contracts procurement agency Arab Bank for African Economic Development Central Bank o f Central African States UN Office for Consolidation o f the Peace in Central African Republic Bretton Woods Institutions Central African Republic Community-Driven Development Central African Economic and Monetary Community African Financial Community Franc Country Financial Accountability Assessment Country Reengagement Note Catholic Relief Services Cooperazione Internazionale, an Italian NGO Country Policy and Institutional Assessment Country Procurement Issues Paper Democratic Republic o f Congo Debt Sustainability Analysis European Development Fund Extractive Industries Transparency Initiative Energy Utility in Central African Republic Emergency Post Conflict Assistance Economic and Social Policy Framework Economic and Sector Work European Union Central African Republic Armed Forces Multilateral Forces in Central African Republic Emergency Funds for Economic Management in Central African Republic Gross Domestic Product Global Environment Facility Heavily Indebted Poor Countries Human Immunodeficiency Virus/ Acquired Immunodeficiency Syndrome Human Development Index International Development Agency International Fund for Agricultural Development International Monetary Fund Joint Interim Strategy Note Kreditanstalt fiir Wiederaufbau Low Income Countries Under Stress Multi-Sector HIV-AIDS Program Multilateral Development Banks Millennium Development Goals Multilateral Debt Relief Initiative

MDRP MTEF NEPAD NGOs NPV OECD-DAC

OHADA PCCF PRGF PRSP RIBSUP SDR SMEs SODECA TRM TUPP UA UNDP UNESCO UNICEF us VAT WB WBG

Multi-Donor Reintegration & Demobilization Project Medium-Term Expenditure Framework New Partnership for African Development Non-governmental Organizations Net Present Value Organization for Economic Cooperation and Development - Development Assistance Committee Organization for Harmonization of Business Law in Africa Post-Conflict Country Facility Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Reengagement and Institution-Building Support Program Special Drawing Rights Small and Medium size Enterprises Water Utility Central African Republic Transitional Results Matrix Single Petroleum Products Tax Unit o f Account (for AfDB) United Nations Development Program United Nations Education and Science Organization United Nations Children’s Fund United States Value Added Tax World Bank World Bank Group

World Bank Vice President: Gobind Nankani Country Director: Ali M. Khadr Lead Economist: Brendan Horton Task Team Leader: Nestor Ntungwanayo Other Team Members: Janet Dooley, Brendan Horton, Al i Zafar, Jerome Chevallier, Maude Jean-

Baptiste, Gilles Alfandari, Sigrun Aasland, Giuseppe Zampaglione, Ronnie Hammad, Kossi Eguida as well as other CAR Country Team members contributed to this strategy.

African Development Bank Vice President: Joseph B. Eichenberger Country Director: Mohamed J. Gharbi Lead Economist: Issa Koussoub6 Task Team Leader: Olivier Manlan

Table of Contents I . INTRODUCTION .............................................................................................................................. 1

A . Political and Security Context ......................................................................................... 2 B . Social Context .................................................................................................................. 2 C . Governance ...................................................................................................................... 3

RECENT AND PROSPECTIVE ECONOMIC DEVELOPMENTS ............................................ 5

Macroeconomic Performance .......................................................................................... 5 External and Domestic Debt ............................................................................................ 6 Macroeconomic Outlook ................................................................................................. 7

I11 . CAR’S DEVELOPMENT STRATEGY ........................................................................................... 9 The Government’s Economic and Social Policy Framework .......................................... 9

I1 . A . B . C .

A . I V . WORLD BANIUAf‘DB INTERIM STRATEGY FY07-08 ............................................................ 11

A . B . C .

D .

Rationale and Approach o f the Joint Strategy ............................................................... 11 Objective and Pillars o f the Joint Strategy ..................................................................... 12 Planned World Bank and African Development Bank Assistance, FY2007-2008 ............ 15 Results Monitoring and Evaluation ............................................................................... 18

V . PARTNERSHIP ............................................................................................................................... 19 V I . RISKS AND RISKS MITIGATION ............................................................................................... 19

List of Annexes

Annex 1 : Summary Matrix o f Government Priority Actions (2006-2008) ................................................ 22 Annex 2: Results matrix for CAR .............................................................................................................. 24 Annex 3: World Bank and AfDB Technical Assistance to CAR in 2007-08 ............................................ 26 Annex 4: CAR Macroeconomic Framework (2002-2009) ......................................................................... 27 Annex 5: Sector Background in CAR ........................................................................................................ 28 Annex 6: CAR’S Governance Indicators (top) Compared with sub-Saharan Africa ................................. 31 Annex 7: CAR - Donor Support by Sector FY 2006-2008 ........................................................................ 32 Annex 8: Activities by Major Donors and by Sector ................................................................................. 33

Annex 10: AfDB Background Intervention ............................................................................................... 38 Annex 9: CAR - Country Financing Parameters ........................................................................................ 34

Annex 1 1 : AfDB Ongoing Operations ....................................................................................................... 39

CAS ANNEX A 1 : Central African Republic at a Glance ......................................................................... 40 CAS ANNEX B2: Selected Indicators o f World Bank Portfolio .............................................................. 43 CAS ANNEX B3: IBRD/IDA Program Summary ................................................................................... 44 CAS ANNEX B4: Summary o f Nonlending Services ............................................................................... 45

List o f Tables

Table 1: Selected Economic and Financial Indicators. 2003-2008 .............................................................. 6 Table 2: World Bank and AfDB Support to CAR. FY07-FY08 ................................................................ 14

List of Boxes

Box 1 : Country Profile ................................................................................................................................. 1 Box 2: Participatory Approach in the Preparation o f the JISN .................................................................. 19

EXECUTIVE SUMMARY

(i) The Central African Republic (CAR) has had a long history o f political instability and episodic low-intensity conflict, which culminated in a change o f regime in March 2003. Following a two-year political transition, a new Government took office in 2005 and has shown commitment to economic reform in order to break the vicious circle o f armed conflict, ineffective and bankrupt government, and deteriorating social indicators. Despite some clear signs o f progress, however, the situation remains fragile.

(ii) After presidential and legislative elections in 2005 conferred political legitimacy on the Government, major development partners have sought to deepen their engagement and/or reengage following arrears clearance. In collaboration with other partners, including the Afr ican Development Bank (AfDB), France, the IMF, and the European Union, the Wor ld Bank has helped prepare a strategy to address the country’s urgent financial requirements. The cornerstone i s a resolution o f CAR’S external arrears to multilateral creditors within a medium-term framework, paving the way for the country to access debt relief through the HIPC initiative and more substantial donor support to CAR. In addition, a Demobilization and Reintegration project and two L ICUS Trust Fund grants’ supporting the provision o f social service delivery to communities as wel l as improved governance were mobilized by the Bank to help build security and put in place the governance conditions, particularly in public finance management, necessary to set the stage for reengagement.

(iii) CAR’S economic performance has been poor over much o f the last decade. Landlocked, hindered by protracted instability, and adversely affected by trade shocks, the economy o f CAR has registered low growth over the last decade and has witnessed a decline in real GDP per capita. Economic growth has posted a slight recovery since 2004, but remains vulnerable to shocks. However, the steady rise in debt and continued accumulation o f arrears, both domestic and foreign, has undermined macroeconomic stability and eroded the country’s long-term fiscal and debt sustainability. As a result, the country faces financial difficulties that can be addressed only with external support.

(iv) Protracted conflicts, HN/AKDS, malaria and malnutrition have negatively impacted social indicators, which stand well below the average for sub-Saharan Africa. Per capita income i s US$350 (2005); and about 70 percent o f the population lives below the poverty line. L i f e expectancy at birth decreased from 49 years in 1988 to 39 years by 2005, and the incidence o f H IV /A IDS i s 10.7 p e r ~ e n t . ~ The infant mortality rate i s around 132 per 1000 compared to 86 per 1000 for sub-Saharan Afr ica (2003), and maternal mortality has increased from 683 to 1350 deaths per 100,000 births from 1988 to 2003 respectively. Owing to the frequency o f conflict, there have been a large number o f internally displaced people, and there has been a disproportionate impact on women and children.

(v) While the Government develops i t s full long-term Poverty Reduction Strategy, the authorities have prepared an 18-month transitional strategy, the Economic and Social Policy Framework (ESPF), which emphasizes the following four areas: (a) reinforcement o f security and consolidation o f peace; (b) improvement o f governance and public sector institutional capacity; (c) promotion o f macroeconomic stability and economic growth; and (d) improvement o f the population’s access to essential social services and rehabilitationheconstruction o f basic infrastructure in rural and urban areas.

(vi) This Joint Interim Strategy Note (JISN) for FY07-08, prepared by the Wor ld Bank and AfDB, reflects the outcome o f consultations with stakeholders in Bangui, and i s aligned with the Government’s priorities. The JISN w i l l provide support to Government to address the country’s development challenges

’ Low Income Countries under Stress (LICUS) grants for fragile states. Country at a Glance, World Bank estimates; Atlas method Source: U N A I D S

2

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and help it implement i t s reform program. framework underpinning the relationship between the two institutions and the C A R Government.

The document provides the analytical and operational

(vii) Despite the severity o f CAR’S difficulties, the current Government has staved o f f collapse, and now offers a rare window o f opportunity to foster recovery and longer-term development. It has launched economic reforms to spur recovery and longer-term economic growth but wil l not be able to address the formidable reform agenda successfully without the restoration o f large-scale international support, thus far blocked by CAR’S external arrears. The JISN has been designed to help C A R recover from a long period o f instability, and to begin laying the foundations for sustained, shared growth over the medium term. Moreover, it seeks to help the country restore credibility in public institutions and set the stage for a broader engagement o f the international community in the country. A combination o f help with arrears clearance, budget support, and new investments are the key features o f the proposed support.

(viii) The JISN draws upon the growing experience with engagement in Fragile Statedpost-conflict countries. It has two broad objectives: (a) supporting economic recovery and helping to strengthen public sector governance and technical capacity; and (b) supporting human development, particularly for the poor. In particular, the JISN i s expected to contribute to: increasing external assistance flows to underpin socio-economic recovery; strengthening capacity in the administration and creating conditions for better public sector governance; reinforcing trust in government and strengthening capacity at the community level; and addressing urgent basic needs o f the population through social service delivery and income-generating activities.

(ix) The Wor ld Bank wil l provide assistance over the 18-month strategy period in several areas. An exceptional IDA allocation o f US$lOO mi l l ion for the IDA-14 period has been provided for C A R on grant terms to support reengagement through both budget support and investment funding. As part o f this allocation, the Bank i s providing a US$82 mi l l ion Reengagement and Institution-Building Support Program Grant to support reengagement. The balance o f IDA resources o f US$18 mi l l ion wi l l be used over the 18-month period to address basic infrastructure and other critical needs. In parallel, the World Bank wil l restructure an existing H IV /A IDS project, o f which US$17.5 mi l l ion remains undisbursed, in light o f developments since the project was approved in late 2001. In addition, the ongoing Demobilization and Reintegration Program and second L ICUS grant wi l l support the new program, and it i s l ikely that a third L ICUS grant wi l l be sought. The Bank i s also envisioning analytical and advisory work, notably in public finance, poverty analysis, and key productive sectors.

(x) The AfDB wil l focus its financial support on capacity-building and on the restoration o f normal financial relations with external creditors as wel l as on reform implementation through balance o f payment support, socio-economic rehabilitation, promotion o f rural development through support to the agriculture sector, regional and countryside transport facilitation, and other basic infrastructure such as water and sanitation. A US$23 mi l l ion grant will be provided to C A R in order to help the country finance part o f the US$46.5 mi l l ion arrears clearance within the post-conflict country arrears clearance scheme (PCCF).4 Moreover, in addition to a US$5.3 mi l l ion grant signed in August 2006 to support economic planning and PRSP preparation, the AfDB wil l support the reform program through a US$9.7 mi l l ion balance o f payments in 2007. In 2008, a Rehabilitation and Reinsertion project wi l l be supported.

(xi) The two institutions’ strategy carries significant internal and external risks. Political instability, a deterioration o f the security situation, and insufficient progress in strengthening governance may adversely affect development outcomes during the strategy period. Vested interests, coupled with weak institutional capacity and/or insufficient political commitment may prevent effective implementation o f policy reform. On the economic front, weak revenue mobilization or slippages in expenditure control risk undermining CAR’S fiscal position, terms o f trade shocks may heighten the country’s economic

Maximum flexibility will be sought from the AfDB Board regarding: (i) the contribution o f CAR; (ii) the cut-off date; and (iii) maturities coming due over the next several months in order to prevent CAR from lapsing back into arrears before reaching the HIPC decision point.

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vulnerability, and external financing shortfalls on a sustained basis may jeopardize the country7s prospects for recovery. There i s also a risk that the country may fa l l back into non-accrual status if it cannot reach the HIPC Decision Point promptly. These risks wi l l need to be mitigated, inter alia, through, good macroeconomic and budgetary management by the Government on a sustained basis, and the provision o f adequate financial support f rom the international community.

(xii) The following issues are proposed for Board discussion:

Are the outcomes which the strategy aims to help bring about appropriately realistic in light o f the country’s fragile and volatile economic situation?

I s the strategy adequately tailored to the country’s institutional capacity to address the challenges facing it?

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I. INTRODUCTION

1. This Joint Interim Strategy Note (JISN) presents the support to the Central African Republic (CAR) planned by the World Bank and the African Development Bank for the next 18 months (FY07-08). On the World Bank side the JISN follows a Country Re-engagement Note (CRN) that was discussed by the Board o f Executive Directors on July 27, 2004, and on the AfDB side by a Dialogue Note discussed by the AfDB Board on March 15, 2006. The over-arching goal o f the JISN i s to help CAR recover from a long period of instability and begin laying the foundations for sustained, shared growth over the medium term. Key features o f the proposed support include helping CAR: (i) resolve its arrears to the two institutions-and to multilateral development partners more generally-in order to restore substantial external support to the country; (ii) begin benefiting from debt re l i e f through access to the Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) initiatives as early as possible; and (iii) address urgent needs on the ground, notably by rebuilding minimal effectiveness o f government to set and execute policy and deliver services. However, given the magnitude o f problems in CAR, it i s important that the JISN embody realistic expectations concerning what development partners, and the World Bank and AfDB in particular, can help the country achieve over the next 18 months.

2. While security has remained fragile since the 2004 CRN, political developments have been broadly positive. Outside of the capital, Bangui, security conditions are generally unfavorable, despite the presence of regional and French troops, and recent weeks have witnessed rebel activity in the Northeast province, which now appears contained. On the political front, presidential and legislative elections took place in March and May o f 2005 and were broadly considered free and fair, giving the current Government needed legitimacy. Moreover, pro-reform elements within the Government have succeeded in setting a favorable course for the country on a path o f recovery and longer-term economic development. The World Bank has supported this course over the past two years by providing funding for service delivery to communities administering multi-donor funding for a demobilization and reintegration program to help consolidate peace and security. A deeper engagement i s now needed. The authorities believe that if they cannot promptly show tangible improvements in living conditions for the population, rising discontent coming on top o f widespread insecurity risks taking the country into a downward spiral once more. I t i s this urgency that underlies the present JISN.

