Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-7197-CD

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED STRUCTURAL ADJUSTMENT CREDIT

OF SDR 22.2 MILLION

TO

THE REPUBLIC OF CHAD

April 12, 1999

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS(as of September 14, 1998)

Currency Unit = CFA franc (CFAF)US$ 1.00 = CFAF 582.95

SDR 1.0 = US$ 1.35

ABBREVIATIONS AND ACRONYMS

AFF Abattoirs Frigorifiques de Farcha (National Slaughterhouse)BDT Banque de D6veloppement du Tchad (Development Bank of Chad)BTCD Banque Tchadienne de Credit et des Depots (Commercial Bank of Chad)BICIG Banque Internationale pour le Commerce et l'Industrie du Gabon (Commercial Bank)

CAS Country Assistance StrategyCNRT Caisse National de Prevoyance Sociale (Social security agency)CNPS Caisse Nationale de Retraite du Tchad (Retirement/Pension fund)COBAC Commission Bancaire (Bank supervisory body in UDEAC)COTONTCHAD Societe Cotonniere du Tchad (Cotton processing and marketing company)CPI Consumer Price IndexDHS Direction des Huileries et Savonneries (Oil and Soap division of Cotontchad)ENAM Ecole Nationale d'Administration et de Magistrature (National Administration School)ESAF Enhanced Structural Adjustment FacilityGDP Gross Domestic ProductHIPC Heavily Indebted Poor CountriesICB International Competitive BiddingIDA International Development AssociationIFC International Finance CorporationIMF International Monetary FundMIGA Multilateral Investment Guarantee AgencyONHPV Office National de l'Hydraulique Pastorale et Villageoise (Rural hydraulic equipment

Agency)ONDR Office National pour le Developpement Rural (Rural Development Agency)PARP Public Administration Reform ProgramPER Public Expenditure ReviewPFP Policy Framework PaperSAC Structural Adjustment CreditSNER Societe National de l'Entretien Routier (Road maintenance company)SONASUT Societe Nationale Sucriere du Tchad (National sugar company)SOTEL TCHAD Societe des Telecommunications du Tchad (Telecommunications company)STEE Societe d'Eau et d'Electricite (Water and electricity utility)UDEAC Union Douaniere et Economique de l'Afrique Centrale (Economic and Customs Union of

Central African States)

FISCAL YEARJanuary 1-December 31

Vice President . Jean-Louis SarbibCountry Director . Serge MichailofSector Manager . Luca Barbone

Task Team Leader : Alain D'Hoore

REPUBLIC OF CHAD FOR OFFICLAL USE ONLYTHIRD STRUCTURAL ADJUSTMENT CREDIT

Table of Contents

Credit and program summary ......................................... i

I. Political, Social and Economic Background ........................................ l1

A. Political Context .................................... IB. Economic and Social Context .................................... 2C. Prior Experience with Economic Reforms .................................... 4

II. The Current Adjustment Program .......................................... 4

A. Overview and Program Objectives ......................................... 4B. Program Implementation and Performance ....................................... 6

1. Macroeconomic and financial performance ..................................... 6II. Privatization and Market Reform Program .................................. 10

III. Public Administration Reform ................................. 13

III. The Proposed Credit ........................................ 14

A. The Credit and its Rationale ................................... 14B. Link to CAS ................................... 18C. Poverty Impact ................................... 18D. Benefits and Risks ................................... 18E. Disbursement Procedures and Implementation Arrangements ...................... 19

IV. Bank Group Operations ................................................. 19

A. Bank Portfolio ............................................. 19B. IFCandMIGA ............................................. 20

V. Collaboration with the IMF and Other Donors ................................. 20

VI. Recommendations .................................................. 21

ANNEXESI. Economic IndicatorsII. Status of Bank Group Operations in ChadIII. Portfolio IndicatorsIV. Letter of Development PolicyV. Supplementary Data Sheet

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Republic of Chad

Third Structural Adjustment Credit

Credit and Program Summary

Beneficiary: Republic of Chad

Amount: SDR 22.2 million (US$30 million equivalent)

Terms: Standard IDA terms with 40 years maturity

Description: The proposed operation supports Chad's adjustment program. Theprogram aims to restore critical public sector capacity, reorientexpenditures towards priority development sectors and facilitatethe operation of the private sector. Specific measures includecontinued efforts at improving government revenues which are stillcritically low; the preparation of civil service reform; a continuedswitch in public expenditures towards priority sectors includingprimarily education and health; the implementation of a pilotreintegration program for demobilized soldiers; acceleration ofpublic enterprise reform, especially in the sugar sector and in theelectricity, water and telecommunications sectors.

Benefits: The operation would contribute to the Governmnent's developmentstrategy. Direct benefits include stronger growth performance andcontributions to poverty alleviation, supported by macroeconomicstability, enhanced rule of law, increased public services in socialsectors and infrastructure and a more favorable environment forprivate sector growth.

Risks: The operation is subject to several risks. The first is political.Though the country has engaged in a political reconciliationprocess that has culminated recently with the holding of aconstitutional referendum, presidential elections in 1996 andlegislative elections in early 1997, risks of unrest and localizedmilitary challenges to the current government cannot be excluded.Social opposition from the small but influential civil service unionscannot be excluded, but the extensive consultation process used todesign the civil service reform strategy has been most helpful inminimizing this risk so far. Finally, implementation capacityweaknesses could cause implementation of the program to stall.To mitigate this risk, the Government will continue to rely on theIDA-financed Capacity Building for Economic Managementproject.

i

Poverty category: Poverty-focused operation, supporting policies that will contributeto faster growth and a shift in public expenditures towards socialsectors. Macroeconomic and financial stabilization, efficiencygains from privatization, lower utility prices and improvedservices, and increased provision of public infrastructure will allcontribute to supporting private sector growth. The shift inexpenditures towards social sectors, though still marginal inrelation to the enormous social deficits in Chad, is a directcontribution to the fight against poverty.

Appraisal Report: Not applicable

Estimated Disbursement:The credit will be disbursed in one tranche following crediteffectiveness, and will follow the Bank's new simplifieddisbursement procedures for structural adjustment operations.

ii

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED THIRD STRUCTURAL ADJUSTMENT CREDIT

OF SDR 22.2 MILLION (US$30 MILLION EQUIVALENT)TO THE REPUBLIC OF CHAD

1. I submit for your approval the following report and recommendation for a Thirdsingle-tranche Adjustment Credit (SAC III) to the Republic of Chad for SDR 22.2million, the equivalent of US$30 million. The credit would be on standard IDA terms,with a maturity of 40 years.

2. The proposed operation would be the last of three policy-based lending operationsenvisaged in the February 1996 Country Assistance Strategy (CAS) for Chad. The firstoperation was approved by the Board of IDA in February 1996, while the second wasapproved by the Interim Trust Fund Committee in June 1997; both were fully disbursedshortly after approval. The proposed Credit, in the amount of US$ 30 million, would bedisbursed in full upon effectiveness.

3. The current CAS has four objectives: (i) restore critical public sector capacity;(ii) focus public expenditures on development and poverty reduction; (iii) create afavorable environment for private sector development; and (iv) promote the sustainableuse of natural resources. SAC III would directly support the first three objectives, andhelp ease Chad's financial constraints in implementing economic reform.

4. Like the two preceding operations, SAC III is a single-tranche adjustment credit.The choice of single-tranche operations is consistent with the Bank's policy to supportmedium-term reform programs when key directions are well identified, but the precisedesign is subject to uncertainties in countries, like Chad in 1995, with limited economicmanagement capacity and the absence of track record. Each single-tranche Creditrewards ex-post the implementation of policies agreed upon during preparation. Thisreport reviews the overall three-year program, and specific actions agreed upon underSAC II.

I. POLITICAL, SOCIAL AND ECONOMIC BACKGROUND

A. Political Context

5. From independence in 1960 to the early 1990s, Chad's political history was oneof chronic instability, marked by civil strife, external aggression, and open or latentconflict between or within ethnic factions for control of political power. Several yearsafter embarking on an ambitious program of political and economic healing, Chad'ssociety, economy and institutions are still bearing the legacy of a history of conflicts.

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6. After taking power in December 1990, President Deby embarked on a program ofpolitical reconciliation, and set a timetable for the installation of multi-party democraticinstitutions. For a few years, the political situation remained tense even as, in 1993, aNational Conference adopted a constitutional Transition Charter and established aninterim legislature.

7. Recent developments. From late 1995, the political reform agenda accelerated.A Constitutional Referendum was held in March 1996, followed by presidential electionsin June. President Deby received 60 percent of the popular vote, and thus became thefirst democratically elected President of Chad. Legislative elections took place in early1997, and a National Assembly was installed in April 1997. In the spirit of politicalreconciliation, and despite winning a majority in Parliament, the President's Party offeredthe Assembly's chairmanship to a leading figure of the opposition, and brought membersfrom opposition parties to his cabinet.

8. Despite this progress, Chad's political situation remains fragile. The political sceneremains fragmented, with over seventy political parties. Most armed opposition groupshave returned to Chad under the amnesty provisions of the National ReconciliationPolicy, and have either rallied the President's coalition or chosen peaceful ways toconduct political opposition. The potential for civil strife remains present, however, asevidenced in late 1997, when a small rebel group broke off negotiations with Governmentand took up arms. A peace agreement was eventually reached in May 1998, but onlyafter clashes with the military had led to losses of civilian lives.

B. Economic and Social Context

9. The Chadian economy is predominantly a rural-based, low-productivity, informaleconomy. About three-fourths of the population is economically active. Agriculture andlivestock are the main productive activities, employing about 85 percent of the laborforce. Food crops still dominate agricultural production in both the Sudanian (southern)areas of the country, where cash-earning production includes cotton and peanuts, and theSahelian (central) area, where people derive cash income from livestock, gum Arabic andfishing. Agricultural productivity is low, and as a result, the primary sector accounts foronly 40 percent of GDP. A small industrial sector dominated by publicly owned agro-industrial companies and utilities, accounts for about 20 percent of GDP. Services,essentially informal (trade, personal services, transport), and government services,account for the remainder.

10. The fourth largest country in sub-Saharan Africa, and one of its least denselypopulated, Chad faces fundamental structural impediments, such as its landlockedgeographical situation, a desert or semi-arid climate in most of the country, and anextremely poor endowment in physical and human capital. On the other hand, itsagricultural and livestock potential is good, though it is unlikely to be realized ifinfrastructure and human capital constraints are not lifted, and it has important mineraland petroleum resources. A consortium of oil companies led by Exxon has discoveredlarge reserves of oil in the South of the country in the Doba area. A project is underpreparation for the exploitation of these reserves, which would give Chad an opportunity

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to greatly improve its development prospects. Oil revenues are expected to start flowingin 2002.

