Mali: Fourth Review Under the Poverty Reduction and Growth Facility Arrangement and Request for Waiver of Performance Criteria
Author: International Monetary Fund
Publication Date:
05 Aug 2002
eISBN:
9781451826357
Language:
English
Keywords:
ISCR; CR; end-June budget deficit target; cotton monopsony; outlay; June; Mali; broad money; reform program; government liberalization; authorities datum; U.S. dollar; Agricultural commodities; Poverty reduction
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This paper examines Mali’s Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) Arrangement and Request for Waiver of Performance Criteria. The implementation of the PRGF-supported program was satisfactory in 2001. All the end-December 2001 and end-March 2002 quantitative performance criteria and benchmarks were observed. However, two structural performance criteria for end-December 2001 that concerned the cotton sector were not observed. Real GDP is expected to grow by 9.3 percent in 2002, compared with the 6.7 percent anticipated under the original program.

Abstract

This paper examines Mali’s Fourth Review Under the Poverty Reduction and Growth Facility (PRGF) Arrangement and Request for Waiver of Performance Criteria. The implementation of the PRGF-supported program was satisfactory in 2001. All the end-December 2001 and end-March 2002 quantitative performance criteria and benchmarks were observed. However, two structural performance criteria for end-December 2001 that concerned the cotton sector were not observed. Real GDP is expected to grow by 9.3 percent in 2002, compared with the 6.7 percent anticipated under the original program.

I. Introduction

1. The discussions for the fourth review under the four-year arrangement under the Poverty Reduction and Growth Facility (PRGF) were held in Bamako during the period March 6-23, 2002 and in Washington during April 24-25, 2002.1 The March mission also discussed a preliminary draft of the poverty reduction strategy paper (PRSP) and undertook preparatory work for the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

2. Mali’s four-year arrangement under the PRGF, in an amount equivalent to SDR 46.65 million (50 percent of quota), was approved on August 6, 1999 (EBS/99/129, 7/16/99)2. Four disbursements have been effected under this arrangement. Mali’s outstanding use of Fund resources at end-May 2002 amounted to the equivalent of SDR 127.06 million (136.18 percent of quota). Mali reached the decision point under the enhanced HIPC Initiative on September 6, 2000. Cumulative assistance under the original and enhanced HIPC Initiative frameworks would amount to US$522 million in end-1998 net present value (NPV) terms, thereby reducing the NPV of debt outstanding at end-1998 to US$906 million (63 percent of pre-HIPC Initiative debt stock).

3. The 2001 Article IV consultation was concluded on December 17, 2001, and on that occasion the Executive Board completed the third review and approved the third annual program under the PRGF arrangement. At that time, Directors noted that the resumption of growth would require a strong implementation of structural reforms in the cotton sector, continued pursuit of sound macroeconomic policies, and improved governance.

4. In the attached letter and memorandum of economic and financial policies (MEFP), dated July 11, 2002 (Appendix I, Attachment I), the Minister of Economy and Finance reviews developments during 2001 and sets out the measures to be implemented during the second half of 2002 in order to achieve the objectives of the revised program. Subsequently, the government that took office in mid-June 2002 endorsed the program. A schedule of the remaining projected reviews and disbursements under the PRGF arrangement is set out in Table 2, and Mali’s relations with the Fund are summarized in Appendix II.

Table 1.

Mali: Fund Position, January 2000-December 2004

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Source: IMF, Treasurer’s Department.
Table 2.

Mali: Revised Schedule of Projected Reviews and Disbursements Under the PRGF Arrangement, 2002-03

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5. The World Bank approved a third structural adjustment credit (SAC III) in the amount of SDR 55 million (US$70 million equivalent) in December 2001. The first of the three disbursements (US$25 million equivalent) was made in early January 2002. A summary of Mali’s relations with the World Bank Group is presented in Appendix III.