A. POLITICAL AND SECURITY CONTEXT

3. The CAR has suffered during the last several years from recurring conflict. Triggers for bouts o f conflicts included mutinies within the armed forces in 1996 and 1997, three attempted coups d’6tat in 1999, 2001 and 2002, and a coup d’6tat in March 2003. The last o f these brought the current Head o f State to power. The 2003 regime marked the culmination o f a long-standing vicious circle whereby mutinies and conflict would cripple economic activity and government finances, leading to inability to pay c iv i l service (including military) wages or sustain even basic public services, in turn fueling further discontent and disturbance. In addition, there was litt le institutionalized political dialogue between those in power and the opposition. Collateral effects o f the conflicts in neighboring countries were also often a factor in sparking or propagating conflict. During the two-year transition period following the March 2003 change o f regime, a new constitution establishing a presidential system with terms l imited to two five-year mandates and embodying the principle o f separation o f powers was drawn up and eventually approved by referendum and ratified in December 2004.

4. Presidential and legislative elections took place under favorable conditions in March and May 2005, and were supported by the European Commission (EU), France, and the UN System. The current Head o f State, General Franqois BozizC, was elected after a run-of f contest. The political stage i s shared among a coalition o f parties (Convergence Kwa Nu Kwa - KNK) which has a majority in the National Assembly; the main opposition party, the Movement for the Liberation o f the People o f Central Afr ica (MLPC - the party o f former President-in-exile Ange-FClix PatassC); and other parties o f lesser influence.

5. A national dialogue initiated during the transition has, however, been difficult to sustain. A national dialogue that facilitated the building o f consensus among various interest groups with diverse and conflicting agendas, defined a roadmap for sustained national reconciliation and the strengthening o f the democratization process in CAR. A set o f key recommendations to guide the process o f rebuilding the nation’s foundations was adopted and are reflected in different aspects o f the reforms under way. However, the speed o f the process i s constrained by the l imited level o f resources as well as inability o f the Government to provide minimum basic public services to the population. In addition, there are deep- rooted challenges to the rule o f law and good governance, which have qualified the notable progress thus far and contributed to an erosion o f public trust and hope.

6. The security situation remains fragile. Efforts to restore security-supported by the United Nations Office for Consolidation o f the Peace in Central Afr ica (BONUCA), France and regional forces (FOMUC), which i s financed by the European Union up to end-June 2007, had begun building hopes o f stability. However, the positive trend has been set back, notably as a result o f increasing rebel activity in the North-East o f the country. This in turn i s linked to growing instability in neighboring countries, raising the risk o f widespread disorder in the region as a whole. The Government has appealed to the international community for support in containing rebel incursions, which it considers a significant threat to national security.

B. SOCIAL CONTEXT

7. With a per capita income of about US$350; the Central African Republic i s one o f the poorest countries in the world. Studies carried out in 2003 on household living conditions, with the support o f the UNDP, show that the proportion o f persons living below the poverty level i s 72 percent in

Country at a Glance, World Bank estimates; Atlas method. 5

rural areas and 68 percent in urban areas.6 Whereas poverty in urban areas i s related to the weakness o f the economic recovery and the arrears in salaries and pensions, rural poverty i s particularly due to the conflicts which caused population displacement and the lack o f security, the declining level o f agricultural production, as well as the isolation and the poor condition o f rural roads which have not been maintained for more than a decade and are now impassable during the rainy season.

8. Social indicators are well below the average for sub-Saharan Africa. The political-military crises experienced during the last 10 years have negatively affected the living conditions o f the population. The Human Development Index (HDI), which was 0.366 in 2001 fe l l to 0.355 in 2003 (versus 0.615 for sub-Saharan Africa). L i f e expectancy at birth has decreased from 49 years in 1988 to 39 years in 2005, while maternal mortality has increased with more than 1,350 deaths registered per 100,000 births in 2003, versus 683 in 1988. The infant mortality rate i s around 132/1000 in 2003, versus 86/1000 for Africa.

9. Health and education suffer from lack of personnel, financial resources and equipment. The education sector has experienced the displacement o f teachers and populations, preventing school attendance, the destruction o f equipment and work tools caused by the recurring conflicts, as wel l as strikes by teachers due to non-payment o f salaries. The rate o f school attendance at the primary level, which was 48 percent in 1988, fe l l to 41 percent in 2003. In Bangui rates are much higher at around 79.5 percent. In health, facilities are also dilapidated and lack personnel and financial resources, medication and equipment. Moreover, in both sectors, the distribution o f personnel heavily favors Bangui over the regions.

10. CAR i s among the most affected countries in Central Africa by the HIV/AIDS epidemic. Nearly I 1 percent' o f people between the ages o f 15-49 are infected with HIV/AIDS, which includes 22 percent o f pregnant women. According to UNDP and UNICEF, 66 percent o f hospital beds were occupied by persons infected with HIV/AIDS, and close to 86 percent o f teacher deaths were connected to HIV/AIDS in 2000. This situation i s essentially attributable to poverty and lack o f education as well as lack o f access to testing, counseling, and adequate treatment as wel l as poor health services.

11. Gender equality remains an important challenge in efforts to promote sustainable and equitable development in CAR. The gender specific indicators o f human development in 2003, which measure sociological inequalities between sexes, ranked CAR 129'h out o f 175 countries, with an indicator o f 0.338, less than the average for sub-Saharan Africa. Rapes and violence against women were widespread in the conflict situation. The participation o f women in decision-making remains marginal. This i s mainly a result o f lack o f qualifications, and the burden o f tradition and customs. School enrollment rates are higher for boys than for girls: 44.3 percent at primary and 26.5 percent at secondary for boys, compared to 36.9 percent and 15.7 percent respectively for girls.

C. GOVERNANCE

12. CAR continues to face major governance challenges as years of political instability have significantly eroded the legitimacy and accountability of the State. Poor economic governance and weak institutional capacity across the entire public administration have been a key impediment to economic growth and poverty reduction. Non-transparent management o f public finances and procurement, weak financial controls, and a dysfunctional justice system have lent themselves to widespread corruption with impunity, contributing not only to poor quality o f services but also a high

Proportion o f households with a level o f expenditure lower than the minimal amount required for providing

Source: UNAIDS

6

a balanced amount o f food to satisfy dietary needs. 7

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level o f public distrust in government institutions. Of particular concern are problems with service delivery and with transparency and accountability, especially in the management o f natural resources (mining and forestry) and the investment climate. These are directly related to the overall deterioration and malfunctioning o f the State during this long period o f crisis

13. Governance in the security sector in CAR also requires more attention and action. The national army o f approximately 5,200 i s undersized and under-trained. The defense and police administrations are not well structured, and basic equipment is lacking. Despite the government’s commitment to carry out reforms in that sector, progress has been slow, owing in particular to vested interests, weak technical capacity and distressed public finances. A national dialogue workshop in September 2003, which brought together major domestic stakeholders, extended a general amnesty to al l those who were involved in acts o f violence during the years o f conflict for the sake o f national reconciliation. This provided those who committed economic and/or human crimes the opportunity to avoid any pursuit through legal channels. As a result, there i s a collective perception o f continuing impunity, especially with respect to combatants involved in violence against the civil ian population. Changing the collective perception o f impunity will need time and wil l require better training o f soldiers and completion o f the reintegration process for former combatants as well as implementation o f the broader government strategy to overhaul the security sector.

14. CAR ranks well below sub-Saharan Africa averages in all o f six of the World Bank Institute’s governance indicators (Governance Research Indicator Country Snapshots) measuring specific dimensions of governance. The most challenging dimensions are government effectiveness, rule o f law and regulatory quality (see Annex 6). Transparency International’s 2006 Corruption Perception Index ranks C A R 130 out o f 163 countries. The Wor ld Bank and AfDB’s Country Policy and Institutional Assessment (CPIA) for 2005 give an equally challenging picture o f governance and corruption in CAR.

15. Against this backdrop, however, some progress has been achieved over the past year in specific areas of governance: these areas include public finance management and public administration. A notable outcome was progress on containing the wage bill, expected to generate savings o f 1 percent o f GDP on an annual basis-by lowering indemnities, identifying 1,600 ghost workers through a 2005 census o f government workers, and freezing the hiring o f government workers with the exception o f the health and education sectors. Measures have been taken to: (i) improve the management o f the treasury and make it more transparent (reducing the number o f government accounts in commercial banks and strengthening oversight); (ii) reduce salary and pension arrears (quasi-normal payment o f salaries in 2006); and (iii) increase collection and recovery o f revenues (adoption o f fiscal audit guides, strengthening o f oversight o f eligibility o f companies subject to a flat tax, and consolidation o f oversight services for recovery o f taxes from major taxpayers). The Government has been publishing information regularly on fiscal revenue and expenditure as wel l as on the allocation o f permits in the mining and forestry sectors. Progress has also been made in improving the business environment and dialogue with the private sector, especially in the telecommunications and forestry sectors.

16. Rebuilding institutions and improving economic governance will be central to sustainable, shared growth and poverty reduction in CAR. This, together with strengthening political governance, security and national dialogue and cooperation, are the key challenges ahead for the country. In line with the fight against corruption, a new organizational structure for the Ministry o f Justice i s in place, and a newly established financial unit has taken up many o f the cases o f fraud identified in the c i v i l service audit. Moreover, the authorities have begun publishing a l i s t o f ongoing corruption cases and their description. The Government also created in 2005 the National Agency for Financial Investigation and an Inter-Ministerial Committee on Corruption. The Public Procurement Code i s in the process o f being

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developed. And in March 2006, the Government set up a permanent framework for coordination with the private sector to find solutions to regulatory problems.

11. RECENT AND PROSPECTIVE ECONOMIC DEVELOPMENTS

A. MACROECONOMIC PERFORMANCE

17. Economic growth in CAR has posted a modest recovery since 2004, but remains vulnerable to shocks. Due to a plethora o f factors-among them the intermittent conflict and c iv i l strife, poor macroeconomic management, and a limited economic base-economic growth and fiscal stability have proven elusive goals. Real GDP growth was negative in 2002 and 2003, with GDP experiencing a particularly large contraction o f 7.6 percent in 2003 owing to the disruption caused by the change o f regime. By 2004, there was a fragile economic recovery, and in 2005, C A R achieved a modest growth o f 2.2 percent due in large part to improvements in the mining and forestry sectors and heightened activity in the tertiary sector (transport, communications, and commerce). However, the economy remains vulnerable to trade shocks and climatic vagaries. Rural food crop production in particular i s very sensitive to security conditions.

18. Due to prudent monetary management by the regional central bank, the BEAC, inflation in CAR has been contained. Like other countries in the Central African CFA zone, price stability has been maintained, and inflation reached only 2.9 percent in 2003. Since the rules in the CFA zone require that monetary policy be used to maintain the fixed exchange peg to the Euro, C A R has relinquished monetary sovereignty and has not resorted to printing money to finance the deficits. A s a consequence, inflation has not been a major concern in CAR. Nevertheless, growing inflationary pressures are apparent, and estimates for 2006 suggest that inflation may reach 4.5 percent as food production remains curtailed by security problems and the pass-through effect o f the increase in petroleum prices i s manifested.

19. One of the major challenges for CAR has been its difficult fiscal position. L o w revenue mobilization coupled with poor expenditure controls have led to chronic budgetary deficits, with the primary fiscal balance reaching -3.5 percent o f GDP in 2005. The fiscal deficits that resulted were init ially financed by grant and concessional external financing, but these have dried up since 2000, and the government has increasingly resorted to accumulating arrears, both internal and external, t o finance i ts deficit. Revenues over the last decade have averaged between 8 and 9.5 percent o f GDP in 1997-2001, rising to a peak o f 10.8 percent in 2002, and reaching 8.2 percent in 2005. This revenue ratio ranks as one o f the lowest in sub-Saharan Africa, and domestic revenue as a share o f GDP has been insufficient to finance the core functions o f the state. The main reasons for this low level o f revenue mobilization include the high share o f subsistence agriculture, a shrinking formal sector, weak customs administration, and widespread tax-evasion, especially in the mining sector.

20. At the same time, poor expenditure controls, resulting in a marked discrepancy between budget allocations and outturns, have led to unproductive spending, including on public sector wages. Over the 2002-2005 period, total expenditure averaged more than 13 percent o f GDP and was financed through both domestic and foreign borrowing. In general, excess spending on the wage bill, coupled with internal and external debt payments, has added significant fiscal pressures on the state in C A R and prevented much needed spending for the country’s social and infrastructure sectors.

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Table 1: Selected Economic and Financial Indicators, 2003-2008 (in percent o f GDP unless otherwise indicated)

Actual Projections Indicator 2003 2004 2005 2006 2007 2008 Output and Prices Annual Percentage GDP -7.6 1.3 2.2 3.2 4.0 4.3 CPI Inflation 4.4 Nominal Exchange rate (CFA 580.1 franc/$) Public Sector Revenues 7.7 Expenditure 12.3

Balance o f Payments Domestic primary balance -2.1

Overall Balance o f payments -4.7

-2.2 2.9 4.5 3 .O 2.5 528.3 527.5

(in percent o f GDP) 8.1 8.2 8.9 9.9 10.6 13.5 16.7 12.4 12.7 13.2 -2.7 -3.5 0.8 1 .o 1 .o

-2.8 -0.8 -2.6 -2.1 -1.7 (in percent o f GDP)

Exports (% change) -19.6 -0.5 2.9 12.0 7.1 6.8 Imports (“h change) -15.6 17.0 .. 8.9 11.3 10.6 9.8 Debt (in percent o f GDP) Debt Service dueExports (in 30.5 21.8 22.3 21.0 21.0 21.6 percent) Accumulated external arrears 26.2 25.6 26.7 0 0 0 Source: IMF

21. The country’s balance of payments and current account have been in deficit throughout the last decade and have been financed largely by an accumulation of external arrears. The external current account deficit, which reached 4.4 percent in 2004, has been affected by the rising cost o f o i l imports and the decreasing value o f exports relative to imports. However, positive balances on transfers and remittances have helped the overall current account balance. In the last five years, diamonds and timber, the country’s two leading exports, have accounted for more than 80 percent o f exports, however, smuggling and fiscal evasion prevented overall revenue from increasing further. Finally, the real effective exchange rate has registered a modest appreciation since the introduction o f the Euro in 1999, partially undermining the competitiveness o f the tradables sector outside o f these natural resources.