11. In its first three decades since independence, Chad's growth potential has beenundermined by civil strife and insecurity. Political and structural factors have combinedto stifle private saving and investment, stunt the process of capital accumulation andgrowth, and considerably weaken the Government apparatus. In contrast with manyother African countries, however, Chad has for a large part escaped the burden of majorpolicy distortions. Its foreign indebtedness is relatively small (about 50 percent of GDPin net present value terms), and its people have developed an unusual degree of self-reliance. On the other hand, the provision of essential public infrastructure and socialservices has been severely curtailed, leaving the country with minimal road,telecommunications, energy or water infrastructure, and a limited coverage of educationand health facilities.

12. Chad has the lowest level and quality of electricity and telephone services inAfrica, and by far the highest prices. More fundamentally, it still lacks the most basicinfrastructure backbone for such services, lagging even behind its poor neighbors. Itspaved road network is probably the smallest in the world for a country of its size, withonly about 300 km of paved roads, and many regions of Chad remain isolated for severalmonths of the year during and after the rainy season. Its telecommunicationsinfrastructure does not extend beyond the capital, N'Djamena, and most urban centers inthe country are deprived of basic urban, energy and water infrastructure. Voluntaryparent associations have attempted to supplement the lack of public supply of educationinfrastructure and services. Almost half of all primary school teachers are hired, paid andmonitored directly by parents, but most of them are unqualified, resulting in low schoolachievements.

13. Incidence of Poverty. Chad's 7 million people live in one of the world's poorestcountries, with an average per-capita GDP of US$240. An estimated 80 percent liveunder a dollar a day. Social indicators better illustrate the dramatic incidence of povertyin Chad, both in scope and in depth. Life expectancy at birth is estimated at 55 years forfemales, and 43 years for males. In 1996-97, child mortality was estimated at 194 perthousand live births, one of the highest in Africa, while maternal mortality was estimatedat about 830 per 100,000 live births. Half the children aged between 3 to 5 exhibitsstunted physical growth; one child in seven under the age of 5 suffers from acutemalnutrition. Access to health services is severely limited. A recent survey indicatedthat 50 percent of women in rural areas are 2 hours away or more from the nearest healthcenter. Vaccination coverage rates are extremely low: for example, only one child in tenbetween the age of 12 to 24 months has received full vaccination coverage, but almosthalf of them (44 percent) have not received any vaccination at all. This low nationalaverage rate hides sharp urban-rural differences: the rates for urban and rural children arerespectively 17 and 51 percent. The literacy rate is extremely low, particularly forwomen, at about 10 percent.

C. Prior Experience with Economic Reforms

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14. Chad initiated a fiscal stabilization program in 1988, but macroeconomicmanagement rapidly faltered. Fiscal deficits were at first financed by the accumulation ofarrears to civil servants, domestic suppliers and foreign creditors, or by extra-budgetarytransfers from public enterprises or agencies. This quickly proved unsustainable, and thefiscal crisis gradually brought the operation of government and administration to a virtualstandstill, generating social and political tensions. In 1992, for example, civil servicestrikes led to the cancellation of an entire school year.

15. By the time of the devaluation of the CFA franc in early 1994, it had becomeclear to the authorities that a policy turnaround was indispensable. The Governmentinitiated an emergency stabilization program with three main objectives: (i) lowering thefiscal deficit by decreasing real public sector expenditures and increasing revenues;(ii) passing through some of the devaluation-induced increase in cotton export prices tofarmers so as to elicit a supply response; (iii) and accelerating the process of divestitureof the state from commercial enterprises. The program was supported by an IMF Stand-by arrangement and an IDA Economic Recovery Credit. Though macroeconomicperformance was satisfactory, with a return to growth in the aftermath of the devaluation,fiscal performance deteriorated sharply, with revenues dropping to 4.9 percent of GDPfrom 6.2 percent in 1993. The program was declared off-track and a shadow programwas put in place for about one year. A Policy Framework Paper (PFP) was eventuallyadopted in July 1995, launching a new adjustment program, and a request from theChadian authorities for a three-year arrangement under the IMF ESAF was approved inSeptember 1995.

II. THE CURRENT ADJUSTMENT PROGRAM

A. Overview and Program Objectives

16. The program's overall objectives, described in the original three-year PFP for1995-1998 and updated annually, are to: (i) restore critical public sector capacity andimprove public finances; (ii) increase the developmental impact of public expenditures;and (iii) create a favorable environment for private sector growth.

17. To achieve the first objective, the Government has taken a number of financialand structural measures. On the financial side, the Government's focus has been toimprove its critically low resource mobilization capacity. These efforts aimed at adaptingthe country's tax regime in the context of a sub-regional tax and tariff reform (UDEAC),enhance the performance of tax administration, and improve compliance. On thestructural side, the Government launched preparation work on a public sector reformstrategy to address deeper and more complex issues of public sector performance,including a review of the public sector missions and mandates, its institutional structureand its organizational efficiency.

18. To achieve the second objective, the Government has changed the composition ofpublic spending in favor of key development sectors (education, health, social affairs, andtransport), and non-wage expenditures. One of the key rationales for financial support

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under the program has been to allow sharp increases in these categories of expenditures,while moving towards fiscal sustainability, by reducing overall expenditure envelopes inline with revenue mobilization and sustainable borrowing capacity. To effect this switchin expenditures, the Government has also implemented, with IDA support, ademobilization program of 7,000 military personnel in 1997, after a first wave ofdemobilization from 1992 of about 20,000 soldiers, with French support, to reduce thesize of the army from 52,000 to about 25,000.

19. To achieve the third objective, the Government has implemented a broad reformprogram, including the privatization of public enterprises and regulatory reforms in theutility and agro-industrial sectors. It has privatized the two remaining publicly-ownedbanks and prepared the ground for the privatization of the large and inefficient publicenterprises in the utility and agro-industrial sectors, such as the water and electricityutility, the telecommunications companies, and a sugar production, processing andmarketing company. The reform program is expected to increase the efficiency of theseenterprises, and also attract much needed foreign capital and technology. It shouldsupport output and productivity growth in these sectors, lower costs of business (energy,transport, finance and communications) for other sectors, and strengthen a weak formalprivate sector constituency. The privatization program also contributes to focusing thestate on its essential missions.

20. As reflected in the Letter of Development Policy for the second SAC, the focus ofthe program to be supported by SAC III has been placed on five essential items: (i) themaintenance of a satisfactory macroeconomic and fiscal framework, and significantprogress in expenditure switching; (ii) the adoption of a satisfactory phasing-out of sugarprotection along with the national company's privatization; (iii) substantial completion ofthe divestiture program, including of the banks and the electricity and water utility;(iv) the adoption of a new Telecommunications Code; and (v) the lifting ofCOTONTCHAD monopolies.

21. The program as a whole is critical for poverty reduction and its three maincomponents are mutually reinforcing. Macroeconomic stabilization has proven essentialfor private sector growth and improved programming of public expenditures, while thedivestiture program has contributed to macroeconomic stabilization and helped theGovernment to focus on the delivery of basic social services.

B. Program Implementation and Performance

22. Overall program implementation has been satisfactory. Most major objectiveshave been met or are solidly on track. Over the program period, the Government hasaddressed a broad range of difficult issues, including tax policy and administrationreform, public expenditure switching, demobilization and reinsertion of militarypersonnel, privatization of public enterprises and related regulatory reforms, civil servicereform, and the restructuring of the pension system. Significant progress has beenachieved on many of these issues. Areas of slower progress, such as cotton sector orpublic administration reform, turned out to be complex reform areas, where carefulanalysis was required and a strong consensus among all stakeholders needed to be built as

5

a prerequisite for deep reform. The. process has started and will be pursued in the nextphases of the reform program.

23. Despite remarkable progress overall, implementation of the reform program hasnot been without lapses in content and continuity, in part because of inefficientmonitoring and management. It was uneven in 1997, but resumed at a rapid pace in early1998. The attention of the authorities was focussed on the legislative elections in thespring of 1997, and the pace of implementation of both fiscal and structural reformsslowed down. As a result, little progress was made on semi-annual targets by the middleof 1997, and discussions held in September with the IMF on a third annual arrangementfrom July 1997 to June 1998 did not conclude. The Authorities decided to use theremainder of the year to consolidate program implementation and undertake strongcorrective actions, in order to ensure a stronger footing for the continuation of theprogram into its third year. The program resumed in full in early 1998 and has beensteadily implemented since then, though with continued monitoring problems.

I. Macroeconomic and financial performance

24. Macroeconomic performance over the program period has been impressive:average annual real growth from 1996 to 1998 has been about 5 percent well overpopulation growth of 2.6 percent, with performance improving sharply in 1997 and 1998over the two previous years. Inflation, which had jumped to 60 percent on an averagebasis in the aftermath of the 1994 devaluation of the CFA franc has returned to its lowpre-devaluation levels.

25. In 1997, real GDP growth reached 4.1 percent, fueled in part by a record cottoncrop. A 20 percent raise in seed cotton prices in 1996, followed by a further increase of14 percent in 1997, led to a sharp expansion of cotton output. Food crop and agro-industrial production also rose, and construction was boosted by an increase indisbursements under the Public Investment Program. Inflation was checked throughoutthe year, with a December to December increase in the CPI of0.5 percent only. Growth, imports for public investment financed by foreign aid, and adeterioration of the terms of trade led, however, to a small increase in the current accountdeficit to 20 percent of GDP, from 19 percent in 1996.

26. In 1998, Chad recorded one of its highest growth rates, with real GDP increasingby 7 percent, led again by sharp increases in agricultural production and related agro-industrial activities, due to record rains and favorable prices. In contrast to 1997,however, the urban economy, centered mostly in the capital, N'Djamena, was negativelyaffected by a crisis in petroleum products imports and distribution, which, in tur,severely curtailed electricity production, and, as a result, the urban private sector.Inflation at the national level was limited to 3.6 percent, close to the 3 percent programtarget, though urban prices increased sharply during the rainy season, to return to normallevels at the end of the year.

27. Prospects for 1999 are less favorable. The effects of the world economic andfinancial crisis of 1998 will be felt in Chad through its main export sectors, cotton,

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livestock and gum Arabic. In addition, since record rains in 1998 had led agriculturaloutput, especially food crops, to overshoot its long term trends by about 15 percent, theexpected return to normal rain patterns in 1999 should lead to a fall of about 10 percent inagricultural production. For these reasons, GDP growth in 1999 is conservativelyprojected at about I percent in real terms. Beyond 1999, growth should rapidly return toa solid annual rate of 5 to 6 percent, helped in part by the large investment in thedevelopment of the Doba oil field in the south of Chad, a privately sponsored project firthe exploitation of about 900 million barrels of oil reserves in the south of Chad, and itstransport to an oil terminal on the Atlantic coast of Cameroon, 1 100 km away.

28. Fiscal performance. Table 1 below illustrates Chad's steady fiscal performancefrom 1994 to 1998. Though the degree of fiscal pressure remains small, having reached7.7 percent in 1998, it is much larger on the narrow urban, formal economy. The extentof formalization of the economy makes it unlikely and probably undesirable to increasefiscal revenues at a much faster pace than the average annual rate of 12 percent abovenominal GDP growth since 1994. Even this rate may have proven to be excessive, andthe Government must now find a careful balance between increased tax revenue and therisk of discouraging a nascent private sector, which operates in a difficult economicenvironment.

