1. We thank the staff for a balanced report. Since the last program review, the authorities have continued to forcefully implement their economic program supported by the Policy Support Instrument (PSI) and the Exogenous Shocks Facility (ESF) with a view to making further inroads into poverty reduction through strong growth and good economic governance. After growth performance weakened last year largely on account of a slowdown in FDI inflows and reduced external demand, there is now scope for cautious optimism about growth prospects in view of latest economic developments. Indeed, clear signs of economic recovery are emerging, underpinning growth projections for 2010 which more than double last year’s estimates.

Program Performance

2. Since the last PSI and ESF reviews, program developments have been broadly positive. Program implementation has been characterized on the quantitative front by the observance of four out of five quantitative criteria set forth by the program at end-December 2009. Notably the authorities have fully discontinued the use of Treasury cash advances, contained the budgetary float, maintained prudent management of external debt, and have exercised limit on recourse to single-tender contracts. However, the criterion on the basic fiscal balance was missed following a combination of lower-than-projected revenues and higher-than-expected current expenditures which were notably aimed at addressing urgent needs, particularly in the education sector, and entailed the use of legally permissible supplemental appropriation decrees. Going forward, the authorities are determined to limit recourse to such decrees and to accommodate any resulting spending increase by reducing nonpriority expenditures. In this light, we would welcome Directors’ support of the authorities’ request for a waiver of nonobservance of this criterion.

3. In line with commitments made on the structural front, the authorities took steps to comply with existing budgetary procedures, essentially ensuring timely execution and accounting closure of the 2009 budget and systematically publishing budgetary and fiscal tables. They also made continuous efforts to clear the remaining extrabudgetary commitments and debt contracted by public institutions and agencies. In this connection, settlement of part of these liabilities was already programmed in the 2009 and 2010 budgets. Moreover, these liabilities were audited last year and a summary of the results made public. The authorities have elaborated and submitted to the parliament a supplementary budget for 2010 that accounts for the settlement of extrabudgetary commitments as well as part of remaining debt of public institutions and agencies.

4. After completing a study according to which estimated tax expenditures and other tax exemptions could amount to over 3 percent of GDP, the authorities worked forcefully on developing an action plan aimed at reducing them. This plan was finalized according to schedule and some of the proposed changes are expected to be reflected in the next budget. Going forward, the authorities have stated their intention to ensure that any new tax expenditures will have to go through successfully an impact assessment prior to its approval.

5. In the financial sector, the authorities made progress in following up with FSAP recommendations. In this regard, consolidated action plan was finalized to implement these recommendations notably with the aim at promoting financial sector development and intermediation, strengthening the legal and institutional framework of the sector, and safeguarding financial stability.

Policy and Reform Agenda for 2010 and 2011

6. Macroeconomic policy will continue to aim at laying down the basis for continued private sector development and progress toward poverty reduction while taking care to safeguard fiscal and debt sustainability and financial stability. In particular, this policy orientation is mirrored on the fiscal front by the budgeted increase in social expenditure from 33 percent of total expenditures in 2008 to 35 percent in 2010. At the same time, efforts to close the infrastructure gap will be pursued and to this end additional fiscal space is expected to be freed, among others, by the projected decline in current expenditures by about 0.8 percent of GDP between 2009 and 2010. Overall, fiscal policy will be conducted with prudence, taking into account potential adverse implications of domestic and external developments for revenue performance and financing prospects. Reflecting the authorities’ attachment to fiscal prudence, program fiscal targets have been revised on the basis of more conservative assumptions about revenue and financing. Over the medium term, the authorities remain firmly committed to constraining the overall fiscal deficit to 4 percent of GDP over the medium term.

7. The authorities attach a high premium to continued improvements in public financial management (PFM) and high value to Fund technical assistance in this area. As rightly underscored in the staff report, the authorities’ positive reaction to Fund advice materialized inter alia into the launch of far-reaching PFM reforms building notably on the recommendations formulated by Fund technical assistance missions. The authorities’ PFM reform agenda also sets forth further improvements in the budget monitoring system (SIGFIP) notably through the inclusion of payroll data and the implementation of an interface between SIGFIP and the Treasury accounting system (ASTER).

8. Relations with the private sector will be further normalized, notably with the planned clearance of at least 50 percent of the estimated remaining unsettled extrabudgetary spending and public institutions and agencies’ debt. In parallel, an audit will be carried out to ascertain if new extrabudgetary commitments were made or additional debt accumulated by public institutions and agencies since end-2008. The results of this audit will be made public along with the status of the clearance process and the prospective steps to be taken to make these extrabudgetary expenditures and agency debt history. It is expected that the new reporting mechanisms which are now in place in public agencies and institutions, coupled with improved management of their cash flow transactions at the Treasury, will facilitate monitoring and strengthening their liquidity situation, thereby helping them avoid accumulation of new debt.

9. More generally, the authorities are taking steps to improve liquidity management by finalizing a strategy for establishing a Treasury single account. In this respect, an exhaustive census of government accounts is being updated and the Treasury’s liquidity forecasting capacities are intended to be upgraded.

10. Among other main areas covered by the authorities’ ambitious reform agenda are the reforms of the energy and financial sectors. In the energy sector, efforts that are underway are geared towards strengthening performance and the financial and debt situation of the electricity company, SENELEC. To this end, the authorities are working in close collaboration with key country’s partners, including the World Bank, with a view to disaggregating SENELEC’s activities into production, transport, and distribution of electricity. To ensure improved tax compliance of the company, the envisaged implementation of legal and regulatory measures will be helpful.

11. With regard to the financial sector, the encompassing reform agenda set forth in the government action plan will be pursued. In particular, it will entail continued, close monitoring of banks’ soundness indicators and introduction of new minimum capital rules, conduct of regular stress tests, and capacity building at the finance ministry’s unit in charge of regulating and supervising microfinance institutions.

12. The authorities’ attention was recently drawn on the fact that the grant element of a loan equivalent to less than 0.1 percent of GDP which was contracted last September with a regional bank was about one point of percentage short of the 35 percent required by the program. As the loan was yet to be disbursed, they promptly contacted the lender upon being informed of this unintentional deviation from this program requirement, requesting an increase in the grant element of the loan to make it concessional in the program sense. Going forward, the authorities’ intention to consult more closely with staff in similar situations will help avoid recurrence of this kind of incident.

13. In light of the authorities’ strong commitment to the program and sound policy implementation, we would appreciate it if Directors would consider favorably today’s request for completion of the fifth PSI and third ESF reviews.