22. CAR’S macroeconomic policy stance has also been influenced by its membership in CEMAC, the economic and monetary union of Central African States. As a member o f CEMAC, CAR implemented the Common External Tariff in 1994; lowered customs tariffs on products from the community in 1998; reformed the Investment Code in 1996; and introduced the VAT on January 1,2001. These measures were undertaken to improve the country’s trade regime and investment climate and facilitate i t s integration into the global economy. The benefits to CAR from trade liberalization have not been significant, however, because o f the unsettled situation in the country and the poor condition o f infrastructure.

B. EXTERNAL AND DOMESTIC DEBT

23. CAR has a heavy and unsustainable external and domestic debt burden in relation to its economic size. As o f end-2005, total external debt including arrears was about US$1.07 bil l ion (about 107 percent o f GDP), o f which US$741 mill ion are current maturities and US$328 mill ion represent arrears (27 percent o f GDP). O f these external arrears, about US$102 mill ion was owed to multilateral creditors (US$49 mill ion to IDA, US$36 mill ion to AfDB, US$9.4 mill ion to the OPEC fund, and US$6.8 mill ion to FAD), and US$184 mill ion to official bilateral creditors, o f which US$23 mill ion to the Paris

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Club, and the rest to other official bilateral creditors. Commercial debt to the London club stands at about US$48 million, o f which US$42 mi l l ion represents arrears. Beginning in late 2001, the country suspended i t s debt payments to creditors, including IDA (as o f January 2002) and AfDB (as o f 1994), with the exception o f the IMF.

24. CAR i s in a situation of debt distress. At the end o f 2005, the net present value (NPV) o f debt to exports was estimated at 53 8 percent, significantly above a l l sustainability thresholds, and the debt service due as a percentage o f exports was more than 20 percent in 2005. I t s inability to service i t s external debt has undermined i t s relationship with international creditors. At this stage, external debt can only be serviced through exceptional financing. A jo in t Bank-Fund Debt Sustainability Analysis (DSA) i s being prepared in the context o f the HIPC Preliminary document for Board discussion alongside this document. The HIPC common reduction factor, which will be confirmed in the Decision Point document, i s l ikely to range between 70 and 75 percent. CAR has made significant progress on reaching understandings with multilateral creditors to resolve i ts outstanding arrears. Arrears to IDA were cleared on November 27,2006 and arrangements are being finalized for the clearance o f CAR’s arrears to AfDB before the end o f December 2006.

25. The international financial community will need to continue to provide financing support to CAR over the long haul. External assistance wil l be needed from several donors, including the EU and France, in order to help meet the country’s vast needs. Arrears clearance alone and debt reduction through the HIPC Initiative wi l l not be sufficient, as CAR would s t i l l lack the domestic resources needed to pay current maturities and invest for development. In addition, C A R will need continued financial assistance even after it attains the HIPC Decision Point due to the size o f debt overhang, the paucity o f i t s domestic resources, and the scale o f the country’s development needs. Overall, the sustainability o f CAR’S debt wil l depend on the willingness o f official creditors and donors to provide positive net transfers to the country on grant or highly concessional terms while reforms are implemented by the authorities to progressively increase the primary fiscal surplus and limit CAR’s current account deficit.

26. The problem i s further complicated by the existence of a large stock of domestic debt and arrears amounting to about 35 percent of GDP at end 2005. About 9 percent o f this stock i s held by financial institutions, including the Central Bank, which charge high real interest rates in excess o f 10 percent, and the remainder (26 percent) by c iv i l servants for which the total stock o f arrears amounts to more than 42 months o f salaries.

27. The settlement of these arrears and preventing their accumulation in the future i s an important social, economic and financial issue. The accumulation o f salary arrears over the last decade has been a principal cause o f domestic conflict. The arrears buildup to the financial and private sector has eroded their confidence in the ability o f the government to pay i ts bills. The factors behind the accumulation include the lack o f an effective cash management system, weak coordination between Treasury and spending ministries, the prevalence o f extra-budgetary expenditure, and under-budgeting o f certain categories o f expenditures, notably utilities. The result o f this situation i s increasing unwillingness o f the private sector to supply the government except on a prepayment basis, which has in turn weakened the impact o f public expenditure. Settling internal arrears wi l l be a major challenge facing government that wi l l need to be worked out in dialogue with c iv i l service unions and suppliers’ groups and i s l ikely to put a further significant strain on public finances.

C. MACROECONOMIC OUTLOOK

28. The medium-term macroeconomic outlook for CAR, while uncertain, holds reasonable promise. A combination o f domestic policy reform and external assistance can help lay the foundations for longer-term sustainability and development. CAR’S success wil l depend on adherence to a medium-

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t e r m macroeconomic framework elaborated with the IMF and the Wor ld Bank that envisages stronger economic growth against a backdrop o f polit ical stability. The authorities wil l need to improve macroeconomic and fiscal imbalances through a combination o f structural reforms, measures to boost domestic resource mobilization, and greater fiscal discipline. The macroeconomic outlook i s predicated on both the credibility o f the country’s economic reforms and the adequacy o f external assistance.

29. The macroeconomic framework recently elaborated for the 2006-2009 period in discussions with the IMF and incorporated into the latest budget law envisages a more robust economic recovery than in the past. The framework i s based on the continuation o f the government’s economic reforms, a favorable international environment, and significant inflows o f foreign aid. The framework also supposes that there i s no further accumulation o f external arrears and debt service i s assumed to be fully paid in a timely manner on an unreduced basis, and that the country wi l l have the necessary financing to fully clear the stock o f external arrears.

30. Specific medium-term macroeconomic objectives are: (a) to achieve real medium-term economic growth o f 4.0 to 4.5 percent in 2007-2009, due to rising public and private investment and a favorable external environment and higher exports and increased output in the agricultural and tertiary sectors, which would allow for per capita annual income growth o f about 2 percent; (b) to reduce domestic inflation from 4.5 percent in 2006 to 3.0 in 2007 and to 2.5 percent in 2009, consistent with the trend in the Euro zone; (c) to increase gross investment f rom 8.3 to 10.4 percent o f GDP in order to boost the country’s capital stock; (d) to increase revenues, including grants, by 1 to 1.5 percentage points o f GDP, and expenditures from 12.4 to 12.9 percent o f GDP, implying an overall deficit on a commitment basis o f less than 0.5 percent o f GDP throughout the program period, thus helping to reduce the debt overhang and leave room for growth-enhancing policies; and (e) to maintain a positive domestic primary balance (excluding grants, foreign-financed investment and interest payments) in a l l years averaging 1 percent o f GDP, giving the government more fiscal space for development spending. In the medium- term, real economic growth i s projected to increase modestly f rom 4 to 4.5 percent by 2009 due to rising public and private investment and a favorable external environment.

3 1. Fiscal reforms are projected to result in an overall decline in the budgetary deficit and a corresponding increase in the primary balance. Reforms in tax and customs administration are expected to increase the domestic revenue mobilization o f CAR to 10.6 percent o f GDP by 2008. Reforms in public financial management wil l contribute to containing expenditures to 13.2 percent in 2008, with a higher proportion o f spending going towards operations and maintenance, while foreign assistance i s expected to significantly boost capital expenditure. In the medium-term, the combination o f debt relief and fiscal reforms i s projected to improve the country’s fiscal space.

32. However, several challenges lie ahead for CAR, and the country’s macroeconomic situation remains fragile. Political uncertainty, a deteriorating security situation, andor stalling governance reforms may adversely affect economic outcomes and weaken the effects o f recent reforms. In addition, exogenous risks, such as trade shocks (for instance higher o i l prices or fall ing diamond prices), andor endogenous risks, such as l ow revenue mobilization and fiscal slippages, could hamper CAR’S economic progress. In this regard, it wi l l be essential that these risks be mitigated through fiscal prudence and judicious use o f foreign inflows.

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111. CAR’S DEVELOPMENT STRATEGY

A. THE GOVERNMENT’S ECONOMIC AND SOCIAL POLICY FRAMEWORK

33. Work i s underway on a full Poverty Reduction Strategy Paper (PRSP). CAR had prepared an interim PRSP, which was discussed by the Board in January 2001. Work on the full PRSP i s progressing satisfactorily, with additional donor-funded technical assistance having been recently put in place covering participation; preparation o f a medium- and long-term macroeconomic framework for growth and poverty reduction; and the establishment o f a monitoring and evaluation system. Work on the full PRSP i s scheduled to be completed around mid-2007.

34. In the meantime, the Government has prepared an 18-month strategy to lay out its reform plans and guide its economic policy dialogue with development partners during the critical period of re-engagement with multilateral donors over the next 18 months. This transitional strategy, known as the Economic and Social Policy Framework Paper (ESPF), is accompanied by a Transitional Results Matr ix (TRM). The preparation o f both the ESPF and the TRM has been supported by the donor community. The ESPF i s built around the four central themes in the draft full PRSP, as wel l as ongoing reforms supported by IDA, the IMF, France and the European Commission:

0 Improvement o f the population’s access t o essential social services and rehabilitated

Reinforcement of security and consolidation ofpeace

35. The Government is aware that the reinforcement o f security and the consolidation o f peace are prerequisites for a successful and lasting economic and social recovery and for improving the climate for both foreign and domestic private investment. The Government’s priority actions consist o f intensifying cooperation with neighboring countries (Chad, Cameroon, Sudan) as wel l as regional institutions (CEMAC) in order to secure borders, contain and prevent cross border conflicts. To this end, C E M A C countries have provided a multinational force, with financial support f rom EU and France, whose mandate expires in July 2007. Support i s also provided by the office o f the United Nations Special Representative o f the Secretary General in CAR, which monitors security, provides training to the National Police and the Gendarmerie. Support in this regard i s also provided by France.

Reinforcement o f security and consolidation o f peace; Improvement o f governance and publ ic sector institutional capacity; Promotion o f macroeconomic stability and economic growth; and

infrastructure.

36. In the short run, the Government’s aim i s to improve security and freedom o f movement in key agricultural areas, and on key commercial routes since rural insecurity i s eroding the authority o f the central government and having a detrimental effect on economic growth. In the medium term, the government intends to implement a complete overhaul o f the security sector. Success here wi l l require greater assistance from donors, since the resources required far exceed national availabilities, and will need to focus not only on provision o f equipment but also training and capacity building.

Improvement of governance and public sector institutional capacity

37. Goals under this rubric include: (i) improving public sector financial management systems, for both revenues and expenditures; (ii) reforming the c iv i l service and public administration; (iii) reforming

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the justice sector; and (iv) reducing corruption and money laundering. On the revenue side, the government i s focusing mainly on improved collection o f internal taxes and customs duties, which represent the bulk o f tax revenues. On the expenditure side, the aim i s to: (a) modernize budget and expenditure management procedures; (b) put in place a unified budget and accounting nomenclature to improve tracabilityhransparency; and (c) improve internal and external control and oversight mechanisms with a view to raising fiduciary standards and enhancing accountability, with the overall aim o f increasing the efficiency o f public expenditure, minimizing leakage o f funds, and ensuring better correspondence between budgeted and actual expenditures. An overhaul o f the procurement system has also begun with a view to bringing procurement legislation practices more into l ine with best international practice.

38. Particular emphasis i s to be placed on the reform and modernization o f the c i v i l service, which the Government considers essential to improving the quality o f public services. During 2006, the Government has been concentrating on setting up an Integrated Financial and Administrative Management system to improve payroll management and reduce fraud. In the medium-term, it plans to reorganize the administration through functional audits, address procedural reform o f human resource management and reform the wage and incentive system.

39. Legal reforms, which are to be based o n the recommendations o f a planned National Workshop on Justice, with support f rom the EU, will seek to strengthen the capabilities o f the legal apparatus through the modernization and the functioning o f the legal and judicial services, supported by training and equipment. It wil l be reinforced by specific actions to fight corruption and money laundering (the Unit for the Fight against Corruption and the Financial Bench in the Ministry o f Justice, the National Agency for Financial Investigation, and the Inter-Ministerial Committee to Fight against Corruption), that wi l l be part o f the framework o f a National Plan for Good Governance. Another key aim i s to improve the legal and regulatory environment for private enterprise and investment, and begin reversing the current climate o f impunity.

Promotion of macroeconomic stabil iw and economic growth

40. Key issues in the promotion o f macroeconomic stability and economic growth are: (i) increased revenue mobilization and improved expenditure management to reduce leakages, enhance the delivery o f basic services, and raise the level o f public investment to finance the country’s growing development needs; and (ii) a better business environment as wel l as structural reforms in sectors with growth potential (in particular agriculture, the private sector, forestry and mining)-all o f which are needed to raise private investment.

41. On the revenue front, since revenues are about 8 percent o f GDP, one o f the lowest in sub- Saharan Africa, a variety o f reforms have been introduced, mainly pertaining to indirect taxes and customs duties. These reforms wil l try to increase revenue mobilization, particularly in the mining and forestry sectors, and develop an effective and integrated revenue administration, including penalizing taxpayer delinquency and fraud, while avoiding discouraging the private sector through punitive rates. On the expenditure side, reforms will continue both with respect to wage and non-wage expenditures. The overall aim in terms o f macroeconomic management must be to ensure a primary budget surplus large enough to avoid the accumulation o f new external and internal arrears, which over the past decade have constrained access to external finance and constituted a significant burden on the private sector. A key objective o f the Government’s strategy i s therefore to solve the external and internal arrears problems which have eroded i ts relations with both domestic and international creditors and which are jeopardizing the country’s long-term sustainability. On the domestic front, the Government i s finalizing the inventory o f domestic arrears, and will propose, in concert with the private sector and i t s partners, a plan to resolve them, which should help recovery o f the private sector.

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42. The Government w i l l also focus on fostering private sector development by lowering factor costs (water, electricity, telecommunications), simplifying administrative procedures for imports and exports and for creating new businesses, and reforming the legal and regulatory frameworks, which wi l l help the development o f key sectors, notably mining, forestry and agriculture. Revival o f the agricultural sector i s a priority, by promoting public and private agricultural investment, rehabilitating the cotton sector, reviving o f coffee and food production, facilitating access to credit, and strengthening agricultural training and research.

Improved access to social services and rehabilitation of basic infrastructure

43. In the education sector, the Government aims to improve access to basic education, and strengthen institutional capacity in the sector as a whole. In the health sector, actions are planned to rehabilitate sanitation infrastructure, strengthen capacity, increase availability and quality o f basic health care and facilitate access to it, reduce infant and maternal mortality, and fight against the principal illnesses, including malaria, tuberculosis and HIV/AIDS. Concerning basic infrastructure, Government priorities include the rehabilitation o f rural roads in areas o f agricultural production, restoration o f communication and transport infrastructure to open up access for isolated pockets o f the population, development o f air transportation, increased energy production, and the encouragement o f new communication technologies.