Table 1. Chad - Fiscal Indicators 1994-1998

In percent of GDP 1994 1995 1996 1997 1998

Revenues 4.9 6.2 7.2 7.7 7.7

Current Expenditures 10.0 9.0 9.3 8.3 7.7

of which: wages 4.0 4.2 3.7 3.5 3.2defense 1.9 1.4 1.5 1.1 1.0

Current Deficit -5.1 -2.8 -2.1 -0.6 0.0

Investment Expenditures 9.1 9.1 9.0 9.6 7.9

Total Deficit -14.2 -11.9 -11.1 -10.2 -7.9

29. Much of the increase in revenues, however, has been due to a broadening of thetax base and an increase in productivity (compliance), brought about by significantimprovement in tax administration, especially at customs, and the introduction of new taxregimes for informal operators, better suited to their limited tax filing and accountingcapabilities. In particular, the Government has introduced a simplified "synthetic tax" inits 1998 Finance Law, in replacement of the standard turnover tax, various licensing taxesand the corporate income tax for companies with an annual turnover lower thanFCFA 40 million. A new fiscal regime for previously-exonerated imports under donor-financed projects, which represent about 30 percent of total merchandise imports and amajor potential loophole for importers, was introduced in September 1997 and, afterinitial technical difficulties, has started to operate satisfactorily.

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30. Reduction in expenditures from 10 percent of GDP in 1994 to 7.7 percent in 1998correspond to a fall of 9 percent in real terms over the period. Much of this reduction hasbeen due to a freeze in nominal wages and tight constraint on hiring in the civil service,control over non-priority sector expenditures, and a decline in the defense budget, whichwas made possible by the Government's demobilization program. This fiscal contractionhas generated for the first time in decades a current budget surplus of half a percentagepoint of GDP in 1998.

31. Fiscal sustainability. Since almost 60 percent of the total deficit is financed bygrants and the remainder is financed by concessional loans (with an estimated average70 percent grant element), the impact of large overall deficits on debt accumulation issmall. In 1997 and 1998, nominal indebtedness increased by, respectively, 1.2 and1.1 percent of GDP in present value terms, while nominal GDP increased, respectively,by 6.9 and 10.7 percent. The deficit now reflects, for the most part, expenditures underdonor-financed investment projects. Thus, the issue of fiscal sustainability essentiallyrevolves around the quality of public expenditure, a question which the Government hasnow placed at the center of its agenda, in anticipation of expanded resources starting in2002 with the advent of oil exports.

32. Expenditure switching. The share of expenditures for the development sectors(education, health and social affairs, agriculture and livestock, environment, andtransport) has increased from about 65 percent of total expenditures, current andinvestment, in 1994 to 72 percent in 1998. When one excludes donor-financedexpenditures, the share of development expenditures rose from 35 percent in 1994 to47 percent in 1998. The clearance of all foreign arrears at the end of 1997 and a sharpincrease in counterpart funding over the program period, from FCFA 320 million in1995 to about FCFA 3 billion in 1998, has allowed a resumption in donor-financedprojects. The Government has also limited hiring into the civil service to education andhealth, and increased the non-wage budget of priority ministries.

33. The 1997 and 1998 budget allocations for non-wage current expenditures ineducation, health, social affairs and transport were increased by, respectively 35 and45 percent in nominal terms, well above the program target of 20 percent in real terms.These budgetary allocations were executed almost in full in their respective budgetaryyears. Sharp improvement in funding to priority sectors has been consistent throughoutthe program: for example, in 1994, the non-wage budget of the education ministry wasless than US$1 million, a level at which questions of efficiency or equity in themanagement of social sector expenditures had limited relevance; five years later, it hasbeen multiplied by six.

34. Hiring into the civil service has been limited to primary and secondary schoolteachers, social workers, and primary health services personnel. In 1998, theGovernment added 400 new primary school teachers, or about 8 percent of the totalnumber of civil-service teachers, and 120 secondary school teachers, and about 90 healthservices workers in primary health facilities, or about 3 percent of the total.

35. In both sectors, Chad is well below international or regional norms: for example,it had only 184 doctors in 1998, or 1 per 38,000 people. While it is clear that additional

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staff is needed, it is important to strike a fine balance between long term sustainabilityand maintaining adequate staff quality and capacity. Despite a decrease in the ratio ofaverage civil service wage to per-capita GDP from about 12 in 1993 to 7 in 1998, thecivil service salary schedule remains unaligned with market indicators. Fully half of allprimary school teachers in Chad are hired and/or paid by local communities or parentassociations at salaries well below those in the civil service for comparable positions.Most of them are unqualified, however. An aggressive long-term strategy to increaseenrollment rates, while decreasing already high pupil-teacher ratios must face the factthat the required teacher body would be considerably more expensive at civil service thanmarket wages. This is one among several issues to which the ongoing revision of theeducation strategy must provide a satisfactory answer. Similar issues arise in othersectors, such as health and rural development.

36. Defense expenditures have been sharply reduced through a significant cut in thesize of the army to a level deemed adequate by external military advisers, after takinginto account the country's overall security situation. Also, the Government hasmaintained a tight control over military pay. During recent years Chad's army has beencalled upon twice to help restore peace in neighboring countries. In 1996-97 Chadcontributed to the UN-sponsored peace force in the Central African Republic at no cost tothe national budget. More recently, together with other African countries Chad sent amilitary force to the Democratic Republic of Congo, which prompted donors to raiseconcerns on the fiscal impact of this initiative. In response to these concerns, theGovernment has emphasized that the size of this force is limited to 1000 troops, and thatits cost is entirely supported by an external party.

37. Available indicators show a considerable improvement in social indicators.Primary school enrollment ratios increased sharply over the program period, from lessthan 45 percent in 1995 to an estimated 63 percent in 1998, though under deterioratingteacher-pupil ratios. Child mortality has reportedly decreased from about 230 per1000 live births in 1993 (the time of the last national census) to 194 in 1996. Theincrease in public expenditure has been a factor in these improvements, albeit a minorone. More importantly, political stability and the return to normalcy in publicadministration have allowed Chad to catch up the ground it had lost during earlier crises.

38. The sustainable financing of road maintenance remains a problem, however. The1998 Finance Law extended indirect taxation to transport services, on top of road usercharges already levied on them. This led private transporters to go on strike against thesharp increase in their tax rates. Negotiations eventually led to a halving of user charges,and, as a result, to a significant under-funding of planned road maintenance expendituresfor 1998. The Government has recently confirmed its intention to revise in depth themechanism for financing road maintenance, to make it genuinely sustainable and lessprone to crisis. To help the Government in this undertaking and smooth the transition tofull funding of routine road maintenance by internal sources in 2000, an increase in theamount of SAC III, by an amount equivalent to the shortfall in 1999, has been proposed.This would enable Chad to avoid losing ground in a crucial area for future growth andhaving to pay much more in the future to make up for lack of maintenance.

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II. Privatization and Market Reform Program

39. In 1992, Chad adopted a Privatization Framework law in which 42 publicenterprises or agencies were slated for divestiture, liquidation or restructuring. Eightenterprises were later added to the list, which included a number of small commercialenterprises, the three public banks, the insurance company, the three utilities (one inelectricity and water, two in telecommunications), and the two largest agro-industriesinvolved in sugar and cotton. The Government also undertook deep regulatory reforms toopen key sectors to competition, while vesting in the State essential regulatory functions.

40. At this point in Chad's reform program, with the exception of the cotton sector,which raises specific and complex issues, most enterprises have been or are on the vergeof being privatized, and most regulatory reforms have been adopted into law. Thoughsome of the most difficult steps of the process have been taken, they will take time totranslate into significant improvement in the every day life of many Chadians. Inaddition, several measures are necessary but not sufficient steps to ensuring outcomes. Inthe utilities sector, for example, public support to private investors may turn out to benecessary to permit Chad to catch up on its enormous deficits.

Banking sector

41. The Government completed its privatization agenda in the banking sector inFebruary 1999. A private bank (BIAT), that had been placed under judicial control afterthe bankruptcy of the Meridien banking group and in which the government had acquireda majority interest, was sold to a foreign private banking group in December 1997. Thelargest Chadian commercial bank (BTCD) was also sold to a French-backed Gabonesebank (BICIG) in December 1997. However, the sub-regional banking supervisionagency, COBAC, disallowed the sale on grounds that the foreign minority shareholder inthe Gabonese bank, which had owned a bank in Chad that had failed in the recent past,had not complied, as equity holder, with sub-regional requirements for bank failureresolution. After protracted negotiation throughout 1998, the operation was finallycancelled. The Chadian authorities promptly turned to the second bidder andsuccessfully concluded negotiations in February 1999. Finally, negotiations for the saleof a controlling stake in the last public bank (BDT) to a private Cameroonian holdingcompany were successfully completed in December 1998.

Divestiture from Commercial Enterprises

42. Small Businesses. The Government pursued the privatization of small andmedium enterprises in 1997 and 1998. A small hydraulic-equipment agency (ONHPV)was privatized, and the Government concluded negotiations with a private hotel chain fora management contract for the publicly-owned hotel in N'Djamena (Hotel du Chari). Acall for bids for the national slaughterhouse (AFF) was issued in September 1998.Preliminary technical work for the privatization of a small enterprise in the transportsector (the road maintenance company SNER), though delayed from its original calendar,is ongoing. The Bank recently advised Government to put the privatization of SNER onhold, pending the resolution of technical issues that have not been appropriatelyaddressed by the Government's advisers. The government has decided to liquidate its

10

national airline company, Air Tchad, and intends to submit legislation to Parliamentliberalizing air transport.

43. Sugar company. SONASUT is the country's second largest commercialenterprise, and supplies over 70 percent of the sugar market from its own production ortransformation activities. It enjoyed a high level of protection. Its privatization hastherefore much political and social significance. A detailed diagnostic study of the sectorwas completed in December 1997, demonstrating the potential for establishing thecompany's long term viability in an unprotected market environment. On this basis, theGovernment formally approved a privatization plan that would allow a strategic investor,to be selected on a competitive basis, to inject fresh capital in the company and increaseits efficiency. The Government has also initiated a plan to reduce the level of protectionof the domestic sugar market with a first cut of 4 percent. Under the plan, the newinvestor will be allowed adequate time to undertake the investment program needed toboost the company's efficiency. After a long selection process, an investment bank washired to effect the last phase of the privatization, with a view to issue intemationalcompetitive bids for SONASUT by June 1999.

Utilities

44. The high cost and low reliability of utilities is a major constraint to private sectordevelopment in Chad. The Government has launched a program aimed at improving theefficiency in the supply of water, electricity and telecommunications services, throughthe privatization of the three companies concerned.