6. Mali’s statistical database is comprehensive and sufficient for program monitoring. The authorities addressed statistical weaknesses by implementing the recommendations of technical assistance missions. However, program monitoring could benefit from a shortening of the period necessary to produce the national accounts and balance of payments statistics (currently 9 to 12 months). The authorities are collaborating with the Fund’s Statistics Department to finalize the metadata requirements for the General Data Dissemination System (GDDS), which, when fully implemented, can be expected to further improve data quality and timeliness.3

II. Economic Performance and Program Implementation in 2001

A. Political Context

7. President Konaré completed his two five-year terms in office, and former President Amadou Toumani Touré took office on June 8, 2002 after winning the second round of presidential elections, held on May 12, 2002. The elections marked Mali’s first transition from one democratically elected president to another. A new government was formed in mid-June, before legislative elections scheduled for July 2002. A noteworthy indication of the maturity of the political system was the introduction of a mechanism, under the Third Structural Adjustment Credit agreed with the World Bank, to help determine the producer price for cotton during the political campaign. The mechanism resulted in a 10 percent decline in the producer price for the 2002/03 (April-March) crop year, reflecting depressed world market conditions (see Section III).

B. Background and Program Implementation

8. At the time of the third review under the PRGF arrangement, the program for 2001 was revised to address the impact of the economic crisis on the population. The crisis had been brought on by problems in the cotton sector,4 the hike in oil prices, a decline in rainfall, and tensions in neighboring Côte d’Ivoire. The resolution of the problems in the cotton sector was critical for the resumption of growth and the return to a sustainable fiscal path. The program included measures to reestablish confidence among cotton growers, avoid a weakening of the domestic banking system, and ensure the financing of the 2001/02 crop.

9. Notwithstanding the difficult environment, the implementation of the revised program for 2001 was broadly satisfactory, as all the end-December 2001 quantitative performance criteria and benchmarks were observed. Government revenue exceeded, and government expenditure was below, the program targets. As a result, the fiscal deficit was 0.5 percentage point of GDP less than programmed (see para. 14).

10. A number of structural measures were implemented in 2001. The authorities introduced a transparent taxation mechanism for petroleum products that provides for the automatic pass-through to consumers of fluctuations in the import price; raised utilities tariffs; and prepared a plan for the allocation of resources freed up by the HIPC Initiative and set up a system to monitor them. In addition, in March 2002, the government selected the international telecommunications company that will operate a second cellular license; however, discussions are ongoing on some of the technical and financial elements of the transaction.

11. As regards the cotton sector, the government prepared an action plan for its reform and implemented a short-term financial rescue package, which contributed to the strengthening of the banking system and ensured the financing of the 2001/02 crop (Box 1). The package helped to restore confidence among cotton producers and thus paved the way for a rebound in production. Nevertheless, two structural performance criteria related to the reform of the cotton sector were not observed on account of technical delays (as reported in EBS/01/204, 11/30/01, App. I; paras. 11-12). The delays relate primarily to: (i) difficulties the authorities experienced in mobilizing funding for the program of studies underpinning the reform program; and (ii) procedures put in place at the World Bank to ensure quality and transparency in the consultant procurement process. As a result, the timetable for the reform was revised in collaboration with the World Bank. With reference to the two structural performance criteria that were missed at end-December 2001, the authorities have made good progress in satisfying the criterion related to the preparation of a financial restructuring plan for the cotton company (CMDT). As regards the launching of bids for the sale of assets relating to one of the cotton growing regions, further delays have been incurred because the process of seeking a consensus between the government and the foreign shareholder of the CMDT on the underlying approach is taking longer than expected. In any event, the authorities will take all the necessary measures to proceed with the launching of the call for bids by September 2002. The authorities are therefore requesting waivers for the nonobservance of these performance criteria.

C. Economic Developments in 2001

12. Economic activity slowed in 2001, owing to the cumulative impact of the crisis in the cotton sector, the hike in oil prices, and lower rainfall. Nevertheless, real GDP grew by 1½ percent, compared with the 0.1 percent expected under the program, thanks to a doubling of gold production and increased economic activity linked to the organization of the African Soccer Cup, which was hosted by Mali in January 2002 (Table 3). Reflecting lower cereal production and the increase in utilities tariffs, price pressures increased, and inflation averaged 5.2 percent in 2001.

Table 3.