44. The Government’s strategy i s broad as befits the situation, and will take several years to come to fruit ion even under favorable circumstances. The key outputs and outcomes expected over the next eighteen months pertain to (i) clearance o f external arrears to a l l multilateral creditors, and effective access to the enhanced HIPC initiative; (ii) the establishment o f budget and accounting nomenclatures, capable o f tracking revenues and expenditures f rom commitment to payment, as wel l as monitoring tax and payment arrears; (iii) full implementation o f a reformed and properly secured payroll management system based on a unified administrative cum payroll f i le, (iv) improvement o f the Treasury cash management system; (v) new procurement legislation; (vi) finalization o f the census and audit o f domestic arrears, as well as establishment o f a strategy for their settlement; and (vii) improvement o f the business environment through the reform o f key legislation, pertaining in particular to telecommunications, forestry, and mining, and a reduction in transactions costs pertaining to business in general and international trade in particular.

IV. WORLD BANWAfDB INTERIM STRATEGY FY07-08

A. RATIONALE AND APPROACH OF THE JOINT STRATEGY

45. Several notable developments underpin the timing of this reengagement. First, democratic elections in March and M a y 2005 were broadly considered free and fair, thus establishing government legitimacy. Second, the Government and donor community have made progress in solving the external arrears issue which was blocking international support, through the resolution o f external arrears to the Wor ld Bank and AfDB, al l within the framework o f a medium-term program supported by the PRGF. Third, despite a legacy o f conflict, with associated vested interests and rent capture, the political leadership has demonstrated a commitment to reform, particularly in the management o f public finances and natural resources. Finally, the fragility o f stability in CAR, exacerbated by regional troubles, necessitates an immediate, fu l le r engagement o f the wider international community.

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46. Despite the severity of CAR’S difficulties, the current Government has staved off collapse, and offers a rare window of opportunity to foster recovery and longer-term development. The Government has launched initial reforms to spur recovery and longer-term economic growth. These include: (i) return to constitutional order; (ii) progress towards containing the wage bill (e+, a large number ghost workers uncovered) and regular payment o f salaries; (iii) a uniform pay scale set for each grade o f civil servant; (iv) measures to improve revenue collection; (v) sanctions against corrupt officials; (vi) strengthened transparency in forestry management; and (vii) preparation o f a new procurement code. However, it wi l l not be able to address the formidable reform agenda successfully without the restoration o f large-scale international support, hitherto blocked by CAR’S external arrears.

47. The World BanWAfDB Interim Strategy i s aligned with emerging lessons on the delivery of assistance to post-conflict countries, which recognize the need for sustained assistance for recovery and reconstruction. Support needs to cover the reestablishment o f the essential functions o f the State, the demobilization o f ex-combatants, the improvement o f security conditions, the reestablishment o f basic social services, the rehabilitation o f socioeconomic infrastructure, the strengthening o f capacity, and the maintenance o f macroeconomic stability, all within the context o f an overall recovery plan.

B. OBJECTIVE AND PILLARS OF THE JOINT STRATEGY

48. The overarching objective of the joint strategy of the World Bank and the AfDB i s to help the CAR recover and lay the foundations of sustained and shared economic growth. The three-fold approach aims to: (i) work in alignment with other partners and domestic stakeholders; (ii) resolve external arrears, notably to multilateral donors; and (iii) get the country on track for HIPC debt re l ie f in order to address the unsustainable external debt burden. The assistance o f the two Banks wi l l address two broad areas o f engagement.

Pillar 1: Support economic recovery and help strengthen public sector governance and technical capacity. Strengthening the technical capacity and effectiveness o f the State i s essential for the country to consolidate recovery and lay the foundations for sustained and shared economic growth. This requires a conducive environment to generate internal financial revenues, an appropriate judicial system, and a regulatory fi-amework for private business development, consistent with international standards. IDA and AfDB interventions will contribute to laying the init ial foundations for the achievement o f these preconditions, albeit very modestly during this transitional period. This pil lar i s expected to contribute to:

Increased exfernal assisfance flows to underpin recovery. The joint strategy will aim at mobilizing the resources necessary to clear CAR’S external arrears to multilateral institutions, about US$102 mil l ion at the end o f 2005, to enable their full reengagement. The strategy also aims at enabling CAR to obtain debt relief in the context o f the HIPC and MDRI initiatives.

Improvedpublic sector governance. IDA and the AfDB will support early public sector governance-related reforms, particularly in the areas o f public financial management and anti-corruption. The two institutions will support government efforts to promote good governance in the management o f natural resources (forestry and mining) and to create more favorable conditions for the development o f the private sector.

Fosfering recovery in key secfors. IDA and the AfDB will support init ial efforts to re- invigorate productive sectors and create conditions for the development o f the private

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sector, mainly through policy advice, analytical studies and technical audits, and possibly small-scale urgent basic infrastructure investments.

Pillar2: Support human development with emphasis on the poor. Support will focus on increasing the supply o f and improving access to basic social services for the most vulnerable groups, thereby helping Government bring a message o f hope to the population. It will also aim at strengthening the technical capacity o f decentralized communities in formulating their development policies and their management tools. With the support o f NGOs, a community-driven approach i s being pursued to help local communities acquire the ways and means to achieve their priorities. This Pillar o f support i s expected to contribute to:

Reinforcement of trust and strengthened capacity at the community level. Building trust between the government authorities and the rest o f the population will be supported through ongoing IDA-administered hnding for demobilization and reintegration o f ex- combatants; and strengthening participation, accountability, and communication between Government and the people. The Poverty Reduction Strategy (PRSP) process includes a participatory approach in the preparation o f the PRSP, as wel l as in i t s monitoring and evaluation.

Rehabilitation of social service delivery. To address urgent, basic needs o f the population, the joint strategy o f the two institutions will also provide modest support for activities addressing urgent social needs to benefit communities. This support will include activities in health, education, HIV/AIDS prevention and control, and the rural sector.

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I

C. PLANNED WORLD BANK AND AFRICAN DEVELOPMENT BANK ASSISTANCE, FY2007-2008

World Bank

49. The Wor ld Bank has been preparing for full reengagement with C A R for some time. Since the country went into arrears t o IDA in 2002, the Bank has mobilized grant assistance totaling US$23 mi l l ion to contribute to efforts to consolidate peace and stability and to strengthen governance in order to break with the past and set the stage for full reengagement. These include the following activities:

Ex-Combatants Reintegration and Community Support (MDW) Project (FY05; US$9.8 million) i s supporting the social and economic reintegration o f 7565 ex-combatants formerly associated wi th different mi l i t ia groups. Activities include training and employment generation for ex- combatants coupled with rehabilitation o f small infrastructure in their host communities.

Four project preparation facilities, totaling US$2 million, were mobilized, on an exceptional basis from the Multisectoral HIV/AIDSproject approved in FY02, notwithstanding suspension o f disbursements since early 2002 due to arrears. This support has enabled the country to mobilize significant grant resources from other donors-US$25 mi l l ion f rom the Global Fund (GF) for access to H IV /A IDS treatment in 2003, and US$16 mi l l ion for orphans and vulnerable children from UNDP, UNFPA, WFP, KFW and CRS).

LICUS Trust Fund Grant I (FY05; US$4 million) for Public Financial Management, Governance, Health and Education.

LICUS Trust Fund Grant 11 (FY07; US$6.8 million), for Public Financial Management and Governance, HIV/AIDS, Mining, Community Dr iven Development Projects and Human Security.

50. Undisbursed support out o f the activities listed above US$7.4 mi l l ion (US$6.8 mi l l ion f rom the second LICUS Trust Fund Grant and US$600,000 from the IDA-administered MDRP Project). The Bank also plans to restructure the HIV/AIDS project (with an undisbursed balance o f US$17.5 million)’2, which w i l l be declared effective in the wake o f arrears clearance. This restructuring wi l l take into account developments since the project was approved in late 2001, including the availability o f the new resources from the Global Fund. The H IV /A IDS project has a component on small grants for communities and one on institutional development. It i s anticipated that about hal f o f the remaining amount wi l l be needed for the original HIV/AIDS support, and the remainder reallocated to support community needs.

51. For the remaining IDA-14 period and timeframe o f this JISN, an exceptional IDA allocation o f US$lOO mi l l ion has been set aside to support the process o f reengagement with CAR. C A R qualifies for exceptional treatment under IDA’S allocation rules, which allow that “additional allocations may be provided on a one time basis to countries that are in the process o f reengaging with IDA after a prolonged period o f inactivity on the basis o f a strong transition plan with concerted donor s ~ p p o r t ~ ’ . ~ ~

52. The strategy provides for the US$lOO mi l l ion to be used in the following way: The lynchpin o f the new strategy i s the Reengagement and Institution-Building Support Program Grant (RIBSUP) (FY07) (US$82 million), which has helped unleash new and existing IDA resources previously blocked by

l2 Undisbursed amount i s higher than original US$ equivalent due to exchange rate gains with the SDR appreciation. l3 See IDA (2005). Additions to IDA Resources: Fourteenth Replenishment. Working Together to Achieve the Millennium Development Goals. IDA/R2005-0029, March 10,2005. Annex 1, paragraph 9.

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arrears. Another US$4-7 mi l l ion wi l l be used as the country allocation’s contribution to the C A R component o f a Regional Transport Program to be supported together with the EU, AfDB, and Japan. This has the advantage o f leveraging twice this amount f rom the Bank’s regional window, for a total Bank contribution o f US$12-21 mi l l ion to the C A R component o f the regional operation.

53. For the remaining U S $ l l - 1 4 million, the Bank wil l use a flexible approach to respond to Government priorities in small-scale rehabilitation and social projects to address urgent needs o f the population, building upon results achieved with support f rom the f i rst L ICUS Trust Fund and expected from the second LICUS Trust Fund grant. Areas o f support are being selected with the objective o f having a rapid and visible impact on living conditions o f the population and confidence-building in the country and among donors. Activities would be selected to reach the population through visible improvements in their daily lives, including preventing a collapse in the delivery o f utility services, refurbishing badly dilapidated health facilities, providing basic school supplies or bednets for malaria control, and increasing employment through the use o f high labor-intensive techniques for works. Local implementation agencies (such as AGETIP), NGOs, and international agencies with a good track record in these sectors would be used for the implementation o f these activities. The Bank will also work closely with the other donors present in CAR. T o facilitate implementation o f the proposed program, the selection o f a Country Manager i s underway. Given the need for technical assistance in CAR, the Bank wil l also put forward a third LICUS Trust Fund grant proposal to complement these activities and support the program’s efforts to improve people’s livelihoods and build capacity to support Government’s reforms. Support provided by the Bank’s program to Government objectives i s further detailed in the following paragraphs.

54. Clearing arrears and preparing the country for HIPC. Arrears clearance and access to the HIPC initiative are essential to enable CAR to better fulfill the social and development needs o f the population through additional external assistance. CAR needs a definitive resolution plan for i t s external arrears in order to pave the way for a PRGF program with the IMF, which can in turn pave the way for access to HIPC debt rel ief. The RZBSUP program i s paving the way for the resumption o f assistance from several donors after a long period o f interruption and helping to set the stage for assistance under the HIPC initiative to alleviate the country’s external debt burden. Continued progress to put this sequence o f support instruments in place calls for intensive efforts by the Government to keep the reform agenda on track, particularly as it relates to improving capacity to manage public resources and track their use. It wi l l also require close collaboration between donors and the authorities to ensure timely completion o f a good-quality PRSP.

55. Improving governance and public finance management to reach HIPC Decision Point. The RIBSUP i s supporting key reforms in public finance management and governance. This operation i s supported by a companion second LICUS Trust Fund grant o f US$2 mi l l ion to provide technical assistance to: (i) improve management o f public finances, strengthen tax and customs revenue collection systems; (ii) improve cash management in the Treasury Department; (iii) design a strategy to clear domestic arrears; (iv) improve c iv i l service management and payroll control; and (v) upgrade the public procurement system. L ICUS resources wil l also fund activities to strengthen governance as it relates to the business environment (telecommunications, forestry and mining), as wel l as to strengthen technical capacity in government departments. T w o important pieces o f analytical and advisory assistance over the JISN period include a Country Financial Accountability Assessment and a Country Procurement Issues Paper, both in FY07.

56. Improving the business environment and spurring economic recovery in key sectors. Ranked at 167 out o f 175 countries in terms o f ease o f doing business, the business climate in C A R i s among the most challenging in the world. The Regional Trade and Transport Facilitation Program will help improve CAR’S access to i t s trading partners. The Bank’s planned support for urgent needs would also

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have a beneficial impact on improving the business environment. The RIBSUP operation i s supporting policy reforms critical to promote investment and economic activity in the areas o f the judiciary and investors’ rights, transparency in and better management o f the mining sector, including adherence to the Extractive Industries Transparency Initiative (EITI). A Diagnostic Trade Integrated Study is underway in FY07 and analytical work on the Rural Sector i s planned for FY08.

57. Supporting human development with emphasis on the poor: To restore and strengthen trust, and capacity at the community level, the Bank i s providing support through two ongoing activities: the MDRP, and the second LICUS Trust Fund grant component supporting human security as wel l as that supporting Community-Driven Development and PRSP participation workshops. In particular, the LICUS I1 grant has earmarked resources to fund: (i) capacity-building for national NGOs; (ii) community-based initiatives and emergency services; (iii) priority projects for communities; (iv) emergency rehabilitation o f bridges; and (v) project monitoring and evaluation. This Strategy wil l seek to scale up these activities f rom four prefectures to a wider coverage involving local communities in the most vulnerable parts o f the country. Analytical work in FY07 to support human development includes a Poverty Report and an Education Country Status Report.

58. IFC, MIGA, and WBI: The IFC i s exploring provision o f technical assistance in the following areas: (i) support to the recently-created public-private dialogue initiative; (ii) strengthening the Chamber o f Commerce; and (iii) creation o f one stop shop for business registration. MIGA i s not currently active in CAR, but there are plans to respond to a Government request t o obtain MIGA support. Under the f i r s t L ICUS grant, WBI carried out leadership workshops and training on project implementation to lay the ground toward achieving rapid results.

African Development Bank

59. Supporting global and coordinated arrears clearance for reengagement. The AfDB wil l focus on tackling the issue o f external arrears clearance to pave the way for i t s o w n reengagement, and wil l coordinate with other creditors, including IDA, to facilitate normalization o f relations between the CAR and i t s multilateral development partners. This wil l also help prepare the country for the HIPC debt relief initiative. CAR’S external arrears toward AfDB are estimated at US$46.5 mill ion. The Post-Conflict Country Facility (PCCF), which i s the AfDB’s main instrument for supporting fragile states, wi l l be used. Given the CAR’S financial difficulties, the AfDB wil l use maximum f l e ~ i b i l i t y ’ ~ in the application o f the PCCF. The arrears clearance package and proposal wi l l be presented to the Board in December 2006, together with the present JISN.