45. Electricity and water utility. The process for the privatization of the water andelectricity utility accelerated in July 1997 with the issuance of bids for the pre-qualification of private operators in electricity production and distribution, and theadoption of a decree providing for the assumption by the Govenmment of the company'slong-term debts. A new Electricity and Water Distribution Code was drafted to redesignthe regulatory structure of the sector. Draft concession agreements were issued to thetwo pre-qualified companies in September 1998 with an invitation to bid, and preliminarynegotiations started in December 1998. The company is expected to be put under privatemanagement in 1999.

46. The commitment to privatization was reinforced after a long crisis in the energysector, during which the Government's ill-conceived attempts to address the crisis endedup worsening its effects. The crisis originated in the collapse of Chad's traditionalsources of petroleum products, the informal markets of neighboring Nigeria. Attempts tocontrol and organize the procurement of petroleum products directly by Government, andto impose restrictions on importers to ensure a steady supply to the electric utility, rapidlyled to severe shortages of fuel in the capital and throughout the country. Donor advice,and, more importantly, the evidence that these policies were failing to generate theirintended objective, led the Government to revise its position and embrace a more liberalapproach based on privatization.

47. Telecommunications sector. New Telecommunications and Postal ServicesLaws were approved by Parliament in July 1998. These new laws grant a limited five-

11

year exclusivity for fixed telephone services to a new company, SOTELTCHAD, to becreated out of the merger of the telecommunications arm of the local postal and telecomagency, and the international telephone services company. It also provides for a reformof the regulatory institutions in the sector, and opens up to private competition the othersegments of the telecom market in Chad. In this respect, in December 1998, a call forbids was issued for the granting of a license to operate a cellular phone service in Chadon the basis of extensive licensing agreements as envisaged under the newTelecommunications law. The operation of this autonomous license will not only rapidlyrespond to the telecommunication deficit in Chad, but also and more importantly willcreate competitive pressure on the main operator for service and quality expansion andlower prices. The Government has confirmed its commitment to privatize the newtelecommunications company once the merger is completed, and has already launchedthe preliminary technical and financial work.

Cotton Sector

48. Cotton is one of the most important sectors in Chad, given its contribution tofiscal revenues, exports and salaried employment, as well as its importance as a majorsource of cash income for more than 350,000 farming households.

49. In mid-1997, the Government adopted a reform agenda with three maincomponents. First, a reform of the seed cotton pricing mechanism was introduced to givefarmers a larger share of international prices and to make adjustments to world conditionsin a more transparent and automatic fashion. As a result of these changes, it is expectedthat the farmers' share in international prices will increase from about 46 percent in1996-97 to 54 percent in 1998-99. Second, taxation on the purchase of farm implementsfrom the public rural development agency (ONDR) was reduced. And third, the Cottonpolicy committee was reorganized to include farmers' representatives. The Governmentalso decided to allow COTONCHAD to implement a pilot decentralization program forthe management of its gins and to look at the opportunity to spin-off non-core activities(oil and soap manufacturing). Consultants were hired in December 1998 to prepare anaction plan for this divestiture.

50. The reform program also included the lifting of the de jure monopolies enjoyedby COTONCHAD in primary marketing, ginning and export marketing. Sharpdivergences emerged, however, among key donors in the sector on this aspect of thereform program, and a consensus was eventually reached that the Government wouldtemporarily suspend its plans to lift the monopolies, until the basis for coordinatedsupport to the Government's strategy could be more firmly established. Discussions onthe sector reform program resumed in late 1998. The Government has indicated that allexisting legal texts granting COTONTCHAD its exclusive rights have in fact becomevoid. Though this legal vacuum in effect removes barriers to entry in the sector, theGovernment is concerned that transitional issues have not yet been fully addressed, andthat deeper internal consensus needs to obtain before moving ahead with ambitiousreform plans. It has requested the Bank's and other donors' assistance to help do moreanalytical work and re-design a comprehensive reform framework. In view of theexpected impact of the reforms on a large part of Chad's population, the donors agreedthat more time was needed to define and better internalize them.

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III. Public Administration Reform

51. In April 1997, the Government appointed a National Civil Service ReformCommittee and gave it the broad mandate to undertake a thorough examination of civilservice performance issues and suggest a reform agenda. After preliminaryconsultations, it was decided that the diagnosis and reform exercise would be furtherbroadened to include a larger array of institutional, organizational and managerial issuesrelated to public administration performance. The diagnosis, in particular, would focuson: (i) role of the state and the institutional and legal framework of the publicadministration system; (ii) pay reform and professionalism; (iii) human, financial andmaterial resources of the administration; and (iv) participation of women in publicadministration.

52. Shortly afterwards, two committees were established to manage the reformprocess, a Steering Committee at the political level, comprising five ministers, includingthe Ministers of Finance, Planning. Civil Service and the Secretary General of theGovermnent. and a Technical Committee (TC) chaired by the Director of the NationalAdministration School (Ecole Nationale d'Administration et de Magistrature. ENAM)and comprising 12 members drawn from different ministries and agencies. A process hasbeen launched to explain the objectives of the reform exercise to a cross-section ofstakeholders, including civil servants, representatives of the private and voluntary sectors,academia and the media. In July 1998 three seminars were organized to discuss a draftPublic Administration Reform Program (PARP). The Cabinet approved the final Reportand adopted a first set of recommendations in December 1998. These included theestablishment of a permanent PARP implementation unit for monitoring and evaluation;the development of options for decentralization, which has turned out to be the mostcritical, as well as most complex, institutional issue in the Chadian public administration;and basic personnel management reforms, such as a revision of pay policy, theharmonization of personnel and payroll data, and the revision of the statutes of the civilservice (civil service code).

53. More importantly, the process has firmly established public administration reformat the center of the Government's long term structural reform agenda. Much workremains to be done, however, to properly identify and sequence key actions. Many of thekey issues of public administration reform are central to sector strategies in health,education and rural development and must be adequately addressed for preparing Chad tomanage effectively the resources expected from oil exploitation.

III. THE PROPOSED CREDIT

A. The Credit and its Rationale

54. The proposed Credit is a single-tranche operation, with the proceeds to bedisbursed against measures taken up-front. It would be the last in a series of threeoperations envisaged under the 1996 CAS to support the Government's currentadjustment program.

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55. The financial rationale for the Credit is essentially budgetary. Despite significantprogress towards fiscal soundness, the financial program has identified non-recurrentbudgetary financing gaps. Budgetary financing gaps originate in the need (i) to serviceexte7nal debt, which accounts for about 21 percent of total revenues; (ii) to reduce arrearstovi-ards foreign and domestic suppliers accumulated before the onset of the program; and(iii) to pay for the fiscal impact of structural reforms, such as debt workouts of privatizedpublic enterprises, mitigation of the social costs of privatization, funding for reintegrationof demobilized military personnel and for the restructuring of the social security system.Financial audits of major public enterprises have invariably revealed large publicliabilities, often underestimated, that need to be dealt with directly or indirectly forreforms to proceed.

56. Exceptional financing of these budgetary gaps would aliow the Government tofinance a higher level of priority sector expenditures, while improving resourcemobilization and constraining the growth of non-priority expenditures. The CFAcounterpart of the Credit's proceeds, equivalent to about 8.5 percent of total Governmentoutlays (including amortization of debt and repayment of internal arrears), would helpclose the 1999 budget financing gap, along with financial assistance from other donorsand the IMF, and ease the Government's cash position throughout the year.

57. In keeping with the requirements for the processing of single-tranche operations,the presentation of the proposed operation was made contingent on (i) the maintenance ofa satisfactory macroeconomic and fiscal framework, as was recently attested by the IMFin concluding the second semi-annual arrangement of the third year of Chad's firstarrangement under the ESAF, and (ii) significant progress in the implementation ofmeasures envisaged in the Government's Letter of Development Policy for SAC II.Specific measures include the following:

(a) significant progress in expenditure switching:

1. Adoption by Government of 1998 and 1999 Budgets, with (i) increases inappropriations for non-wage current expenditures to the Education, Health, Social Actionand Transport and Public Works ministries of at least 20 percent in real terms (actualappropriations were significantly larger); (ii) provisions for the recruitment of at least400 primary school teachers, 120 secondary school teachers and 90 health servicespersonnel, while maintaining the recruitment freeze in other ministries; (iii) adequateappropriation for the payment of counterpart funds to foreign-financed investmentprojects.

2. Submission to the Association for review and approval of the 1998-2000 and1999-2001 Public Investment Programs, including the 1998 and 1999 InvestmentBudgets.

3. Submission to the Association of Budget Execution Reports and quarterlyProgram Implementation Reports on an ongoing basis.

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(b) the adoption of a satisfactory phasing-out of -sugar protection along with thenational company's privatization:

4. Initial reduction in sugar protection and recruitment of an investment bankto prepare and implement the privatization of the National Sugar Company (December1998).

(c) substantial completion of the divestiture program, including the banks and theelectricity and water utility:

5. Issue of call for bids on an ICB basis for the sale of shares of the BanqueTchadienne de Depots et de Credit (BTCD) (October 1997).

6. Issue of call for bids on an ICB basis for the pre-qualification of privatecompanies for the granting of a concession agreement for the Societe Tchadienne d'Eauet d'Electricite (STEE) (June 1998); submission to pre-qualified companies of draftConcession Agreement for STEE (September 1998); adoption by Government of a draftWater Code and a draft Electricity Production, Transportation and Distribution Lawacceptable to the Association (January 1999).

7. Granting of a management contract for Hotel du Chari (January 1999).

8. Completion of public offering of shares in Office National d'HydrauliquePastorale et Villageoise (ONHPV) (June 1997).

9. Invitation for bids for a management contract for the FarchaSlaughterhouse ("Abattoirs Frigorifiques de Farcha" , AFF) (September 1998).

(d) adoption of a new Telecommunications Code and progress in overall sectorreform:

10. Adoption by Government of new Laws for Telecommunications andPostal Services acceptable to the Association (July 1998). The two laws were submittedand approved by Parliament in August 1997.

11. Call for bids for the granting of a license to operate a cellulartelecommunications service (December 1998).

(e) lifting of COTONTCHAD's monopolies and progress in overall sector reform:

12. Recruitment of a consulting firm for the preparation of an action plan forthe separation and privatization of the Oil and Soap Division ("Direction des Huileries etSavonneries", DHS) of the national Cotton Company (COTONTCHAD) (initiated inmid-i 998).

13. Increase in farmers' share of world cotton price to 54 percent in 1998-99from 49.5 percent in 1997-98.

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58. Other reforn measures, covering fiscal reforms, civil service reform, socialsecurity and private sector development, include:

14. Preparation by the Technical Commission and adoption by Governnent(December 1998), of a Public Administration Diagnosis and Reform Strategy Report, andan Action Plan.

15. Adoption in the 1998 Finance Law of the "Imp6t General Liberatoire"(synthetic tax) to replace the "Patente" (licence tax), "Taxe sur le Chiffre d'Affaires"(TCA, turnover tax) and Corporate Income Tax for businesses with turnover lower thanCFAF40 million.

16. Preparation of an action plan for the simplification and reduction in numberof business licensing and other administrative procedures (submitted to IDA in January1 999).

17. Preparation of a draft Investment Charter compatible with UDEAC taxation,customs and investment reform (submitted to IDA in December 1998).