Mali: Selected Economic and Financial Indicates, 1999-2005 1

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Sources: Malian authorities; and staff estimates and projections

The staff has updated the balance of payments lo be fully consistent with the IMF’s Islance of Payment; Manual (5th edition) and the authorities’ presentation.

Including capital outlays financed through external project aid and transfers to the local authorities; data on commitment basis.

Change in percent of broad money at the beginning of the period.

End-of-period interest rate on the West African Monetary Union money market.

Defined as total revenue (excluding grants) minus total expenditures and net lending, (excluding foreign-financed investment).

Defined as footnote 5 above, but also excluding HIPC Initiative-related expenditure and exceptional expenditure financed by World Bank credit.

In percent of exports of goods and services.

Goods and services.

13. The real exchange rate appreciated by an average of 3½ percent in 2001, reflecting primarily the pickup in domestic inflation. However, given the low inflation recorded during the past five years, the gains in external competitiveness achieved through the 1994 devaluation of the CFA franc have been largely preserved. The external current account deficit, including official transfers, is estimated to have been 11.9 percent of GDP in 2001, as projected under the program, with both exports and imports higher than forecast. Gold exports almost doubled, more than offsetting the drop in cotton exports. At the same time, imports of petroleum products, machinery and equipment by mining companies, and construction materials related to the preparation for the African Soccer Cup rose markedly.

14. The fiscal program was on track in 2001. The basic fiscal balance5 recorded a deficit estimated at 0.2 percent of GDP, or 0.5 percentage point less than expected, mainly on account of lower expenditure (Table 5). Similarly, the overall fiscal deficit, excluding grants, of 11.0 percent of GDP was less than programmed while the deficit, including grants, was 5.8 percent of GDP, 1.8 percentage points less than anticipated on account of grants received to cover the financing gap. Domestically financed investment was kept below the programmed target as a reaction to an anticipated shortfall in program financing. Nevertheless, expenditure financed with resources freed up under the enhanced HIPC Initiative exceeded the targeted amount. At the same time, favorable tax collections reflected a higher-than-projected increase in the tax yield resulting from the implementation of administrative measures6.

Table 4.

Mali: Selected National Accounts Indicators, 1999-2005 1/

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Sources: Malian authorities; and Fund staff estimates and projections.

The staff has updated the balance of payments to be fully consistent with the IMF’s Balance of Payment Manual (5th edition) and the authorities’ presentation.

Including official transfers.

Table 5.

Mali: Central Government Consolidated Financial Operations. 1999-2003 1/

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Sources: Malian authorities; and staff estimates and projections.

The historical GDP figures through 2000 have been revised upward to be fully consistent with the authorities data. Thus ratios to GDP in the program column may not be strictly comparable with the new ratios.

Defined as total revenue excluding grants minus total expenditure and net lending excluding foreign financed capital expenditure.

Cassie de Retraite du mali.

Excepted to be covered by donor assistance.

Defined as footnote 2 above but also excluding HIPC indicative related expenditure and exception expenditure financed by World Bank credit.

Mali: Cotton Sector—Participatory-Style Reform, Social Impact, and Outlook

The cotton sector reform program, negotiated and supported by the World Bank under the Third Structural Adjustment Credit, aims at raising productivity and producer income over the medium term. Following the producers’ boycott of production in protest of the low prices offered by the parastatal monopsonist CMDT, the government conducted a survey in 2001 in the cotton-growing regions on the problems in the sector and the steps to be taken to boost cotton production. Farmers indicated low and unstable producer prices and high input costs as the main reasons for their decision to boycott production. A small fraction of those surveyed referred to the poor management of the CMDT as a problem. In order to build a broad consensus on the content and sequencing of the cotton sector reforms, the government organized a forum of major players in April 2001. Producers accepted the need for the establishment of a pricing mechanism for seed cotton based on movements in international prices and prices in neighboring countries in exchange for the CMDT lowering its production costs. The CMDT would focus on its core activities (ginning and marketing), thereby entailing the transfer to the private sector, producer organizations, and decentralized communities of the company’s noncore activities. One group of producers indicated their readiness to move away from existing arrangements with the CMDT and to accept a buy-out of CMDT assets in their growing area by a private agro-industrial operator. The majority of producers, however, expressed preference for a gradual liberalization approach, to enable capacity building of producer organizations to be more effective participants in the liberalized environment.