60. Strengthening governance and economic management. Regarding the improvement o f governance and the effectiveness o f the State, AfDB wil l intervene through the reform support program and the institutional support project, and through technical advice o n structural and financial reforms that wi l l be provided in the course o f f ie ld missions. AfDB wil l contribute to enhancing State effectiveness through the economic management support project approved in July 2006 in an amount o f US$4.9 million. I t s implementation will contribute to improving the design and execution o f development programs and projects. In particular, it wi l l contribute to consolidating and developing competencies in the area o f macroeconomic forecasting, programming o f public investments, monitoring o f the national debt, and the collection o f socio-economic data. The above grant agreement will be completed by the preparation in 2007 o f a reform support program in an amount o f about US$9.5 mill ion. The areas o f concentration, which wi l l be finalized based on discussions with the Government and other donors active

l4 Maximum flexibility wi l l be sought from the Board regarding: (i) the contribution o f the CAR; (ii) the cut-off date; and, (iii) current maturities (as proposed by the World Bank) in order to prevent the CAR from lapsing back into arrears before reaching the HIPC decision point.

-1 7-

in the CAR, wi l l include the following: (i) streamlining o f the Government expenditure chain (simplification o f budgetary procedures, and computerization o f the personnel management and payroll control); (ii) initiation o f a framework for medium-term expenditures; (iii) civ i l service reform; (iv) support to the Inspector General o f Finance and the Court o f Accounts; and (v) regular publication o f the Official Journal.

61. Facilitating recovery of key economic sectors. T o support recovery and reconstruction, AfDB wil l support and advise the government in the areas o f updating and upgrading sector strategies and policies related to the promotion o f good governance, socioeconomic rehabilitation, transportation, agriculture (through an agricultural master plan), water and sanitation, and education and health-care.

62. Support to vulnerable groups. AfDB will support employment creation and socio-economic reintegration and rehabilitation activities that confer clear benefits on vulnerable groups, with a v iew to improving the delivery and quality o f social services. A planned socio-economic project wi l l fund the rehabilitation and equipment o f health training centers and institutions involved in the education sector, as wel l as contribute to the training o f health and education personnel. It i s also planned to promote microfinance institutions so as to support revenue-generating activities in order to allow low-income groups to access rehabilitated social infrastructure. The project could be located in the poorest regions, where other partners are already involved, namely in the Ombella-M 'poko and Nana-MambCrC prefectures, which are among the poorest in the country, and where micro-credit institutions supported by the UNDP are established. The project w i l l be financed within the context o f the ADF X I (2008-2010). Moreover, subject to additional resources, public works to support infrastructure rehabilitation may be envisaged. This support wi l l use resources to a maximum o f €3 million, for the financing o f p i lot projects f rom the water facility window. Capacity-building among beneficiaries receiving economic and social development assistance wil l be supported through the economic management support project and the Japanese grant o f US$347,000 approved in August 2006. These operations wi l l serve to support the national dialogue through sector and thematic consultations, in the context o f the participation workshops planned for PRSP preparation and implementation. The above wil l also fund consultations intended to raise awareness about the importance o f security issues and the role that the defense and security forces must play in the implementation o f the PRSP.

63. Regional Integration. In the context o f the development o f infrastructure that i s indispensable to regional integration, AfDB will facilitate the opening up o f the country with a v iew to jump-starting economic activity in key sectors. Under the multinational window, the AfDB wil l contribute to the financing o f the pi lot program covering the Douala-N'DjamCna and Douala-Bangui corridors, intended to remove the obstacles to road traffic in order to reduce transportation costs and promote trade among Cameroon, the CAR, and Chad. For the CAR, it wi l l concern the development and asphalting o f roads between Garoua Boulai and GaoundCrC, and the development o f the Garoua Boulai' - Bouar section (1 55 km) and Bouar-Baoro section (60 km) as wel l as the rehabilitation o f the Baoro-Bangui section (369 km). As indicated earlier, the World Bank also plans to contribute to this regional transport program.

D. RESULTS MONITORING AND EVALUATION

64. The JISN proposes to assess performance against a set o f indicators aimed at measuring the outcomes of the programs of the World Bank and AfDB. The indicators, presented in Annex 2, are grounded in the realities o f the current country situation as well as the short (1 8-month) horizon o f this JISN. These indicators have been developed to ensure a focus on concrete results and have been specifically tailored to the institutional capacity o f the government. The indicators are organized according to the two pillars o f this JISN: (i) supporting economic recovery and helping to strengthen public sector governance and technical capacity; and (ii) development o f human capital with emphasis on the poor. Under these broad headings, they fal l within the following five areas: (i) flows o f external

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~ss~st~~nce, (ii) pubtic sector go~rerna~1ce, (iii) inves~r~ent climate, (iv) hunian capital, and (v f service delivery. Progress against these indicators will be assessed on an ongoing basis, ~ l ~ r ~ s ~ ~ ~ h regutar cons~~ l~a t jons Rith the ~ ~ ~ v e r n m e n ~ . other key domestic s ~ ~ ~ e ~ o l d e r s ~ and donors. These are c o ~ i s ~ s ~ e ~ ~ t with the ~ o ~ ~ ~ r n ~ ~ ~ e n t Priority matrix and PRSP f r ~ ~ ~ ~ e w o ~ k that is under preparatior~ uhich 11 ill benefit from aligned support aniorig d e v e l o p ~ e ~ ~ ~ partners.

65. Aid ~ ~ ~ r ~ ~ ~ a ~ i ~ ~ and ~ ~ ~ r ~ ~ n j ~ ~ t ~ ~ ~ . The joint strategy of the AfDB and the World Bank represents tlie first stage o f an e f h r t to ~ ~ ~ ~ ~ o n ~ ~ e and coord~~~ate donor assistance according to the princ~p~es of i n ~ e r ~ ~ a ~ i o ~ ~ a l e n ~ a g e ~ ~ e ~ 1 t in fragik States ~ ~ ~ ~ ~ ~ ~ - ~ ? ~ ~ C ~ and o f the Paris d e c ~ ~ r a ~ ~ o n on Align~ient and ~ ~ a r ~ ~ ~ n ~ ~ a ~ j ~ ~ n . It bias prepared in c i ~ i ~ ~ u l t ~ ~ ~ i ~ ~ n with partners and stnke~~o~ders (see Box 2). In addition, C'AR's partners are uorking in cfose c o l l a ~ ~ r a ~ ~ o n on the r e e n g a ~ e ~ e ~ ~ ~ process, i ~ c l u d i n ~ through donor meetings. The World Bank and AiDB close15 coordinate M ith the French ~ e v e l o p ~ ~ ~ e n t Agenc) . the Europear~ Union, arid the IJriited Nations system. part~cu~arl~r the UNf>P--thc three main doriors active in CAR, and are e x ~ e n ~ j n ~ the co~)rd ina~i~~n process to several other ne\+ isr prospective donors to the CAR (see Annexes 7 and 8). In ~ r e p a r ~ r i ~ projects, dotior collaboratio~~ and co- f ~ n a n c ~ n ~ to leverage scarce r e s ~ ~ u r ~ e ~ w i l l activel) be sought.

00. Security risk. As in man) ~ o n ~ ~ c ~ - a f f e c t e d countries, a deter~oratio~ o f the security situation co i~s~ j~u~es tile largest source o f risk for the program. In part~c~lar, a d e ~ e ~ i o r ~ t ~ ~ ~ ~ ~ o f the repicinal s ~ t ~ ~ a ~ ~ o n ~ whether in Stidan ~ ~ a r f ~ i r ~ or in Chad, would leave CAR at risk. The capacit) o f the ~~i ternat io~al c o n ~ ~ ~ i n ~ ~ y to support peace keep in^ efforts in rhe region u ill be a major d e t e r ~ ~ ~ i K i a ~ ~ o f the extent of risk that persists. P ~ ~ ~ ~ - e ~ e ~ ~ ~ o ~ ~ ~irice~air1t~es in DKC mnj also tiave some impact on CAK. DRC's Equator province across the ~ u ~ a n g u ~ Rher from €3angui, has bcen the g e ~ ~ r a ~ l ~ i c a ~ base o f armed rehcl groups in the past. If the den~ocra~ic process in DRC sufTers setbacks, d is~urb~nee~ in the North of the country could easily threaten stilbilit) in CAR, which is ~ i g ~ i i ~ c a n ~ ~ ) less p~~pula~ed. 'I'hese country risks are e ~ o g ~ ~ i o ~ s and their n~i t i~at ion Pills iargely outside the scope o f this strategj. The

this risk. In n d ~ i ~ ~ o n ~ re~tora t io~ of \Yorid Bar& and t.ZfiX3 support uill unleash greater financial support of the ~nternati~?na~ ~ o ~ n n ~ u n ~ ~ ~ more broadly, e n ~ ~ ~ l i K ~ ~ the ~ o ~ e r ~ ~ ~ 1 e n t to extend basic service delivery

current support o f the uw em, France, and CEMAC countries in the area o f security w i l l help mitigate

outside o f Bangui, contribute to nation-building efforts, and thereby helping to mitigate domestic security risks.

67. Political risk While the Government’s recent track record has lowered risk concerning the “whole o f Government” commitment, significant vested interests remain. A setback in the political stabilization process would constitute serious risks for the program. The proposed strategy attempts to mitigate these political r isks through engagement-within their mandates-of the World Bank and AfDB in supporting the reinforcement o f security and consolidation o f peace. This would be done through support for demobilization and reintegration o f ex-combatants, improvements in governance, and both urgent investments and C D D activities to improve living conditions o f the population. The RIBSUP program includes prior actions and triggers that focus on areas in which the Government has expressed ownership and has demonstrated a commitment to reform. The World Bank and AfDB wil l carefully monitor developments in close consultation with the broader international community. Political risks would clearly increase, however, if the population fails to see tangible benefits f rom the reengagement o f the international community. Understanding stakeholders’ expectations matters in a post-conflict setting such as CAR, and participatory consultations can help mitigate this specific risk. In case o f serious obstacles to delivery, such as a deterioration o f the security situation, the program wil l be adjusted as needed.

68. Limitations in the technical capabilities o f the cabinet and c i v i l service to implement reform are a clear source o f risk. Recent reforms and technical assistance to improve public financial management, especially in the areas o f tax and customs administration, reform and modernization o f the c i v i l service, and improvement o f public financial management systems, should enhance the quality o f public services and help build the requisite capacity. Also, within this fragile State environment, greater support by international donors for service delivery implemented through NGOs and other implementing agencies can also help circumvent government capacity constraints. C D D approaches aim to build greater capacity at the community level. Moreover, implementation risks can be mitigated by: (i) strengthening regional cooperation, especially within the framework o f the C E M A C and o f meetings organized by the international community for the management o f conflicts in the Great Lakes region (the next meeting i s scheduled for December 2006); (ii) strengthening activities aiming at national reconciliation, so as to prevent a build-up o f discord; and (iii) providing technical assistance to assist in implementing appropriately-paced reforms as wel l as in communicating the positive results o f reform.

Lack of technical capability to implement the strategy.

69. Macroeconomic risk The country’s macroeconomic performance represents another important risk. The success o f the program wil l depend critically o n CAR’S adherence to a medium-term macroeconomic framework prepared in collaboration with the IMF. Macroeconomic r isks can be mitigated through a combination o f fiscal prudence coupled with facilitating greater inflows o f foreign capital. Close economic monitoring and policy advice by the IMF and other partners can help guide the authorities’ macroeconomic management in the face o f weaker-than-expected revenue mobilization, slow export growth, or terms o f trade shocks. The particular macroeconomic risk o f C A R fall ing back into arrears has been addressed in the design o f the recently-approved DPO by facilitating access to external financing in the immediate wake o f arrears clearance. However, the risk could materialize if the country experiences significant delays in reaching HIPC Decision Point relative to the end-September 2007 target. T o mitigate the risk, the Wor ld Bank and the AfDB, together with the IMF, w i l l endeavor to provide continuing leadership to coordinate and synchronize broader support f rom donors.

70. Fiduciary r i s k Financial controls in C A R are weak and systemic fiduciary risk i s significant. However, this risk can be mitigated by building a dialogue and implementation plan around the recently- initiated analytical work on public financial management. For the specific installment o f budget support provided under this JISN, through the DPO, measures to mitigate the risk have been built into the design

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o f the operation. Beyond this, advisers funded by the Wor ld Bank and other partners provide some de facto oversight, which further mitigates the risk.

VII. SCALING UP AND EXIT STRATEGY

71. Given the fragility o f the political and economic situation in CAR, the weakness o f government capacity, as well as limitations on the amount o f assistance the Wor ld Bank and AfDB will be able to provide, the benchmarks for scaled-up assistance must remain somewhat general. K e y benchmarks, which will be closely monitored, are:

Political and Institutional Stability. stability as appraised by the international community.

Continued consolidation o f pol i t ical and institutional

Macroeconomic Management and Stability. Successful implementation o f the current EPCA, as appraised by the IMF stafc and establishment o f a PRGF arrangement, with successful implementation o f i t s in i t ia l phases.

Updated Poverty Reduction Strategy. Del ivery o f a fill PRSP, wh ich provides priorit ized and reasonably-costed objectives for recovery and national development, as j o in t l y appraised by Fund and Bank staff.

Governance. Progress o n governance as monitored through the R IBSUP program, the CPIA and the Country Governance Profile.

72. In principle, improvement in country policy and institutional performance, including progress on governance reforms, should permit an increase in the IDA and AfDB allocations for CAR; however, the exact amount o f allocations would also depend on the performance o f a l l other IDA borrowers and on the total size o f the IDA resource envelope at the time. Satisfactory progress in line with these benchmark indicators would also pave the way for the preparation o f a full Country Assistance Strategy by the end o f the JISN period. In the event o f unsatisfactory progress, the World Bank and AfDB will adjust their operations as needed. In practice, this would mean revising implementation schedules and planned activities, or in the case o f severe obstacles, a partial suspension o f activities. Nevertheless, the World Bank and AfDB remain committed to staying engaged in C A R over the long-term, even in the event that activities would need to be scaled down.