18. Completion of the audits of the Social Security companies (Caisse Nationalede Retraite du Tchad (CNRT) et Caisse Nationale de Prevoyance Sociale (CNPS)(November 1998); both audits were submitted to IDA.

59. Section II has identified areas where program targets have not yet been fullyachieved, and the reasons for these delays. They include: (i) the privatization of the sugarprocessing company, SONASUT, and (ii) the lifting of COTONTCHAD monopolies (ormonopsonies) on primary marketing of seed cotton, ginning and export marketing. In thefirst case, the process is now well advanced, and the Government expects bids in thespring of 1999. In the second one, the Government has indicated that existing legal textswith explicit reference to exclusive marketing or industrial rights for COTONTCHADare now void, in effect meeting the conditionality by default. It is however concernedthat a comprehensive regulatory framework for the sector, as well as support measures toeffect a smooth transition to a competitive environment, still need to be put in place.

60. Overall progress and specific achievements warrant continued support. TheGovernment has now established a significant track record in implementing a broad,ambitious and complex program. It has done so in the difficult environment of a majorpolitical transition, and despite persistently weak management and technical capacity. Ina matter of only a few years, the Government has positioned Chad as a solid reformistcountry and has caught up on the general reform movement in the region. It hasunderlined its commitment to carry out its program, by undertaking difficult andexpensive technical steps towards its completion. In most cases, except for cotton,technical diagnoses, analyses or action plans have been completed, and Government hasgiven the go ahead. The Government has also been careful in building up internalsupport for the reform program. For instance, a consensus on the privatization of thecountry's second-largest enterprise, SONASUT, has been nurtured, to the point whereGovernment is now confident it will be able to complete the privatization process.Finally, the Government has indicated that its reform program is by no means over. It

16

intends to continue its adjustment policies and has requested the support of the Bank andthe IMF to launch a new program in mid-1999. The unfinished agenda of the currentadjustment program will thus be pursued in the next phase, including reform programs inthe cotton sector and public administration.

61. Elements of the Government's agenda have already been articulated in the contextof the preparation of the proposed Chad-Cameroon Pipeline project. A Letter of Policyfor the "Management of the Economy at the Oil Era" has already been prepared by theGovernment, and a Law defining the principles for allocating oil revenues todevelopment programs has been adopted by the National Assembly in December 1998.

62. Both documents outline the direction of Government policy in the medium to longterm. The thrust of current financial and structural policies has been reaffirmed, whilethe economic and institutional implications of the transition to the "oil era" are beingaddressed. Further technical work and continued dialogue are currently ongoing toprepare the next phase of adjustment. and identify in particular key actionable steps thatwould serve as triggers for disbursing financial support under adjustment credits.

B. Link to CAS

63. The proposed third single-tranche Structural Adjustment Credit is consistent withthe high case scenario of the CAS, which was discussed with the Executive Directors inJanuary 1996. In extending this Credit the Bank would deliver on the commitmentsmade in the assistance strategy envisaged in the CAS. A new Country AssistanceStrategy is under preparation. Extensive consultations with stakeholders are in progress.While the ongoing CAS was focused on restoring the basic functions of the state, the newCAS will be centered on the transition to the oil era. The advent of oil resources is anopportunity for Chad to build up on the progress made under the ongoing phase ofadjustment, and give its population a much better access to basic social and infrastructureservices. It will also help Chad move out of its present cycle of boom and bust linked tothe world prices of cotton and the amount of rainfall. The new CAS will be presented tothe Board when the oil project is firmly established and about to be launched. It willoutline a medium-to-long term scenario and propose a program to help Chad prepare forthe efficient management of its oil resources.

C. Poverty Impact

64. The program has contributed to poverty alleviation in a variety of ways, direct andindirect. Fiscal stabilization has been a key ingredient in restoring growth, creating amore favorable climate for private investment, and in re-establishing a capacity to deliverbasic services. Social and political unrest, administrative gridlock, pervasive insecurityand financial crises, which had plagued Chad during its first three decades as anindependent country, are all now largely over. Additional financial resources, thoughlimited compared to the social deficits in Chad, have allowed the Government to devotean increasing level of public spending for the provision of social services andinfrastructure. The divestiture program is a pre-requisite to allow private capital andmanagement to expand the production and lower the costs of infrastructure and services,

17

without which private-led growtlv is impossible. More importantly, the program hascreated a policy and dialogue environment where the focus has shifted from crisismanagement to development.

D. Benefits and Risks

65. Benefits. The operation supports the Government's macroeconomic program, and,more broadly, its development strategy. Direct benefits include an improved provision ofsocial services, fiscal and macroeconomic stabilization and a more favorable environmentfor private sector to support growth and poverty reduction. The credit amount has beenincreased to enable Chad to properly finance routine road maintenance in 1999. In theabsence of such funding, the cost of road maintenance would increase in 2000 andChad's growth prospects would be undermined.

66. Risks. Risks to the operation per se are limited, since all conditionalities havebeen met, but there remains risks to Chad's future development strategy. The mostimportant risk is political. Political risk entail less the prospects of interruption in theimplementation of the reform agenda because of interest group opposition or democraticchanges in governing coalitions, than the type of ethnic-based conflict and change inregime that has paralyzed the country repeatedly over the last decades, and the associatedsocial and economic turmoil, including loss of lives and destruction of assets. Recentdevelopments in the setting up of democratic institutions have significantly reduced,though not eliminated, these risks.

67. Risks of social opposition have been mitigated by consultations with stakeholdersand, to some extent, by the very success of the program. To mitigate these social andpolitical risks, it is critical, however, that the Government continues and improves itscommunication and information efforts about its policies in general, and adjustment inparticular. Temptations to adopt alternative policy agendas, or ideological biases againstthe current liberalization agenda of the Government, have not disappeared. In addition,increased fiscal pressure on the narrow formal private sector, reduced real civil servicewages and likely layoffs in the course of privatization, especially for the larger publicenterprises, may all put pressure on the Government to slow down programimplementation.

68. Finally, the gradual improvement in economic management capacity needs to bebuilt upon, with continued donor support where necessary, to ensure not only a smoothexecution of the program, but also Government readiness in the face of unanticipatedcrises.

E. Disbursement Procedures and Implementation Arrangements

69. The proposed Credit will be disbursed in one tranche. It will follow the Bank'ssimplified disbursement procedures for structural adjustment operations. Proceeds of theCredit will be deposited by IDA in a Central bank account at the request of the BorrowrIf the proceeds of the Credit are used for ineligible purposes, IDA will require v_.Borrower to either: (a) return that amount to the account for use for eligible purposes; or(b) refund the amount directly to IDA. The administration of the Credit will be the

18

responsibility of the Minister of Finance. Although an audit of the deposit account willnot be required, the Bank reserves the right to require audits at any time.

70. Implementation of the adjustment program is under the direct supervision of theHigh Inter-ministerial Committee for Adjustment at the political level, and a TechnicalCommittee for Adjustment at the technical level. A Program Monitoring Unit, the"Cellule Economique", coordinates and monitors the program, and issues quarterlyimplementation reports. Regular IDA supervision missions also monitor programimplementation and the general conduct of economic policy.

IV. BANK GROUP OPERATIONS

A. Bank Portfolio

71. The currently active portfolio, as of December 1998, is composed of 9 IDA-financed investment operations. Portfolio action plans, identified after a 1998 CPPR, ledto an improvement in portfolio performance compared to FY98 when three projects wererated unsatisfactory for both implementation progress and achievement of developmentobjectives. In FY99, only one project, the ATETIP public works project, is currentlyrated unsatisfactory under both criteria and the government has taken the first necessarysteps in view of lifting the suspension of disbursements. The Education project is stillrated unsatisfactory for its development objective, despite significant improvement inphysical implementation. A CPPR was carried out in February 1999. Its major emphasiswas on the sustainability of results.

72. Several constraints to satisfactory portfolio performance have been identified. Acommon factor is weak local management capacity, exacerbated by rapid personnelturnover at the project or ministerial level. Support from the IDA-financed CapacityBuilding for Economic Management Project, technical assistance from various donorsand capacity building components in other projects all contribute to alleviating capacityconstraints. Chad has also been at the forefront of the African Capacity BuildingInitiative. A local Capacity Building Secretariat (focal point) was created in April 1997for the in-country coordination of the Initiative; a detailed Business Plan has beenprepared.

73. In addition to institutional capacity, project performance also crucially depends onthe quality of public policies and sector strategies. As the experience with adjustment hasdemonstrated, rapid social and economic changes in Chad have altered the policy andinstitutional environments in which projects are undertaken. In many instances, areevaluation or redesign of sector strategies has been required. In education, health, ruraldevelopment and transport, the Government is now engaged, with donor support, inrevising its strategies. They will be presented at sector Roundtables, which will be heldin Chad throughout 1999.

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B. IFC and MIGA

74. Chad became a member of IFC in 1997. It has requested IFC to participatedirectly and as an arranger in the financing plan for the Chad-Cameroon pipeline project,which is scheduled for 1999. Chad is not a member of MIGA.

V. COLLABORATION WITH THE IMF AND OTHER DONORS

75. The Bank has worked closely with the IMF and other donors (mainly France, theEuropean Union and the African Development Bank) in helping Chad design, prepareand implement its program. The African Development Bank's Second StructuralAdjustment Credit is closely linked to the Bank's proposed operation. The SwissDevelopment Corporation contributed to Chad's program through its GeneralCo-financing Agreement with the Bank under SAC II in December 1997.

76. The IMF and the Bank collaborated with the Chadian Government on thepreparation of the 1995-1998 PFP, and its subsequent updates. A new three-year PFPwill be jointly prepared in the spring of 1999. The IMF approved Chad's first three-yeararrangement under its ESAF in September, covering the period from July 1995 to June1998. A program consolidation period later extended the arrangement's coverage toMarch 1999. Financing under all three annual arrangements have been approved. TheChadian authorities have already indicated that they will seek a new three-yeararrangement under the ESAF.

VI. RECOMMENDATION

77. I am satisfied that the proposed IDA Credit would comply with the Articles ofAgreement of the Association and I recommend that the Executive Directors approve it.

James D. WolfensohnPresident

by Sven Sandstr6m

Washington, D.C.