Responses to the survey and the forum indicated that: (i) raising producer prices during the 2001/02 crop season would help to boost cotton growers’ confidence; (ii) lowering the CMDT’s operating costs and spinning off a number of its noncore activities to the private sector would provide room to boost producer price by lowering ginning and marketing costs; (iii) strengthening producer groups would help the latter negotiate better input and output prices; and (iv) raising producers’ participation in the capital and management of the CMDT would help to keep costs in check. The CMDT has already started implementing measures to improve internal management and marketing strategies, as well as lower its operating costs: (i) the wage bill has been cut by about 20 percent; (ii) the marketing of cotton fiber is no longer being done by one exclusive agent; (iii) all aspects of transportation have been liberalized, with the exception of that for seed cotton, which is also slated for liberalization; and (iv) investment in new capacity has been significantly curtailed. In 2000, the CMDT reduced its production costs by about CFAF 15 billion, two-thirds of which on a permanent basis.

Following the increase in the producer price from CFAF 170 per kilogram of seed cotton in 2000/01 to CFAF 200 per kilogram in 2001/02, the production of seed cotton reached a record level of 571,000 tons. The higher producer price and larger production increased producers’ gross revenue by about 180 percent. The impact on poverty has been significant as cotton affects the livelihood of about one-third of the population and cotton growers are among the poorest segments of the population. Also, a stronger cotton production has a direct impact on ginning and transport activities. All this, however, will be partly reversed in 2002/03, given that world prices continue to be depressed: the producer price has been reduced to CFAF 180 per kilogram for 2002/03, and cotton output and farmers’ income will be adversely affected. The table below offers an illustrative scenario for 2002/03.

Mali: Impact of Cotton Pricing on Producer Income, 1998/99-2002/03

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Source: Compagnie Malicane de Developement des Textiles (CMDT); and staff calculations.

Compared with the average for 1998/99-2001/02.

15. Monetary developments in 2001 were characterized by a buildup of the net foreign assets of commercial banks and a rapid expansion in broad money and in domestic credit (Table 8). The increase in credit to the economy reflected higher activity, especially in the last quarter of 2001, in the trade, construction, transport, and communications sectors. In addition, the government borrowed from the Central Bank of West African States (BCEAO) as foreign aid disbursements occurred later than expected. The quality of banks’ portfolios improved somewhat in 2001 as the ratio of nonperforming loans to net bank credit to the economy fell by 2 percentage points to 9.9 percent. This was due to the repayment by the government of CFAF 30 billion in guaranteed bank loans to the public enterprise in the cotton sector (Compagnie Malienne de Developpement du Textile, or CMDT). Also, most banks complied with the main prudential ratios of the West African Economic and Monetary Union (WAEMU), although a majority of banks did not yet meet the new liquidity ratio, which was raised on January 1, 2000.

Table 6.

Mali: Fiscal Impact of the HIPC Initiative, 2000-05

(In billions of CFA francs, unless otherwise specified)

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Sources: Malian authorities; and staff estimates and projections.

Includes IMF.

Excludes foreign-financed investment.

Table 7.

Mali: Compliance with WAEMU Convergence Criteria, 1999-2005

(In percent, unless otherwise indicated)

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Sources: Malian authorities; and staff estimates and projections.
Table 8.

Mali: Monetary Survey, 1999-2002 1/

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Sources: BCAO; and Fund staff estimates and projections

The historical GDP figures through 2000 have been revised upward to be fully consistent with the authorities’ data. Thus ratios to GDP in the program column may not be strictly comparable with the new ratios.