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Annex 1: Summary Matrix of Government Priority Actions (2006-2008)

Objectives and Priority Actions

4xi<s I: Strengthening of Security and Consolidation of Peace 3ecuritv 3 3 Revamp security forces

Reinforce internal and trans-border security

4xis 2: Promotine Good Governance Good Governance and Anti-CorruDtion 3 Legal reform and rule of law 3 Publication and diffusion of the rule of law o Strengthening management of public finances o Management o f natural resources (mines and forestry) o Fight against corruption o Strengthening of technical capacities

(State/privateMGO/population) o Building up public administration

Axis 3: Macroeconomic Stabilization and Acceleration of Reform Management of Public Finances 0

0 0 0

0

0 0

0

Create an environment favorable to economic recovery Promote development of the private sector Improve the preparation of the Budget Increase tax revenues (Customs) Increase tax revenues (Taxes) Strengthen treasury collection of revenues Provide better monitoring and auditing of revenue collection and ensure transfer to the Treasury Strengthen para-fiscal revenues

Selected Performance Indicators

3 2 3

3

200 trained and equipped gendarmes 200 trained and equipped police officers Police stations and barracks built or refurbished Former combatants demobilized and reinteerated -

3 Mobilization of internal and external budget resources for security

Number ofjudges and law enforcement agents trained Regular publication o f the Official Journal Number o f financial audits performed Financial management software installed Number of agents assigned to the Customs corridor and number of visits and patrols Number o f audit assignments and amount of monthly repayments to the treasury Cash plan available and published monthly Number o f agreements published (Mines and Forestry) in the Official Journal and on the government website -

o Ethics Code available

Number o f businesses created, delays for creating a business reduced, cost o f creating a business minimized Stateprivate Sector Partnership established and strengthened and number o f new taxpayers Computerized management of taxpayer f i les and tax ID number established for each taxpayer Number of auditing assignments and collections, Number of agents trained, number of escorts secured monthly, Customs value of imports known Level o f monthly collections from litigated cases Number of audits, respect for spending ceilings Civil servants database approved, and calculation and payment of payroll computerized

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0

Objectives and Priority Actions

Axis 4: Reconstruction of Busic iifrustriiciure and Social Sectors

Health o Strengthen technical and institutional caDacities o f the

Minisyry o f Health Stop the spread and progress o f HIV/AIDS o

Education

o

o

Stimulate the demand for education

Improve teaching and evaluation methods

Energy o

o o o o

o

Water o

o

Pursue drafting o f law to apply the Electricity Code and i t s implementation Strengthen and increase electrical production Pursue free-market policies in the petroleum sub-sector Implement a national energy information system Pursue drafting o f law to apply the electricity code and its implementation Improve production o f and strengthen transportation services and electrical distribution

Strengthen institutional and legal capacities and support reform o f the water sector Reform the legal and institutional framework and adapt i t to the new socio-economic environment

Telecommunications: o Restructure and develop the telecommunications and

Information and Communication technology sectors in Central Africa Make operational the new Authority for Telecommunications and the Post Office

o

TransDortation o Rehabilitate the transportation infrastructure

Selected Performance Indicators

o

o

o

o o o

o

200 health committees and 200 health management committees created 80 paramedics and 60 assimilated doctors who have been given supervised training 1,500 health agents trained, Multi-indicator Country Survey 2006 achieved Number o f vaccinations, vehicles, freezers distributed Number o f school health services put in place Number o f persons trained: 17 district supervisors, 150 doctors, 1,200 health agents and 2000 ASC o f which 350 matrons 5,000 persons put under anti-retrovirals, and number o f orphans cared for

Number o f schools provided running water Number o f school centers rehabilitated and equipped Number o f teachers retrained and number o f foster parents retrained

o o o

o o o

o

StateENERCA plan adopted and functioning Analytical accounting and management available Management o f sales function delegated to a private party, and a pre-payment accounting system put in place 5 power stations rehabilitated (13 M W available), 18 M W o f guaranteed power available, and 10 M W o f additional power available 1 pipeline to transport energy between Boali and Bangui Action Plan and table o f indicators o f energy available

New laws governing the functioning o f the management o f the Water company (SODECA) 600 new wells equipped with human operated pumps, and 350 old wells rehabilitated

o o

o

o

o o

57 km o f pipes rehabilitated and 3 1 km-long new ones installed Versatile Multimedia Centers deployed in the interior, - -

o o

o

o

o

o

o

Implement a money transfer system by electronic wire transfer An operational Master Plan for Telecommunications and Post Office and Action Plan are drawn up Post Office Regulatory Mechanism set up

700 km o f track roads rehabilitated, and 1,000 Km o f rural roads rehabilitated 5 00 km o f roads repaved, number o f ports rehabilitated and km o f waterways improved, and number of airfields rehabilitated Airport o f Bangui Mpoko brought up to International Civil Aviation Organization standards The 8 subdivision neighborhoods o f Bangui restructured and sanitation provided

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Annex 3: World Bank and AfDB Technical Assistance to CAR in 2007-08

In compliance with lessons learned from reengagement experience with post-conflict countries, support f rom IDA and AfDB includes the provision o f significant technical assistance to buttress CAR’S public administration.

StaffMonth AfDB (2) StafflMonth

Macroeconomist Expert M&E Expert Financial Management expert Tax and Customs Experts

Domestic Arrears Auditors (4) Procurement Expert Personnel and Payroll Expert Mining Experts (7) Telecommunications Expert

12 12 12 12

8 12 6 7 1

Macroeconomist Experts (2) National Accounts Experts(2) Price statistics Experts (2) Economic Planning & Public Investment Expert (2) Expert in PRSP implementation Debt Management Expert (SYGADE) Education statistics Expert (UNESCO) Network Information Systems Expert

18 & 24 18 & 24 15 & 24 18 & 24

24 6 12 6

Forestry Expert 1

(1) Technical assistance wil l be funded by the LICUS I1 grant, under i t s Public Finance management and governance Component (2) Technical assistance wil l be funded by the Economic Management Support Project

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Annex 4: C A R Macroeconomic Framework (2002-2009)

GDP growth cpi NER RER

GNS Gr. Investment Ig IP Sn-l

Total Revenue, inc. grants Total Exp. Overall Balance, inc grants Overall Balance, exc grants pm: grants Domestic primary balance

Ext Debt, before relief (%of GDP) NPV Of debtlexports (Yo) Debt serviceduelexpork(%) Debt service pdlexports (%) Debt service pdlrevenues. exc. Grants(%)

Nominal GDP (billions of CFAF)

-0.6 2.3 1.5 8.4

5.7 9.0 4.8 4.2 -3.3

14.6 15.8 -1.2 -5.0 3.8

-0.5

94.1 412.7

25.0

-7.6 4.4 4.2 6.2

1.4 6.0 2.1 3.9

-4.6

9.2 12.3 -3.1 4 . 6 1.5

-3.3

96.5 464.7

29.8 0.3

1.3 2.2 3.2 -2.2 2.9 4.5 1.7 -0.2

-0.9 0.7

in percent of GDP 1.7 6.0 4.9 6.1 8.8 8.3 2.0 4.0 2.7 4.1 4.9 5.6

-4.4 -2.8 -3.4

in percent of GDP 11.4 12.2 11.5 13.5 16.7 12.4 -2.1 4 . 5 -0.9 -5.5 -8.5 -3.5 3.4 4.0 2.6

-3.9 -3.5 0.8

82.5 79.1 74.4 531.6 514.8 489.3 21.8 22.3 21 .o

1.7 3.1 21 .o

29.5

2002 2003 2004 2005 2006 2007 2008 2009

726.2 694.7 690.6 723.0 774.7 825.3 882.5 945.5

4.0 3.0

5.8 9.2 3.0 6.2

-3.4

12.5 12.7 -0.2 -2.7 2.5 1 .o

68.3 469.7

21.0 21 .o

30.8

4.3 2.5

6.0 9.9 3.3 6.6

-3.9

13.0 13.2 -0.2 -2.6 2.4 1 .o

64.1 454.0

21.6 21.6

30.3

4.5 2.5

5.9 10.4 3.5 6.8

4 . 5

13.3 13.5 -0.2 -2.6 2.4 1 .o

60.2 445.3

19.1 19.1

25.8

Source: IMF

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Annex 5: Sector Background in CAR

The Education System has suffered from the displacement o f teachers and populations, the destruction o f equipment and work tools caused by the recurring conflicts, as well as strikes by teachers due to non-payment o f salaries. The pockets where lack o f security persists have prevented school attendance and the appointment o f teachers. The rate o f school attendance at the primary level which was 48 percent in 1988 fel l to 41 percent in 2003. The above rate in the city o f Bangui, which i s 79.5 percent shows a profound regional imbalance regarding access to basic education due to the rural exodus and the lack o f a policy o f decentralization. Concerning health, facilities have been dilapidated and lack personnel and financial resources, medication and equipment. Moreover, the distribution o f medical and paramedical personnel i s very unequal, with one doctor per thousand inhabitants in Bangui, versus one doctor per 90,000 inhabitants in the regions.

The HIV/AIDS situation i s worrisome, with 10.7 percent o f people between the ages o f 15-49 infected, which includes 22 percent o f pregnant women; the C A R holds the top position among countries most affected in Central Africa. According to UNDP and UNICEF, 66 percent o f hospital beds were occupied by persons infected with HIV/AIDS, and close to 86 percent o f teacher deaths were connected to HIV/AIDS in 2000. This situation i s essentially attributable to poverty and lack o f education. Contributing factors are lack o f access to testing, counseling, and the failure o f health services (quasi-absence o f care and treatment).

Population. According to the last census carried out in 2003, the C A R has a population o f about 3.9 mi l l ion inhabitants, o f which 43 percent less than 15 years o f age. About 62 percent o f the population lives in rural areas. The average household size is 4.8 persons. The two largest ethnic groups account for over ha l f o f the total population. C iv i l str i fe has caused the displacement o f populations from C A R to Chad (between 12,000 and 15,000, and from Chad and Sudan to C A R (about 21,000 refugees). The fert i l i ty rate i s about 5, and population growth i s estimated at 2.5 percent per annum.

Agriculture. Agricultural potential i s 15 mi l l ion farmable hectares, o f which 0.7 mil l ion hectares are farmed each year. Agriculture i s dominated by food production and subsistence farming (663,000 ha), such as cassava (560,000 tons on average per year, or around 60 percent o f food production), a basic foodstuff o f the population. Currently, food production i s unable to feed the population. The main cash crops are coffee and cotton, for which production fe l l respectively from 11,800 tons in 2000 to 3,800 tons in 2004, and from 21,000 tons in 2000 to 6,800 tons in 2004, because o f insecurity, liabilities o f CFAF2 bi l l ion toward cotton growers, lack o f inputs, and the worldwide fal l in prices. The cotton sector directly supports more than 100,000 people, whereas coffee growing which i s done by small family farms (1 to 10 ha), constitutes the sole cash income for close to 10 percent o f the population. Finally, regarding animal farming, there are on average 1.2 mi l l ion heads o f livestock, o f which 26 percent are cattle. Animal farming has suffered from persistent insecurity and the lack o f extension services.

Forestry. The Central African forests, one o f the richest in Afr ica in rare wood species (sapele, limba, ayous and Iroko), cover 3.5 mi l l ion hectare, o f which 77 percent i s exploitable. I t i s one o f the living environments for the rural population (hunting, gathering), and supplies on average more than 40 percent o f exports in value. The sector employs around 4,000 people directly. Annual average production o f saw logs was 570,000 tons for the 2001-2004 period, o f which 54

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percent was exported (3 10,000 tons). The lumber industry suffered pil laging and destruction o f property during the conflicts.

Mining and Diamond Sector. The subsurface o f the C A R produces mineral resources (cobalt, copper, diamonds, iron, manganese, gold, o i l and quartz), but only diamonds and gold are traditional operations. The mining sector contributes on average 3 percent o f GDP, and 40 percent o f export revenues. Diamond operations are alluvial and subject t o massive fraud. Security problems are also an obstacle to balanced development o f the sector. CAR has committed to respecting the Kimberley process to which it subscribed in 2003. Government management o f the sector i s weak. A new mining code has been issued.

Transportation and Telecommunications. The C A R i s landlocked, 1,700 km from seaports in Cameroon and Congo, with most urban markets far from production areas due to the inadequacy and poor quality o f infrastructure and methods o f road transportation, the dominant mode o f transportation. The C A R has two means o f overcoming i t s geographical isolation, the Trans- Cameroon Bangui-Douala highway (1,650 km), which allows access by road to the Cameroon port o f Douala, and the trans-equatorial (around 1,700 km), which connects by rivers and rai l the capital, Bangui, with the Congolese port o f Pointe Noire. Transportation has been affected by the problems in the C A R and the regional conflicts in Central Africa and in the Great Lakes. The principal obstacles to development o f the transportation sector are the heavy dispersion o f the population over a vast territory, the lack o f security along certain priority arteries, the high cost o f maintaining the infrastructure and the impassability o f the majority o f roads during the rainy season. The lack o f navigability during the dry season constitutes a major factor limiting the use o f river transportation. In the area o f telecommunications, the number o f landline telephones was 2 per 1,000 inhabitants in 2003. With 9000 subscribers in 2004, the national telecommunications company (SOCATEL) has suffered from the political-military events and the financial problems o f the State. Three mobile phone companies operate in CAR.

Energy and Water. The production o f electrical energy does not cover needs, and i s mostly distributed to urban centers (around 3 percent rate o f access by the population) due to i t s high cost. Electricity represents on average 1.4 percent o f energy consumption, versus around 87.7 percent for wood, and around 10.9 percent for imported petroleum products. ENERCA, the State- owned company operates two hydro-electric power plants (Boali 1 and 2) and small diesel plants in the provinces. For lack o f adequate maintenance, Boali 1 and 2 are close to breakdown. Supply o f diesel to the secondary centers i s highly irregular. Despite the existence o f the country o f major water resources, the availability o f drinking water i s low, around 24 percent, with major differences between rural areas and urban centers. SODECA, the public water company suffers from large technical losses and poor payment o f bills by the Government.

Private Sector. The private sector i s essentially comprised o f industries in the area o f natural resource exploitation, forestry, processing and construction. I t also involves services, such as transportation and large and small scale commerce. Political instability, and the high cost o f production caused by the poor condition o f the infrastructure and the collapse o f public services, corruption and inefficiencies in public administration, and the crisis in public finances have caused a steady deterioration in the business climate. Consequently, the number o f companies has significantly decreased during the last 10 years, from more than a hundred to around 20 large companies. As a corollary, the informal sector has been developing.

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Financial Sector. The financial sector i s extremely fragile. I t suffers from the consequences o f the conflicts (destruction o f property, decline in economic activity, and the aversion o f investors due to the security risks and the weakness o f the regulatory framework in key economic sectors). The banking system includes three banks, o f which one i s in critical condition, which are: the International Bank for Central Africa; the Commercial Bank o f Central Africa; and, the Popular Bank o f Morocco-Central African Republic. Other than the l o w rate o f deposits (4.5 percent o f GDP on average versus more than 20 percent for sub-Saharan Africa), the banking system which has very few branches in the rest o f the country, i s all the more fragile due to the accumulation o f State arrears, and by the high level o f dubious debts, such as the debts o f public companies. More than 50 percent o f credits are granted to the public sector. The Cre‘dit Mutuel en CentruJFique i s the principal agency for micro-finance, which groups together a federation o f 18 credit unions with 50,000 members. Access to credit i s extremely low, however, (less than 2 percent o f the population).