April 12, 1999

Attachments

20

ANNEXES

Annex IPage 1 of 6

Chad at a glance 2/12/99

Sub-POVERTY and SOCIAL Saharan Low-

Chad Atrica Income Development diamoetnd1997Population, mid-year (millions) 6.8 614 2,048 Life ~r ectancyGNP per capita (Atlas method, US$) 240 500 350GNP (Atlas method, US$ billions) 1.6 309 722

Average annual growth, 1991-97

Population (%) 2.5 2.7 2.1Labor force (%) 2.5 2.6 2.3 GNP Giross

per primaryMost recent ostimate (latest year available, 1991-97) capita enrollment

Poverty (% otpopulation below natlonal poverty line)Urban population (% of total population) 22 32 28Life expectancy at birth (years) 49 52 59 JInfant mortality (per 1,000 lve births) 113 90 78Child malnutrtion (% of children under 5) .. 27 .. Acceso In sale waterAccess to safe water (% of population) 24 44 71Illiteracy (% of population age 15+) 48 43 47Gross prlmary enroliment (% of school-age population) 65 75 91 - Chad - Low-income group

Male 85 82 100Femalb 44 67 81

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 1996 1997Economic ratios

GDP (USS billions) 0.87 1.1 1.6 1.6Gross domestlc lnvestmentVGDP 17.1 8.1 13.5 16.3 1Exportsofgoodsandservices/GDP 16.1 13.4 17.5 17.6 ldeGross domestk savings/GDP 1.2 -5.9 -2.8 -1.5Gross national savings/GDP .. .. 1.3 1.4

Current account baIanoa/GOP -10.5 -16.3 -12.2 -15.0 DmsiInterest payments/GDP 0.1 0.2 0.9 1.0 mstlavi InvestmentTotal debtGDP 11.9 22.7 61.3 57.3 SavingsTotaldebtservice/exports 3.6 5.2 11.9 12.3Present value of debt/GDP ..Present value of debt/exports ..

Indertedness1976486 1987-97 1996 1697 1998-02

(average annual growth)GDP 1.0 2.1 3.7 4.1 6.4 Chad-Low-incomegroupGNPpercapila -1.3 -0.6 1.3 1.7 3.8Expols ol goods and servlces -1.0 1.7 -4.9 9.7 14.7

STRUCTURE of the ECONOMY1976 1986 1996 1997 Growth rates of oufiA and Investment (%)

(% of GDP) 5

Agricuiture 37.0 32.6 38.2 38.5Industry 15.4 15.0 13.8 15.1 1001

Manufacturing 11.5 11.9 11.4 12.8 so .-Services 47.6 52.4 48.0 46.4 o'

Private oonsumption 70.8 101.0 90.6 90.6 .50 93 94 95 9r, 97

GeneralgovemmentconsumptUon 16.7 13.9 12.2 10.9 - SDI -- OGiDPIrnports of goods and servIces 26.4 35.4 33.6 35.4

1976-86 1987-97 1996 1997 Growth ratee of eipeft and Impods (%)(average annual growmth)Agrculture 0.1 4.8 2.7 5.2 30 .Industry 0.6 1.7 5.9 9.5 20.A

Manutacturing .. .. 1.9 12.6 to .Services 1.6 -0.1 1.9 1.5

Private consumption 4.3 1.4 0.5 3.2 r o4 95 - 97General govemment consumptlon -5.4 -4.4 15.0 -5.8GrossdomestlcInvestment -11.3 -0.3 48.9 24.1 -20Imports of goods and services 1.7 -2.4 3.8 7.0 ExpHs tmportsGross nationai product 0.9 1.9 3.9 4.3

Note: 1997 data are preliminary estimates.

The diamonds show tour key Indicators In the country (In bold) compared with Its Income-group average. If data are @frilng, the diamond willbe Incomplete.

Annex IPage 2 of 6

Chad

PRICES and GOVERNMENT FINANCE1976 1986 1996 1997 Inflation (%)

Domestic prices(% change)Consumer prices -13 1 11 3 5.6 40

Implicit GDP deflator 8.4 -16.9 11 6 2.6 2

Government finance 0(% of GDg includes current grants) 94 95 90 97

Current revenue 4 8 9 1 8.4 -20

Current budget balance -2.0 -0.2 02 - GDP deflator -0 CPIOverall surplus/deficit -14.5 -9.2 -9.5

TRADE1976 1986 1996 1997 Export and Import levels (US$ millions)

(USS millions)Total exports (fob) - 99 221 211 583 -

Cotton 42 108 115Meat .. 35 52 49 437

Manufactures 35 2 1Total imports (cif) 207 432 423 2; . ,

Food .. . 1 1 149Fuel and energy 19 1 4 18 ICapital goods .. 42 149 156 ii

91 92 92 94 95 90 97Export prce index (1995=100) 92 100Import price index (1995=100) 100 105 . Exports li mportsTerms of trade (1995=100) 92 95

BALANCE of PAYMENTS1976 1986 1996 1997 Current account balance to GDP ratlo%)

(USS millions)Exports of goods and services 127 143 283 267 0.Imports of goods and services 213 378 546 537 -2 91 92 93 94 95 96 97

Resource balance -86 -235 -263 -270 -

Netincome 0 -9 -32 -29 8,Net current transfers 112 92 -,

.10Current account balance -91 -174 -197 -228

Financing items (net) 104 155 193 201 2 1Changes in net reserves -14 19 4 27 -1E

Memo:Reserves including gold (USS millions) 0 20 160 131Conversion rate (DEC, locaLAJS$) 239.0 346.3 511.6 583.6

EXTERNAL DEBT and RESOURCE FLOWS1976 1986 1996 1997

(USS millions) Composlton of total debt, 1997 (USS millions)Total debt outstanding and disbursed 103 242 996 890

IBRD 0 0 0 0 F 5 G: 24IDA 16 48 433 457

E: 151 '- Total debt service 5 8 34 33

IBRD 0 0 0 0IDA 0 2 4 5 \ .

Composition of net resource flows 3 B: 457Official grants 145 138 D: 182\/Official creditors 5 29 106 93Private creditors 2 0 -2 0Foreign direct investment 15 16Portfolio equity ! C 71

World Bank programCommitments 20 35 40 25 A - IBRD E - BilateralDisbursements 5 10 69 27 B - IDA D - Other mutilateral F - PrivatePrincipal repayments 0 2 1 2 C - IMF G -Short-termNet flows 5 8 68 25Interest payments 0 1 3 3Net transfers 5 8 65 22

Development Economics 2112199

Annex IPage 3 of 6

Chad - Key Economic Indicators

Actual Estimate ProjectedIndicator 1994 1995 1996 1997 1998 1999 2000 2001

National accounts(as % GDP at currentmarket prices)

Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture' 37.2 35.1 37.1 37.4 37.5 35.0 34.7 33.8Industry' 11.7 14.3 13.4 14.7 15.0 15.7 15.8 15.8

Services' 49.5 48.4 46.7 45.1 43.2 43.2 42.8 43.3

Total Consumption 102.2 105.2 102.7 101.5 100.8 98.9 99.0 92.2Gross domestic fixed 11.8 11.6 11.9 14.4 15.0 19.8 33.6 41.1investment

Government investment 7.3 6.3 6.4 6.6 7.1 7.4 7.9 8.3Private investment 9.3 4.0 7.1 9.7 7.9 12.5 25.7 32.8

(includes increase instocks)

Exports (GNFS)b 16.0 21.5 17.5 17.6 19.7 19.0 19.4 19.8Imports (GNFS) 34.9 36.9 33.6 35.4 35.5 37.7 52.0 53.0

Gross domestic savings -2.2 -5.2 -2.7 -1.5 -0.8 1.1 1.0 7.8Gross national savingsC 5.3 -0.1 1.3 1.4 3.5 4.4 4.3 9.8

Memorandum itemsGross domestic product 1179 1438 1624 1521 1566 1607 1743 1888(US$ million at currentprices)Gross national product per 240.0 220.0 220.0 240.0 ..capita (US$, Atlas method)

Real annual growth rates(%, calculated from 1977prices)Gross domestic product at 9.9% 0.9% 3.7% 4.1% 7.0% 1.3% 5.7% 5.6%market pricesGross Domestic Income 6.8% 4.0% 3.1% 2.7% 8.3% 1.9% 5.8% 5.5%

Real annual per capitagrowth rates (%/o, calculatedfrom 1977 prices)

Grossdomesticproductat 7.1% -1.6% 1.1% 1.6% 4.4% -1.2% 3.2% 3.1%market pricesTotal consumption 1.1% 4.5% -1.5% -1.2% 4.2% -2.7% 2.4% -5.7%Private consumption 8.6% 5.4% -3.2% -0.2% 4.0% -7.4% 1.1% -8.0%

(Continued)

Annex IPage 4 of 6

Chad - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 1994 1995 1996 1997 1998 1999 2000 2001

Balance of Payments(US$m)

Exports (GNFS)b 190.0 309.0 283.0 266.8 308.5 305.5 338.3 373.5Merchandise FOB 135.2 247.1 221.1 211.1 247.6 237.8 265.8 293.2

Imports(GNFS)b 411.4 531.2 545.7 537.2 555.4 606.3 905.9 1001.5Merchandise FOB 203.7 281.7 289.3 283.6 296.2 333.0 544.7 654.0

Resource balance -221.4 -222.2 -262.7 -270.4 -246.9 -300.8 -567.6 -628.0Netcurrenttransfers 113.3 100.3 112.4 91.7 151.1 124.5 132.7 130.7(including official currenttransfers)Current account balance -48.7 -53.7 -106.3 -139.8 -131.9 -192.7 -457.9 -540.9(after official capital grants)

Net private foreign direct 14.2 10.1 14.8 15.8 31.8 88.7 335.4 464.8investmentLong-term loans (net) .. .. .. .. ..

Official 38.9 70.3 45.8 41.8 94.0 123.5 99.5 83.0Private

Other capital (net, includingerrors and omissions)

Change in reservesd -49.9 -59.3 4.1 27.3 -9.4 -22.4 29.8 42.7

Memorandum itemsResource balance (% of -18.8% -15.4% -16.2% -17.8% -15.8% -18.7% -32.6% -33.3%GDP at current marketprices)Real annual growth rates(1977 prices)

Merchandise exports -0.8% 26.5% 14.3% 5.0% 12.9% -5.3% 7.0% 7.4%(FOB)

Primary 9.4% 20.8% 11.9% 4.5% 11.4% -5.5% 5.7% 5.7%Manufactures -0.8% 22.6% 14.0% 0.0% 5.0% 6.1% 8.9% 12.3%

Merchandise imports -13.3% 18.2% 13.7% 3.3% 6.9% 14.0% 55.4% 7.5%(CIF)

Public finance(as % of GDP at current

market prices)"Current revenues (inclu. current grants) 7.6 8.3 9.1 8.4 9.1 12.3 12.6 12.7Current expenditures 10.0 9.0 9.3 8.3 7.7 9.8 11.0 11.3

(Continued)

Annex IPage 5 of 6

Chad - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 1994 1995 1996 1997 1998 1999 2000 2001

Current account surplus (+) -2.4 -0.7 -0.2 0.1 1.4 2.5 1.6 1.3or deficit (-)Capital expenditure 9.1 9.1 9.( 9.6 7.9 9.8 10.6 10.8Foreign financing 9.4 8.3 10.0 10.9 8.9 10.1 7.8 6.0

Monetary indicatorsM2/GDP (at current market 12.1 15.0 15.6 13.2 13.3 13.6 13.8 13.9prices)Growth ofM2(%) 66.3 36.0 20.2 -9.3 11.8 6.6 10.8 9.1Private sectorcredit growth/ 51.7 -41.3 55.1 61.0 42.0 30.6 85.7 80.0total credit growth (%)