III. Medium-Term Economic Framework

16. The updated medium-term framework for 2002-05 takes into account the spring 2002 projections of the World Economic Outlook (WEO). During this period, real GDP growth is projected to average 6.2 percent; inflation to decline below 3 percent; and the external current account deficit (including official transfers) to narrow by 2.3 percentage points of GDP to 9.1 percent of GDP. At the same time, relative to GDP, the overall fiscal deficit, excluding grants, is expected to decline by 3.2 percentage points to 7.1 percent; the deficit, including grants, would decline by 2.5 percentage points to 4.1 percent. However, the macroeconomic framework for 2003 and beyond may be revised again in the coming months as the authorities finalized the PRSP. A source of uncertainty is the price of cotton on the world market, which dropped below US$0.40 per pound in May 2002—against the US$0.46 per pound assumed under the current program. Even though the producer price was recently cut by 10 percent to CFAF 180 per kilogram, 7 the total loss for the cotton sector could be as high as 1 percent of GDP during the next crop year (2002/03).

17. The Fund and World Bank staffs discussed with the authorities the possibility of lowering the producer price for 2002/03 to reflect the current depressed world market price. The consequences would be (i) a drop in the producer price of more than 25 percent, well below the average break-even point for producers; (ii) the risk of yet another boycott of production; and (iii) a blow to the government’s efforts to lower poverty. Hence, the staffs agreed with the authorities that the issue should be reviewed in the context of the discussions on the 2003 budget and the next program review scheduled for the fall, when the authorities would be in a better position to assess the subsidy that the sector may continue to require. At that time, World Bank and Fund staffs will also discuss the possibility of replacing subsidies by better targeted social safety net instruments. In the meantime, the authorities intend to pursue the reform of the sector and require the CMDT to take additional cost-cutting measures.

18. On the external front, the current account deficit is projected to narrow by 2½ percentage points of GDP over 2002-05, reflecting a pickup in exports other than gold. To finance its public investment program and other budgetary expenditures, Mali will continue to rely on concessional external financing over the medium term. Taking into account the HIPC Initiative assistance, Mali’s debt-service obligations would fall from 12½ percent of exports of good and services to 10½ percent between 2000 and 2005.8 The update of the 20-year forecast of the balance of payments indicates that Mali’s external debt situation would remain broadly sustainable after it reaches the completion point under the HIPC Initiative.

IV. Updated Program for 2002

19. The objectives of the updated program for 2002 are broadly in line with those of the original program (EBS/01/204, 11/30/01):

  • Real GDP is now projected to grow by 9.3 percent in 2002—compared with 6.7 percent in the program—mainly owing to higher growth in cereal production (16.5 percent against 5.3 percent) and a smaller decline in gold output.

  • The deficit in the current account balance, excluding official transfers, (11.9 percent of GDP) is projected to be narrower than originally programmed by 0.6 percentage point of GDP, in view of the higher export price for gold.

  • The underlying degree of fiscal consolidation is expected to be somewhat higher than originally programmed, owing primarily to higher government revenue.

  • Inflation is projected to decelerate to about 3 percent by the end of the year.

A. Performance in the First Quarter of 2002

20. Cotton production more than doubled to 571,000 tons during 2001/02, restoring Mali to its position as the leading cotton producer in sub-Saharan Africa. However, gold production declined by about 11 percent in the first quarter of 2002 (compared with the same period last year). Inflation rose to 6 percent in March 2002 (year on year), reflecting primarily an upward adjustment in utility tariffs in the first quarter of 2002.

21. On the fiscal front, the basic fiscal balance registered a small surplus in the first quarter of 2002 instead of a small deficit expected under the program (Table 5). Government revenue exceeded the program target by about 10 percent, owing to continued efforts to strengthen tax administration and an increase in the specific tax rates on petroleum products in December 2001. Total government expenditure was lower than targeted, especially as regards current spending. However, spending financed by HIPC Initiative resources was greater than anticipated, as Mali received higher-than-expected debt relief. Concerning monetary developments, the trends noted in 2001 continued in early 2002, as an improvement in the net foreign assets of the banking system was accompanied by an expansion of broad money and credit to the economy.