Environment. The extensive migrant agriculture system, and the use o f wood charcoal in Bangui, estimated at lkg/person/day, which causes between 5 and 8 km o f canopy forest to disappear every year, are destroyers o f the environment. They have a negative impact on the water table, the fauna and flora, besides the threat to the environment caused by the displacement o f population resulting from the lack o f security and the widespread poaching in the north and east o f the country. Because o f financial constraints, the Government has done little to protect the environment.

Regional Integration and International Commerce. As a member o f CEMAC, the economic and monetary union o f Central African States, has implemented the Common External Tarif f in 1994; the lowering o f customs tariffs on products from the community in 1998; the reform o f the Investment Code in 1996; and the introduction o f the VAT on January 1, 2001. CAR’S benefits from trade liberalization have not been significant, however, because o f the unsettled situation in the country and the poor condition o f infrastructure.

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Annex 6: CAR’S Governance Indicators (top) Compared with sub-Saharan Africa Averages (bottom) 2005

I I

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Annex 8: Activities by Major Donors and by Sector

France/AFD: Total amount o f France’s assistance since 2003 stood at €95 million. In 2006, it focuses on providing technical assistance in the areas o f health, education and research, and economic and financial management. French Development Agency (AFD), provided support in transportation and infrastructures, forestry and the rural sector, and health. A new Cooperation framework for the period 2007-201 1 i s under preparation, and will be consistent with other donors’ cooperation strategies. France will also contribute to the resolution o f external arrears with respect to the AfDB, as well as to the consolidation o f defense and police forces, by training and equipping the Central African Armed Forces (FACA), training police and gendarmerie, supporting the FOMUC, and providing territory air control.

European Union: Support from the E u r o p e a n U n i o n (EU) falls within the framework of Article 96 o f the Cotonou agreements. In July 2005, the EU resumed its official cooperation with the CAR, suspended after the March 2003 coup d’ktat. Project agreements for an indicative amount of €60.5 million were signed. Moreover, an envelope of €12 million will be allocated in the form of budgetary assistance. From this envelope, budgetary assistance o f €4 million has been earmarked to support the clearance of the CAR’S arrears toward AfDB. In 2007, within the framework o f the AREMIF project supporting public finances management, four long-term experts will be recruited to build capacity in the Customs General Directorate, the Tax General Directorate, and the Budget General Directorate.

IMF: In July 2004, IMF approved a first EPCA supported by a loan o f SDR5.6 million. In January 2006, it approved a second EPCA in the amount o f SDR7 million to support the government’s 2006 program. PRGF negotiations took place in November 2006, as well as work on bilateral debt reconciliation and Debt Sustainability Analysis. IMF support focuses also on the strengthening o f technical capacity in the area o f macroeconomic management, especially in the area of budget preparation and management, tax and customs collection, and in the development o f national accounts.

UNDP and UN agencies: During the transition period, UNDP funded and oversaw the electoral process, while the United Nations Observation Bureau in Central Africa (BONUCA) monitors the security environment. UNDP pursues dialogue with the donor community about mobilizing resources for reconstruction, provides technical assistance to finalize the PRSP, and supports promotion o f microfinance, governance (formulation o f the national strategy to fight corruption), and consolidation o f peace (notably by administering the demobilization and reintegration o f former combatants program). UN agencies have been present in Bangui to provide humanitarian assistance in their respective area o f specialization (UNICEF, WHO, WFP, and so on).

China: I t provided an interest-free loan o f Yuans75 million, or about CFAF6 billion in 2002 to build the Bangui Stadium. In 2004, it provided another interest-free loan (over five years) o f Yuans20 million (about CFAFl.7 billion), for office supplies, and small agricultural equipment, as well as budgetary support o f Yuansl2 million (about CFAFl billion) for the payment o f salaries. This loan was followed by a grant o f Yuans2O million (about CFAF1.7 billion ) for the continuation o f work on the Bangui Stadium, the financing o f a feasibility study for the construction o f a cement factory, and construction of health centers in Bangui. Finally, China provided a loan o f Yuans 30 million (about CFAF2.7 billion) in 2005 to initiate new development projects.

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Annex 9: CAR - Country Financing Parameters

1. This Annex provides additional information on the country financing parameters for Central African Republic (CAR) pursuant to OPBP 6.00, Bank Financing. The Government o f Central African Republic has been consulted and welcomes the increased flexibility the parameters would provide.

A. Cost Sharing

2. In CAR’S fragile post-conflict environment, there i s little scope at this time for Government to provide direct contributions to project financing. While it i s feasible that some cofinancing from other donors may be made available in some instances as a means o f reducing the Bank’s share in project financing, it i s expected that flexibility to go up to 100 percent financing will be needed in al l Bank-financed operations for the upcoming Bank strategy period.

3. The Bank will focus on interventions that will be reflected in the joint reengagement strategy. Ownership o f Bank-financed operations i s being ensured through a close relationship between the Bank and the Government’s top leadershippart icularly the Governor to the Bank. At the project level, ownership i s being ensured through close supervision o f the second L ICUS grant and the envisaged operations in the pipeline, and through capacity-building o f government institutions. For example, line ministries responsibilities in the management o f the LICUS grant and the new operations would be increased, as opposed to the first L ICUS grant and the demobilization program that were managed by third parties.

B. Recurrent Cost Financing

4. I t i s expected that the government will request the Bank to finance recurrent costs in al l projects implemented over the lifetime o f the upcoming Bank strategy. The majority o f recurrent costs will finance external experts and for the capacity building required for eventual government takeover, in addition to general operating costs. The government’s weak fiscal situation argues for Bank financing o f recurrent costs simply to ensure sustainability o f the Bank and Government’s development investments until the situation begins to normalize. At 8.2 percent o f GDP, Government revenues are low even compared with countries in similar circumstances. Thus, the government cannot now be expected to finance recurrent costs even for small grant-based development assistance. However, balanced against these practical considerations i s a concern for the fiscal and debt sustainability o f recurrent cost financing. As discussed in the main text, the fiscal position remains in a perilous state, and C A R has a large debt burden, which i s currently under discussion with i ts creditors and could be significantly eased in the medium term.

5. Bank financing o f recurrent costs per se would not have an adverse impact on the country’s debt sustainability. Financing some recurrent costs in the short to medium term could even have a stimulating effect on the economy and thus contribute to increase government capacity to support larger recurrent costs in the future. Nonetheless, the Bank will continue to monitor the fiscal situation, public expenditure management, and public sector reforms to ensure that recurrent cost financing i s embedded in a credible and sustainable Government macroeconomic strategy. As the situation normalizes, the Bank will carry out diagnostic work, such as a Public Expenditure Review, where issues o f the sustainability o f a possible future Bank lending program will be identified and addressed.

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6. Based on the above assessment and taking into account the immediate financing needs o f the country, no country-level limit i s being set on recurrent cost financing. Recurrent costs may be financed as needed in individual projects, subject to project or program-level assessment. In determining Bank financing o f recurrent costs in individual projects, the Bank will take into account sustainability issues at the sector and project levels, including a consideration o f implied future budgetary outlays. The fiscal consequences and the impact on debt sustainability o f Bank financing o f recurrent costs i s expected to be marginal given that projected debt rel ief under HIPC will contribute significantly to reducing the external debt burden for CAR.

C. Local Cost Financing

7. The criteria for Bank financing o f local costs have been met. Most important, financing requirements exceed the public sectors own resources from taxation and other sources. The residual financing gaps between resources and requirements are currently US$42 mi l l ion in 2006, US$49.2 mi l l ion in 2007, and US$5 1.6 mi l l ion in 2008 after taking into account already identifiable financing. Thus, C A R cannot finance i t s government programs without a combination o f debt relief, new budget support, and investment lending. Second, the financing o f foreign expenditures alone would not enable the Bank to assist in the financing o f individual projects. The Bank’s current operations focus primarily on projects in the social sectors and governance, the f i rst sectors having a high element o f local expenditure. The future Bank portfolio will l ikely necessitate a similar level o f local cost financing. Thus, the Bank may finance local costs in any proportions required by individual projects.

D. Taxes and Duties

8. CAR’s tax and customs regime i s relatively liberal due to i t s reform efforts and membership in CEMAC (Communaute‘ Economique et Mone‘taire de 1 ’Afiique Centrale), the Central African Economic and Monetary Union. Membership in the trade regime, with a common external tari f f in place with third countries, and in principle, no duty for goods traded within the community, has conferred a degree o f credibility and discipline to CAR’s overall policy. The dismantling o f high tariffs have been part and parcel o f a broader strategy o f trade liberalization over the last decade to improve CAR’s participation in the global trading system.

9. In design, C A R has a reasonable tax system. The composition o f taxes follows prevailing norms in sub-Saharan Africa. In 2005, indirect taxes accounted for 49.5 percent o f total revenue, direct taxes accounted for 28.5 percent o f the total revenue, and international trade taxes for 21.9 percent. Due to trade liberalization, the revenue composition has changed somewhat since international trade taxes accounted for about 35 percent o f revenue in the period 1986-1996. Direct taxes for medium-sized companies in C A R include a corporate income tax o f 30 percent on profits or 10 percent on turnover depending on which i s higher, and there i s withholding at source. Wi th regard to indirect taxes, in January 2001 , C A R introduced a value-added tax with a single rate o f 18 percent (subsequently increased to 19 percent).

10. Because o f the country’s weak administrative capacity to collect direct taxes, government depends upon trade taxes for close to 50 percent o f i t s tax revenue. Imports are subject to three main duties: an import duty according to the classification in the common external tar i f f (droit de douane), a VAT on imports levied at a flat rate o f 19 percent (la tuxe sur la valeur ajoute‘e), and an excise duty (droit d’accise), which i s levied for revenue purposes on certain luxury goods. Furthermore, a community tax (TCI), equal to 1 percent o f overall imports, i s levied at the border.

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11. The duties on imported goods range from 0 to 30 percent. According to rules o f the common external tari f f (CET), the customs duties applied on imports from third countries are fixed at: 5 percent for primary or essential goods, 10 percent for raw material and capital goods, 20 percent for intermediary goods, and 30 percent for consumer goods. Thus, import tariffs are particularly l ow for capital and essential goods. The CET i s applied on the c.i.f. value (cost, insurance, freight) o f the imported good. While in theory, intra-CEMAC trade i s not taxed, in practice there i s derogation to the CEMAC’s free trade area as C A R applies an MFN tari f f to selected products from other CEMAC countries. Also, it should be noted that tax exemptions from import duties (exonerations) play a role in the low revenue mobilization from imports in CAR.

12. same rates as the country’s normal rates, or in some cases are exempted from taxes and duties.

Table 1 provides a summary o f the current tax rates. Bank-financed projects are taxed at the

Table 1: Current Tax Rates ~ ~~ ~~~

Tax Rate Comments Personal income tax

Corporate income tax

Value added tax 19 percent Recent tax (2001)

Ranges f rom 10 percent t o 50 percent received or earned 30 percent on profits o r 10 percent on turnover

Levied on net annual income

Based on taxable income

Customs 0-30 percent Depending on product Excise 0-30 percent On special products Property tax 15 percent Building rental value Social security contribution 15.84 percent Gross salaries

Source: C A R authorities, IMF

13. Capacity for revenue collection remains weak. The Government has recently introduced a number o f tax pol icy changes to boost Government revenue. The use o f the single taxpayer administration number (NIF) has been established in order to bring the informal sector into the tax base. There has been an increase in the VAT rate from 18 percent to 19 percent and a narrowing o f the scope o f exemptions. Moreover, an attempt was made to strengthen the verification o f compliance with the VAT system by large enterprises. There was the introduction o f a deposit paid on goods imported by small and informal sector enterprises that would be applied to their domestic obligations. In addition, the specific tax on petroleum products was increased, and new taxes on real estate introduced. In an attempt to rein in corruption in the mining and logging sectors, the Government signed a contract with BIVAC, one o f the world’s largest providers o f import control and inspection services, to help monitor the country’s imports. Finally, in order to improve revenue mobilization at customs, the C A R authorities have reinforced customs border posts and a transit customs office in Douala that acts as a one-stop window for transit trade.

14. In summary, taxes and duties have been assessed to be reasonable, and the Bank may finance al l taxes and duties associated with project expenditures. The application o f this general approach will be subject to an ongoing monitoring o f tax policy and how taxes are applied to Bank-financed projects. At the project level, the Bank would consider whether taxes and duties constitute an excessively high share o f project costs.

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Central African Republic: Country Financing Parameters

The country financing parameters for the Central African Republic (CAR) set out below have been approved by the Regional Vice President, Africa Region, and are being posted on the Bank’s internal website. These parameters will be updated during preparation o f the next Country Assistance Strategy.

Item Cost sharing. Limit on the proportion o f individual project costs that IDA may finance

Recurrent costfinancing. Any limits that would apply to the overall amount of recurrent expenditures that the Bank may finance.

Local costfinancing . Are the requirements for IDA financing o f local expenditures met, namely that: (i) financing requirements for the country’s development program would exceed the public sector’s own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing o f foreign expenditures alone would not enable IDA to adequately assist in the financing of individual projects? Taxes and duties. Are there any taxes and duties that the Bank would not finance?

Parameter 100%

No country- level limit

Yes

No

RemarWExplanation At this time, al l projects are expected to financed at 1 OO%, given Government’s extremely small budget and inability to provide counterpart finding. In the near term, only when cofinancing i s available will the Bank’s cost share be less. Ownership o f Bank-financed programs i s being ensured through a close relationship between the Bank and the Government’s top leadership. At the project level, ownership i s being ensured through means such as close supervision and capacity-building o f government institutions, and placing project management responsibilities directly in the concerned ministries. No country-level limit i s being set on recurrent cost financing. Recurrent costs may be financed as needed in individual projects, subject to project or program-level assessment. In determining Bank financing o f recurrent costs in individual projects, the Bank will take into account sustainability issues at the sector and project levels, including a consideration o f implied future budgetary outlays. The requirements for local cost financing are met. The Bank may finance local costs in any proportions required by individual projects.

Taxes and duties are considered reasonable. The application of this general approach will be subject to an ongoing monitoring o f tax policy and how taxes are applied to Bank-financed projects. At the project level, the Bank will consider whether taxes and duties constitute an excessively high share o f project costs.