Price indices( 1977 =100)Merchandise export price 103.4 149.4 117.0 106.3 110.5 112.0 117.0 120.1indexMerchandiseimportprice 164.8 192.9 174.7 165.8 148.7 144.6 152.2 157.1indexMerchandise terms of trade 62.8 77.5 67.0 64.1 74.3 77.4 76.9 76.5indexReal exchange rate 57.4 63.0 65.3 65.4 65.4 65.4 65.4 65.4

(US$/LCU),Real interest ratesConsumer price index 41.3% 9.5% 11.3% 5.6% 2.9% 2.7% 3.7% 3.8%(% growth rate)GDPdeflator 43.8% 8.7% 11.6% 2.6% 3.6% 3.1% 2.9% 3.0%(% growth rate)

a. If GDP components are estimated at factor cost. a footnoote indicating this fact should be added.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Should indicate the level of the government to which the data refer.f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex I

Chad: External Financing Requirements, 15S4-2000 Page 6 of 6

1994 1995 1996 1997 1998 1999 2000 1998-2000)

Est. Projected Total

(In millions of U.S. dollars)

External financing requirements 243.7 266.4 338.8 248.0 247.1 297.6 242.9 787.6

Current account deficit 247.2 252.9 298.9 305.0 284.7 390.0 657.9 1,332.6

Exports of goods and nonfactor services -190.0 -309.0 -282.9 -266.8 -307.0 -304.2 -334.8 -946.0

Imports of goods and nonfactor services 411.5 531.2 545.7 537.2 556.8 655.1 951.6 2,163.5

Noninterest current account (excl. official transfers) 235.5 240.3 285.1 293.0 273.5 379.0 647.6 1,300.1.

Scheduled interest 11.7 12.6 13.8 12.1 11.2 11.0 10.3 32.6

Capital accountAmortization due 10.9 11.6 12.1 12.4 17.4 21.1 23.4 61.9

IMF repayments 2.2 5.6 6.2 11.2 11.2 4.8 0.9 16.9

Other capital -71 4 -98.1 -68.7 -58.2 -71.4 -137.4 -401.4 -610.2

Change in arrears -7.8 28.2 76.6 4.6 7.0 0.0 0.0 7.0

Change in gross official reserves 62.6 66.3 13.6 -27.1 -1.7 19.0 -37.9 -20.6

Disbursements: existing commitments 243.7 266.4 338.8 248.0 9.1 0.0 0.0 9.1

Grants 176.1 157.1 148.8 135.5 0.0 0.0 0.0 0.0

Loans 45.2 52.3 106.6 93.4 0.0 0.0 0.0 0.0

Debt rescheduling/cancellation obtained 7.5 44.5 59.4 7.7 9.1 0.0 0.0 9.1

Remaining financing gap 0.0 0.0 0.0 0.0 238.0 297.6 242.9 778.5

Disbursements: expected new commitments 0.0 0.0 0.0 0.0 238.0 237.1 217.9 692.9

Grants 0.0 0.0 0.0 0.0 127.5 119.0 123.2 369.6

Current official transfers 0.0 0.0 0.0 0.0 81.1 66.9 68.6 216. 5Of which: exceptional aid 0.0 0.0 0.0 0.0 20.4 0.0 0.0 20.4

Project grants 0.0 0.0 0.0 0.0 46.4 52.1 54.6 153.1

Loans 0.0 0.0 0.0 0.0 99.3 118.1 94.7 312.1

Debt rescheduling/cancellation expected 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Expected use of IMF resources 0.0 0.0 0.0 0.0 11.3 0.0 0.0 11.3

Residual financing gap for exceptional financing 0.0 0.0 0.0 0.0 0.0 60.5 25.0 85.5

Annex IIStatus of Bank Group Operations in Chad Page I of I

Operations Portfolio

Difference Betweenexpected

Original Amount in US$ Millions and actual Last PSRFiscal disbursements a/ Supervision Rating b/Project ID Year Borrower Purpose

IBRD IDA Cancel. Undisb. Orig Frm Rev'd Dev Obj Imp Prog

Number of Closed Projects: 25

Active ProjectsTD-PE-528 1991 GOVERNMENT ENGINEERING 0.00 11.00 0.00 4.61 4.72 4.84 S STD-PE-530 1993 GOVERNMENT OF CHAD TRANSPORT SECT II 0.00 49.70 0.00 4.08 -9.67 2.58 S STD-PE-517 1993 GOVT BASIC EDUCATION 0.00 19.30 0.00 11.15 10.96 0.00 S UTD-PE-533 1994 REPUBLIC OF CHAD PUBLIC WORKS AND CAP 0.00 17.40 0.00 11.42 11.44 0.00 U UTD-PE-509 1994 GOVT OF CHAD HEALTH & SAFE MOTHER 0.00 29.40 0.00 12.10 -1.66 -.74 S STD-PE-35601 1995 GOVT OF CHAD POP. & AIDS CO 0.00 20.40 0.00 11.58 1.43 0.00 S STD-PE-501 1995 GOVERNMENT AG SERVICES 0.00 24.53 0.00 12.04 1.68 0.00 S STD-PE-35623 1996 GOVT OF CHAD CAPACITY BUILDING 0.00 9.50 0.00 2.61 2.76 0.00 S STD-PE-532 1998 GOVT OF CHAD HOUSEHOLD ENERGY 0.00 5.27 0.00 5.45 .94 0.00 S S

Total 0.00 186.50 0.00 75.04 22.60 6.68

Active Projects Closed Projects TotalTotal Disbursed (IBRD and IDA): 110.00 397.00 507.00

of which has been repaid: 0.00 21.84 21.84Total now held by IBRD and IDA: 186.50 364.06 550.56Amount sold 0.00 6.00 6.00

Of which repaid : 0.00 6.00 6.00Total Undisbursed : 75.04 0.00 75.04

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS - highly Satisfactory, S - satisfactory, U unsatisfactory,HU - highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.

Note:Disbkirspment data is updated at the end of the first week of the month.

Generated by the Operations Information System (OIS) Page I

Annex IIIPage I of 4

Chad - Bank Group Program Summary, FY 1999-2001

Proposed IBRD/IDA Base-Case Lending Program, FY 1999-2001a

Strategic rewardsh Implementation"FY Project USS(M,fj (H/M/L) risks (H/MIL)

1999 SAC III 30.0 H MSAFE MOTHER SUPPLEM 10.9 M L

Subtotal 40.9

2000 CAP.BLDG MGT PET.ECO 8.0 H HCHAD TELECOMM. 8.0 M MELECTRICITY 20.0 M HHEALTH SEC. INV. 30.0 H LPET. TA/OIL SECTOR 24.0 M HTD/CM PIPELINE 35.0 M M

Subtotal 125.0

2001 THIRD TRANSPORT SECT 20.0 H H

Subtotal 20.0 H M

Total, FY 1999-2001 185.9

a. This table presents the proposed program for the next three fiscal years.b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H),

moderate (M), or low (L).

Generated by the Operations Information System (OIS) on 03/23/99

Chad - Selected Indicators of Annex III

Bank Portfolio Performance and Management Pagc 2 of 4

Indicator 1996 1997 1998 1999Portfolio Assessment

Number of Projects under implementationa 12 11 11 9Average implementation period (years)b 3.48 3.91 3.92 4.60Percent of problem projects"'

by number 25.00 36.36 27.27 22.22by amount 33.89 43.32 26.76 19.68

Percent of projects at risk'by number 50.00 40.00 33.33 33.33by amount 54.68 50.76 49.20 46.33

Disbursement ratio (%) 22.88 21.31 21.0 15.71

Portfolio Management

CPPR during the year (yes/no) No YES YES YESSupervision resources (total US$) 768,46 684.93 848.68 333.88Average Supervision (US$/project) 64.04 62.27 77.15 37.10

Memorandum item Since FY80 Last five FYs

Projects evaluated by OEDby number 22 7by amount (US$ millions) 351.30 194.90

Percent rated U or HUby number 55.00 28.57by amount 37.15 31.55

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. Pcrcent of projects rated U or HU on development objectives (1)0) 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.

Generated by the Operations Information System (OIS)

Chad - Selected Indicators of Annex IIIBank Portfolio Performance and Management Page 3 of 4

Indicator 1996 1997 1998 1999Portfolio Assessment

Number of Projects under implementation' 12 11 11 9Average implementation period (years)b 3.48 3.91 3.92 4.60Percent of problem projects"

by number 25.00 36.36 27.27 22.22by amount 33.89 43.32 26.76 19.68

Percent of projects at risk" dby number 50.00 40.00 33.33 33.33by amount 54.68 50.76 49.20 46.33

Disbursement ratio (%) 22.88 21.31 21.70 15.71

Portfolio Management

CPPR during the year (yes/no) No YES YES YESSupervision resources (total US$) 768.46 684.93 848.68 333.88Average Supervision (US$/project) 64.04 62.27 77.15 37.10

Memorandum item Since FY80 Last five FYs

Projects evaluated by OEDby number 22 7by amount (US$ millions) 351.30 194.90

Percent rated U or HUby number 55.00 28.57by amount 37.15 31.55

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 pol¶folio at the beginning of the

year: investment projects only.

Generated bv the Onerations Information Svstem (OIS)

Annex IIIPage 4 of 4

Chad - IFC and MIGA Program, FY96-99

PastCategory 1996 1997 1998 1999

IFC approvals (US$m)' 0.00 0.00 0.00 0.00

Sector (%)

TOTAL 100.00 100.00 100.00 100.00

Investment instrument (%)Loans 0.00 0.00 0.00 0.00Equity 0.00 0.00 0.00 0.00Quasi-Equity b 0.00 0.00 0.00 0.00Other 0.00 0.00 0.00 0.00

TOTAL 100.00 100.00 100.00 100.00

MIGA guarantees (US$m) 0.00 0.00 0.00 0.00MIGA commitments (US$m) 0.00 0.00 0.00 0.00

aExcludes AEF projects.bIncludes quasi-equity types of both loan and equity instruments.

Generated by the Operations Information Svstem (OIS) on 03/23/99

Annex IVPage 1 of7

ENGLISH TRANSLATION OF ORIGINAL FRENCH TEXT

UNITY-WORK-PROGRESSREPUBLIC OF CHAD

MINISTRY OF FINANCE,PLANNING, ECONOMY ANDTERRITORIAL ADMINISTRATION

N'Djamena. March 22, 1999

Minister of Finance, Planning, Economy andTerritorial Administration

toMr. James D. Wolfensohn

President of the IDA1818 H. Street

Washington, D.C.

Mr. President,

On behalf of the Government of the Republic of Chad, I have the honor and thepleasure to address to you the following Letter of Development Policy for the ThirdStructural Adjustment Credit.

This Letter of Development Policy, examined attentively and adopted by theGovernment, confirms the main commitments of the Government under the StructuralAdjustment Program, in particular those associated with preparations for a new structuraladjustment program, the macroeconomic and financial framework, structural reforms,rehabilitation of the essential capacities of the State, and improved public finances andthe creation of a favorable environment for private sector development.