B. Fiscal Policy

22. The fiscal targets for 2002 are broadly in line with those of the initial program. The budget reflects efforts to lower poverty, address the problems in the cotton sector, foster the democratization process, and pursue fiscal consolidation. In view of the upward revision in total government revenue projections, the degree of fiscal consolidation in 2002 has been slightly increased, even though expenditures have also been raised. The basic fiscal deficit (excluding expenditures related to HIPC Initiative resources) is projected at 0.4 percent of GDP, or 0.1 percentage point of GDP below the initial target. The overall fiscal deficit, excluding grants, would be maintained at 10.3 percent of GDP, while the deficit—including grants—would be 6.6 percent of GDP, 0.1 percentage point of GDP higher than programmed. The overall financing gap for the 2002 budget would amount to 2 percent of GDP, and financing assurances have been received from the World Bank (CFAF 14.5 billion), the European Union (CFAF 15.7 billion), France (CFAF 2.9 billion), the Netherlands (CFAF 6.2 billion), Sweden (CFAF 3.4 billion), and others (CFAF 0.6 billion).

23. Total expenditure for 2002 has been raised to account for the following (see MEFP, para. 14): (i) larger HIPC Initiative-related spending plans; (ii) the impact of civil service reform (see Box 2); (iii) increased utilities tariffs; (iv) higher election costs; and (v) higher capital outlays for the decentralization program. In order to fight poverty, the government will continue its efforts to compress nonpriority outlays9 and devote more resources to the social sectors, in line with the goals set in the interim poverty reduction strategy paper (interim PRSP), the ten-year programs for education (PRODEC) and health (PRODESS), and the basic infrastructure development program.

24. Government revenue is projected to increase by 1½ percentage points of GDP to 18.1 percent in 2002, or by ½ of 1 percentage point more than initially targeted. The additional revenue reflects mostly higher nontax receipts expected from the gold sector, as the authorities have resolved outstanding issues with mining companies by conducting and validating an inventory of value-added tax (VAT) and other tax credits that they had accumulated (see para. 16 of the MEFP). As indicated under the initial program, tax revenue is expected to rise to 15.5 percent as a result of the new taxation system for petroleum products and the administrative measures described in paragraph 15 of the MEFP.

C. Monetary Developments and Domestic Financing of the Fiscal Deficit

25. Monetary policy, which is conducted at the level of the WAEMU, will continue to be guided in 2002 by the objective of preserving the peg of the CFA franc to the euro. Mali is expected to continue to contribute to the international reserves of the BCEAO, while broad money is assumed to expand in line with nominal GDP growth, or by 10½ percent. The increase in the net domestic assets of the banking system is likely to slow to about 12 percent with the growth in credit to the economy expanding by about 10 percent and net bank credit to the government rising by 2.2 percent of beginning-of-period broad money. The treasury will repay a portion of the advances (CFAF 3 billion) from the central bank and finance some of the government spending by drawing down its deposits with commercial banks. The government is also discussing with other WAEMU member countries the modalities and timing for implementing the regional decision requiring all member governments to repay all advances from the BCEAO.10

D. Structural Reforms

26. The structural reform agenda focuses on two critical areas: the continued reform of the cotton sector and the improvement of the public expenditure management system (Box 3). Measures in areas related to the financial and telecommunication sectors, privatization, the judicial system, and good governance are covered in programs supported by the World Bank and other donors. In addition, the authorities intend to continue their efforts to reform the civil service (see Box 2). Details of these reforms are provided in paragraphs 21-27 of the MEFP.

Mali: Civil Service Reform

Background. At end-2001, the civil service comprised 35, 700 permanent and 6,200 contractual staff. As a result of a hiring freeze in place since the early 1990s, the civil service has aged considerably; currently, more than half of the civil service is over 45 years old (including two-thirds of the senior staff). The civil service is hampered by low pay, uncertain career prospects, and ineffective organization.

Key elements of Mali’s civil service reform:

  • The reform program has five key objectives: adapting the institutional framework to the changing role and responsibilities of the central government; strengthening human resource management; improving the civil service pay structure; enhancing the social security and retirement options for civil servants; and revising the relevant legal and regulatory texts.

  • The government completed an organizational audit of the civil service by departments in December 2001. The audit identified central government tasks that could be transferred to the private sector and to decentralized governmental entities or local communities. The next step is to develop an action plan for the transfer of the identified tasks, as well as reorganization plans for central government agencies that reflect their new responsibilities. It is anticipated that, with the reorganization, some civil servants will transfer to decentralized agencies,