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Annex 10: AfDB Background Intervention

AfDB Group Portfolio and Management. Since 1972, the AfDB has funded 23 operations with a net total commitment o f UA 109.98 mi l l ion (UA13.72 mi l l ion from the ADB and UA96.26 mi l l ion from the AfDB) broken down as follows: multisector (30.12 percent); agricultural sector (25.12 percent); public uti l i t ies (23.72 percent); transport (1 1.95 percent) and social sector (9.09 percent). The AfDB Group co-financed two economic reform programs with the Bretton Woods institutions (BWI). Because o f the lingering problem o f arrears since 1994 and in order to reduce the CAR’S debt, it cancelled al l i ts loans and grants in 1996. Implementation o f operations encountered the following problems: (i) the Government’s delay in paying i ts contributions to project financing; (ii) administrative red tape; (iii) long delays in effectiveness o f loan agreements resulting in several extensions o f the deadlines for the last disbursements; (iv) lack o f familiarity with AfDB Group procedures for the procurement o f goods and services; and (v) debt repayment arrears.

2. Arrears Clearance Actions by the AfDB. Since 1994, the Central African Republic has been under sanctions due to arrears on i ts debt repayment. As at 3 1 December 2005, the total amount o f arrears due stood at UA25.31 million, comprising UA21.14 mi l l ion to the ADF window and UA4.17 mil l ion to the ADB window. Attempts at clearing arrears owed to the AfDB since 1994 have not been successful because o f the country’s economic hardships, polit ical instability and lack o f a program with the BWI, even though the AfDB has intensified i t s dialogue with the authorities o f the Central African Republic and strengthened i ts consultation with other development partners, in particular the BWI. In this connection, it has conducted several jo in t program review missions with the B W I as well as arrears monitoring missions to the CAR, and discussed with the authorities on several occasions at i t s head office the problem o f arrears clearance. In the context o f such dialogue, the AfDB agreed with the Government on several arrears clearance plans, including the July 2002 plan covering arrears o f UA16.2 mi l l ion (about CFAF15 billion) which focused on the following points: (i) payment o f 20% o f arrears at the time o f approval o f the PRGF (July 2002 - June 2005) with the support o f France; (ii) payment o f the outstanding amount by the mid-term review o f the PRGF at the latest but before the decision point scheduled for the f i rst ha l f o f 2003. However, the discussions were interrupted due to the political upheavals which followed the 2002 coup attempt and to the non-presentation o f the PRGF to the IMF Executive Board. The resumption o f discussions in 2003 on the 2002 plan was not also successful because o f the coup d’Ctat o f March 2003. In 2004- 2005, the Bank presented to the authorities o f the Central African Republic the Post-Conflict Countries Facility (PCCF) adopted by the Boards in July 2004 and pursued dialogue on the need to make progress in the fulfil lment o f conditions o f eligibility for this arrears clearance instrument. I t also continued dialogue with the authorities on the crucial importance o f concluding a program with the IMF, maintained consultations with the Bretton Woods institutions (B WI) on developments in the economic situation in the C A R and participated in discussions on the second Emergency Post- Conflict Assistance (EPCA) in 2005 and 2006, and on the PRGF scheduled to be presented to the Board o f the IMF in December 2006.

-3 8-

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CAS ANNEX A 1: Central African Republic at a Glance

Key Development Indicators Central African Republic

0005)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (Oh) Urban population (% of total population)

GNI (Atlas method, US5 billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international 5)

GDP growth (%) GDP per capita growVl(%)

(moat recent wtimate, 2000-2005)

Poverty headcount ratio at 51 a day (PPP. %) Poverty headcount ratio at 52 a day (PPP. %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Chiid malnutrition (I of children under 5)

Adult literacy, male (Oh of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

4.0 623 1.3 44

1.4 350

1,140

2.4 0.9

67 * 8 4 . 39

132 24

65 33 76 52

Access to an improved water source (% of population) 75 27 Access to improved sanitation facilities (% of population)

Saharan Africa

741 24,265

2.1 37

552 745

1.981

5.3 3.1

44 75 46

100 29

99 87

56 37

LOW income

2,353 29,285

1.8 31

1,364 580

2,486

7.5 5.6

59 80 39

73 50

110 99

75 38

Net Aid Flows

(US8 miiiions) Net ODA and official aid Top 3 donors (in 2004):

France United States Germany

Aid (%of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer prices (annual % change) GDP impiidt deflator(annua1 % change)

Exchange rate (annual average, local par US$) Terms of trade index (2000 = 100)

Population, mid-year (millions) GDP (US$ millions)

Agrimlture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services Imports of goods and services Gross savings

Manufacturing

1980

111

69 1 3

13.9 48

0.0 18.3

21 1.3

2.3 797

40.0 20.1 7.2

39.9

93.7 15.1 7.0

25.2 41.1

1.6

1990 2000

250 75

71 19 3 1

14 7

17.1 8.0 83 20

4.4 3.2 2.3 2.4

272.3 712.0 225 100

3.0 3.8 1,488 953

(% of GDP) 47.6 53.2 19.7 15.8 11.3 4.0 32.7 31.0

85.7 80.9 14.9 11.3 12.3 10.8

14.8 13.2 27.6 16.3 4.4 9.5

2006

105

37 12 2

8.0 26

2.9 2.3

527.5

4.0 1,369

54.7 14.3 6.4

31.0

14.0

Ape distribution, 2006

Male Female

7074

me4 -54 40-44

x-3 20-24 10.14

c u

Under-6 mortality rate (per 1,000)

2YI 1 200

1%

ica

YI

0

1893 1 M m 2m4

OCentral Afncan Republic DSubSaharan Afnul

Orowth of GDP and GDP per capka (X)

10 1

80 85 W 0

-V-GDP -GDP per capita

1980-90 199C-2000 2 0 0 M 6 (average annual growth %)

2.5 2.3 1.3 1.4 2.0 -1.4

1.6 3.8 2.6 1.4 0.7 4.2 5.0 0 . 2 4.0 1 .o 0 .3 -12.9

1.5 -1.7 10.0

-1.2 0.5

-10.7

Note: Figures in itaiicS are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available a. Country poverty estimate is for 1993. b. Source: RGPH2003 c. Aid data are for 2004.

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lalance of Payments and Trade

IS$ millions) otal merchandise exports (fob) otal merchandise imports (df) et trade in goods and services

dorkers' remittances and compensation of employees (receipts)

urrent account balance as a 56 of GDP

eserves, including gold

:entral Government Finance

Y. of GDP) urrent revenue excl. grants Tax revenue xpenditure and Net Lending

:ash surplus/deficit

lighest marginal tax rate (%) Individual Corporate

ixternal Debt and Resource Flows

YS$ millions) 'otal debt outstanding and disbursed otal debt service liPC and MDRl debt relief (expected; flow)

otal debt (% of GDP) 'otal debt servlw (% of exports)

oreign direct investment (net inflows) 'ortfoiio equity (net inflows)

2000

142 140 -45

-26 -3.0

9.0 8.0

13.2

858 14 -

90.0 7.6

1 0

2005

101 Ill -61

-39 -2.6

8.2 7.1

12.8

1.078 18 -

82.4 15.5

-13 0

:omposition of total external debt, 2004

IDA 455

I t e r d , m L F , 44

Private Sector Development

Time required to start a business (days) Cost to start a business (% of GNI per capita) Time required to register property (days)

Ranked as a major constraint to business (% of managers surveyed who agreed)

n.8. n.a.

Stock market capitalization (% of GDP) Bank branches (per 100,000 people)

2000 2006

- 14 - 211.6 - 69

I overnance Indlcators, 2000 and 2004

doice and acwuntabllrty

Political rtabilty

RsgulatoF/ qualrty

Rule of law

Control of wrmption

2004 02000

Country's percentile rank (c-ico) hlmr v.LI.8 hplybenwntmgr

2000 2004 Technology and Infrastructure

Paved mads (% of total) 2 7 Fixed line and mobile phone

High technology exports subscnbers (per 1,OM) people) 4 18

(% of manufactured exports) 0 1 0 1

Envlronment

Agnwltural land (% of land area) 8 8 Forest area (% of land area 2000 and 2005) 3 6 8 3 6 5

8 7

35,374 0 0

CO2 emissions per capita (mt) 007 007

GDP per unit of energy use

Nationally protected areas (% of land area)

Freshwater resources per capita ( w meters) Freshwater withdrawal (% of internal resources)

(2000 PPP $ per kg of oii equivalent)

Energy use per capita (kg of oil equivalent)

(US$ millions)

iBRD Total debt outstanding and disbursed Disbursements Princlpal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

IFC (fiscal yea0 Total disbursed and outstanding portfolio

Disbursementsfor IFC own account Porffolio sales, prepayments and

repayments for IFC own account

of which iFC own account

MlGA Gross exposure

0 0 0 0

391 13 9

- - - -

-

Note: Figures in italics are for years other than those specified. 2005 data are preliminaly estimates .. indicates data are not available. -indicates observation is not applicable.

8/23/06

Development Economics, Development Data Group (DECDG).

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With selected targets to achieve between 1990 and 2015 (eslimab closesf to d a b shown, +/- 2 yeam)

Goal 1: halva the rates for $1 a day poveny and malnutrklon 1990 1996 2000 2w4 Poverty headcount ratlo at $1 a day (PPP % of population)

Share of lnwme or consumption to the poorest qunitlle (%) Prevalenw of mainutntlon (% of children under 5) 23 24 25 c

66 6

2 0 Poverty headcount ratio at national poverty line (% of populalon)

Goal 2: ansum that children are able to c0mpl.t. primary schooling Pnmary school enrollment (net %) 52 4c Pnmary completion rate (% of relevant age group) 29 4s Secondary school enrollment (gmss, K) Youth literacy rate (% of people ages 15-24)

11 52 12 12 47

Goal 3: allmlnate gender dlspatity In education and empower women Ratio of gWs to boys In pnmary and sewndary education (%) Women employed in the nonagncultural sector (% of nonagnwiturai employment) Proportion of seats held by women in nalonal partlament (%) 4 4 7 7

bo 30

Goal 4: raduca undmr4 moMlity byhvo-thirds Under-5 mortality rate (per 1,000) Infant mortality rate (per 1 000 live btrlhs) Measles immunmatm (proportion of one-year olds immunized. %)

Goal 5: reduce maternal moMlity by thrw-tourths Maternal mortality ratio (modeled esbmate. per 100 000 live births) Births attended by skilled health staff (% of total)

188 180 193 192 102 107 131 132 83 48 38 3e

1,100 46 44

Goal 6: halt and begin to reverse the spread of HlViAlDS and Other major diseases Prevalence of HiV (% of population ages 15-49) 13 5 15 C Contraceptlve prevalenw (% of women ages 15-49) 15 28 incidence of tuberculosis (per 100 000 people) 117 322 Tuberculosis cases detected under DOTS (%) 62 9 4

Goal 7: halva tha proportion of peoph wlthout susuinabia aceass to basic mads AGWSS to an improved water SOUM (K of population) 52 75 Access to improved Sanitation faallties (% of population) 23 27 Forest area (% of total land area) 37 2 38 8 36 5 Nationally protected areas (% of total land area) a 7 CO2 emissions (metnc tons per capita) 0 1 0 1 0 1 0 1 GDP per unit of energy use (wnstant 2000 PPP 5 per kg of 011 equivalent)

Goal 8: develop a mlobal partnership for development Fixed line and mobile phone subscnbers (per 1.000 people) 2 2 4 18 Internet users (per 1,000 people) 0 0 1 2

2 Personal computers (per 1,000 people) Youth unemployment (% of total labor force ages 15-24)

ducation Indicators (X)

50 I 1690 XW m2 2-

-Primary net enrollment ratio ( )

-Ratio of girls to b y $ in primary 6 secondary ducalion (. I

Maatlas immunization (X of 1 -par olds)

':I n

CT Indicators (per 1,000 people)

Note: Figures in italics are for years other man those speclled. .. indicates data are not available. 8/23/08 Sourws: 1. EDS 1994-1995: MlCS 2000 2. Ministry of Education- UNDP development report (2W5) 3. RGPH2003 4.2005 UNDP report on HIV impact on development and ONUSIDA Development Ewnomics, Development Data Group (DECDG).

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CAS Annex B2: Selected Indicators of Wor ld Bank Portfolio

Performance and Management

As Of Date 11/06/2006

Indicator 2004 2005 2006 2007 Pottfolio Assessment Number of Projects Under Implementation a 1 1 0 C Average Implementation Period (years) 2.6 3.6 0.0 0.c Percent of Problem Projects by Number a * c 100.0 100.0 0.0 0.c Percent of Problem Projects by Amount 100.0 100.0 0.0 0.G Percent of Projects at Risk by Number a , d 100.0 100.0 0.0 0.c Percent of Projects at Risk by Amount a, 100.0 100.0 0.0 0.c Disbursement Ratio (%) e 0.0 0.0 0.0 0.c Portfolio Management CPPR during the year (yes/no) No No No Nc Supervision Resources (total US$) 0.0 119.5 61.4 88.2 Average Supervision (US$/project) 0.0 59.7 61.4 88.2

Memorandum Item Since FY 80 Last Five FYs Proj Eva1 by OED by Number 24 2 Proj Eva1 by OED by Amt (US$ millions) 415.1 14.6 YO of OED Projects Rated U or HU by Number 66.7 100.0 YO of OED Projects Rated U or HU by Amt 80.4 100.0

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year.

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CAS ANNEX B3: IBRDADA Program Summary

As Of Date 11/06/2006

'roposed IBRDllDA Base-Case Lending Program a

Strategic Rewards b implementation b Fiscal year Proj ID US$(M) (H/ML) Risks (HIMIL)

2007 CF-Development Policy Grant (DPG) (FY07) 82.0 2008 Investment Projects tbd 18.0

Total Overall Total

100.0 100.0

H H

H M

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CAS ANNEX B4: Summary of Nonlending Services

As Of Date 11/06/2006

Product Completion F Y Cost (USSOOO) Audience a Objective

Recent completions CF Policy Notes Leadership Seminar

FY05 FY06

Underway Poverty Assessment Analysis FY07 HlPC Preliminary Document FY07 Full PRSP FY07 Modernization of Public procurement FYO8 Strengthening National Statistic System TA FY07 PRSP finalization FY07 Diagnostic Trade Integration FY07

Planned Education Country Status FY07 Poverty Report FYO8 Sector strategy for the rural area FYO8 Public expenditures review F Y O 8

550,000 Bank Government

50,000 240,000

32,000

210,000

59,000 115,000

GovVBan WlMF GovVBan WlMF Government GovVBanWlMF Government GovVBanWlMF GovVBanWlMF

Government GovVBank GovVBank GovVBank

Knowledge Problem Solving

Knowledge Problem Solving Problem Solving Problem Solving Problem Solving Problem Solving KnowledgelProb Solving

KnowledgelProb Solving Knowledge Knowledge Knowledge

a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving.

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This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

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CENTRAL AFRICANREPUBLICSELECTED CITIES AND TOWNS

PREFECTURE CAPITALS

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