The Government believes that the policies and measures described in the Letter ofDevelopment Policy are of such nature as to permit the realization of the objectives of theprogram, and remains ready to adopt any additional measures, which prove essential tothis end. The Governiment will respond favorably to all requests for information on thepart of IDA relating to the implementation of these measures and policies.

Sincerest regards,

MAHAMAT ALI HASSANMinister of Finance, Planning, Economyand Territorial Administration

Annex IVPage 2 of 7

THIRD STRUCTURAL ADJUSTMENT CREDIT

LETTER OF DEVELOPMENT POLICY

I. Preface

Since 1995, the Government of Chad has been implementing a structuraladjustment program that focuses on strengthening the capacity of the state to fulfill itsessential functions now that the country is emerging from a financial crisis that haddeeply affected its economy and the operations of the Government's developmentinstitutions, and severely hampered the prospects for sustainable poverty reduction.

As 1999 begins, impressive progress has been made. Public finance has sharplyimproved, government revenues have considerably increased, spending has been broughtunder control and resources have been reallocated to priority sectors such as health,education, public works, and social services. The capacities of the Government'sfinancial management agencies have been steadily strengthened, even though continuedefforts must still be made to ensure that the results will be sustainable.

In addition, the Government has continued to implenment its divestiture program,the purpose of which is not only to increase the economic efficiency of state enterprisesby permitting the private sector to acquire or manage them, but also to enable the State tofocus on its essential functions. Now that the first three-year adjustment program hasbeen completed, only a few enterprises are still owned by the Government, which itintends to privatize in the near future. At the same time, it has undertaken a wide-rangingreform of the regulatory and legal frameworks governing taxation, external trade,employment legislation, and several economic sectors, the purpose being to provide afavorable environment for the development of the private sector and competition.

Since the Government is aware of the need to take a long-term view in developingthe institutional environment, it has also initiated other development reforms such asreform of its civil service, for which a strategy has been approved, and is now in theprocess of being implemented.

Annex IVPage 3 of 7

II. Preparation of a New Structural Adjustment Program

The Government wishes to continue the task begun in 1995, and plans toimplement a new three-year program covering the period from 1999 to 2001.

The Government intends to review the outcomes and draw the lessons from its firstthree-year program and to promote awareness of it among all actors in the country'seconomic and social life.

On this basis, the Government plans to prepare a new three-year economic-policyframework paper, in partnership with donors, in particular the International MonetaryFund and the World Bank.

The Government has requested IDA support to implement a new structuraladjustment program, and intends to discuss the modalities of this support (with particularregard to the characteristics of IDA structural adjustment financing) in the context of thepreparation of the Chad Country Assistance Strategy (CAS) in the first half of 1999.

III. Macroeconomic and Financial Framework

Medium-term growth targets have been set at between 4% and 5% per year.However, due to a number of exogenous factors, growth in 1999 could reach at most1.2%. The following should be noted: (i) the delayed effects on industrial output of the1998 decline in seed cotton production, resulting from the fall in international prices,which was partly passed on to producers; and (ii) the anticipated effects of a return tonormal rainfall in 1999, after very favorable levels in 1998, which brought about aconsiderable rise in food-crop output. Inflation is expected to remain stable at about3.5% per year, demonstrating that the effects of the price rises following the1994 devaluation have been brought under control.

Despite these less favorable growth projections, the Government plans to continueits fiscal effort, focusing on: (i) continuing its policy of broadening the tax base byadopting measures for collecting taxes from the informal sector (i.e. withholding tax oncorporation and personal income, and general synthetic tax'), and by increasing its effortsto combat fraud and tax evasion, particularly as regards import taxes (customs andimports of fuel); and (ii) controlling government expenditure, and redirecting spendingtoward priority sectors. In particular, the Government plans to achieve a current primarysurplus equivalent to 2.3% of GDP.

'Impot gin&ral liberatoire.

Annex IVPage 4 of 7

IV. 1999-2000 Reform Program

Although the Government plans to finalize its new short- and medium-termeconomic reform program only after completing the consultations and discussionsscheduled for the first half of 1999, it has already identified a number of specific areas topursue the reform agenda of its first structural adjustment program; in particular:

(i) revision of its policies for financing road maintenance;(ii) continuation of its divestiture policy;(iii) continuation of the posts and telecommunications reform program;(iv) preparation of a reform strategy for the cotton sector;(v) implementation of the civil service reform strategy.

A. Road Maintenance

The Government is fully aware that the financing of road maintenance is currentlyin crisis. The present system presents conceptual and structural problems which affectthe availability of medium- and long-term resources; in addition, the CAER(Autonomous Road Maintenance Fund), is now in an acute funding crisis, unable toundertake routine maintenance because it cannot pay arrears to suppliers.

In order to overcome the immediate crisis facing CAER, the Government, inconsultation with the IMF, has committed to transferring CFAF 2.2 million to the CAERfrom the Third Structural Adjustment Credit as soon as this financing becomes available,making it possible for routine road maintenance to resume. The Government alsocommits to a schedule of monthly payments of CAER's regular resources and topublishing a monthly implementation report.

The structural principle adopted by the Government is that road maintenance costsshould be borne by users, for which the most appropriate mechanisms remain to beidentified. Though this will constitute the guiding principle for the proposed reforms,additional measures to mobilize local resources may be considered.

The amount of local resources needed annually for the routine maintenance of thepriority road network (totaling 4,800 km) is at least CFAF 5 billion. Any increase in thesize of the network would call for an upward adjustment in the financing for routinemaintenance. The mechanisms for mobilizing and using these resources, together withthe amounts involved, will be clearly defined in appropriate legislation, and indicated inpublic finance plans, beginning in the year 2000.

Annex IVPage 5 of 7

To this end, the Government will study the various options for introducing revisedmechanisms for financing road maintenance, including:

(i) Establishment of an overall budget appropriation for roadmaintenance. In this case, the Government would provide all thefinancing necessary for maintenance work out of its currentbudget, collecting for its own account all the revenue currentlyallocated to CAER, without earnarking any of these resources forspecific purposes.

(ii) Revision of the existing system, through an increase in the share ofpetroleum tax revenue allocated to CAER from the current 16% toabout 65%, this amount being added to the 7.5% freight fee.

(iii) Fully autonomous financing of road maintenance, off budget andwithout any contribution from Government. This option wouldimply a complete overhaul of the mechanisms for roadmaintenance financing and include, among other measures: (i) theelimination of the freight fee; (ii) a reduction in the petroleum tax;(iii) introduction of a road user fee, to be levied on fuel sales andpaid directly to CAER.

The Government intends to consult its partners before making any final decision,and, because of the potential impact on the government budget for 2000 and subsequentyears, it plans to reach that decision by June 1999 at the latest, so that the year2000 Finance Law reflects any changes.

B. Divestiture by the State

The Government intends to press ahead with its programn divestiture.

(a) It has recruited an investment bank to handle the process of privatizationof Societt nationale sucriere de Tchad (SONASUT), and expects to(i) examine the Memorandum on Privatization Strategy this bank isscheduled to submit by March 31, 1999, and (ii) issue a call for bids on amajority shareholding in SONASUT by June 30, 1999.

(b) Regarding Air Tchad, SNER (Societt nationale d'entretien routier), andAFF (Abattoirs frigorifiques de Farcha), the Government intends tofinalize implementation of its divestment plans by June 30, 1999. Inparticular, it expects to award a management contract of AFF by March31, 1999, to initiate the liquidation of Air Tchad by June 30, 1999 andsubmit a bill on air transport deregulation to the National Assembly.

Annex IVPage 6 of 7

C. Water and Power Sector

The Government will submit new water and electricity legislation to the NationalAssembly in the spring of 1999. By mid 1999, it will also have drawn up the mainimplementing legislation dealing with water and power tariffs and the monitoring ofcontracts with private operators.

In 1998, following pre-qualification proceedings, the Government invited twoprivate operators to submit technical and financial bids for the concessioning of the waterand electricity utility. Both firms have completed their appraisals of the sector in Chad,and consultations with the Government have been under way since December 1998. It isanticipated that these two pre-qualified contractors will put in their technical andfinancial bids by April 30, 1999.

The Government expects to have selected the successful bidder, who will takecharge of electric power production and distribution in the areas currently serviced bySTEE (Societt tchadienne d 'eau et electricite).

Concurrently, the Government will seek the financing necessary to restructure thewater and power sectors, and will complete the financial reorganization of STEE, inparticular with regard to its short-term debt.

D. Postal and Telecommunications Sector

The Government's key policy choices in the postal and telecommunications sectorare reflected in two sectoral laws enacted by the National Assembly in July 1998. Theselaws also provide the regulatory framework for the implementation of reforms, which thegovernment intends to pursue vigorously in 1999 and beyond. In addition, theGovernment will request IDA assistance for a reform support project in the sector.

In this context, a cellular license will be awarded during the first half of 1999, onthe basis of the results of an international call for bids issued in December 1998.

In addition, the Govermment is strongly committed to moving ahead expeditiouslywith the privatization of SOTELTCHAD, following the procedure outlined in the newtelecommunication law. The main steps expected to be completed by end of 1999 are:(i) completion of the splitting of posts and telecommunications activities within ONPT(Office national des postes et telecommunications), and completion of the mergerbetween TIT (Societt des telecommunications internationales du Tchad) and thetelecommunications arm of ONPT; and (ii) formal incorporation of SOTELTCHAD.These steps are prerequisites for the privatization of SOTELTCHAD, planned for theyear 2000.

Annex IVPage 7 of 7

E. Cotton Sector

The Government has requested IDA support to prepare a cotton sectorliberalization strategy by June 30, 1999. On the basis of this strategy, Government willadopt a schedule for a medium-term reform sector.

Concurrently, the Government will pursue the preparatory technical work requiredto split oil and soap manufacturing from the main activities of COTONTCHAD, with aview to the privatization of DHS by December 31, 1999.

F. Civil Service Reform

A strategy for reform of the civil service was developed and ratified in 1998. TheGovernment has established a permanent unit with a mandate to monitor theimplementation of the strategy's key recommendations. With the support of this unit, theGovernment expects to implement the first reform measures quickly, in particular-andprior to December 31, 1999-the policies on (i) recruitment, (ii) compensation, and(iii) promotion.

G. Adjustment Program Monitoring

Oversight of implementation of the structural adjustment program will continue tobe the responsibility of the High Inter-ministerial Committee, assisted by the TechnicalCommittee for Adjustment and the Economic Unit, which was set up recently to replacethe Structural Adjustment Support Unit. The latter will continue to produce quarterlyprogress reports on the adjustment program and collect and disseminate information ofinterest to all parties concerned.

Annex VPage I of I

Republic of Chad

Third Structural Adjustment Credit

Supplementary Data Sheet

Timetable of Key Processing Events

a) Time taken to prepare 8 months

b) Prepared by Government and IDA

c) First Preparation Meeting February 1999

d) Appraisal March 1999

e) Negotiations April 1999

f) Planned Date of Effectiveness May 1999