Language: English Original: French

AFRICAN DEVELOPMENT BANK

AFRICAN DEVELOPMENT FUND

PROGRAMME : Economic Reform Support Programme, Phase II

(ERSP II) COUNTRY : Central African Republic (CAR) APPRAISAL REPORT

Appraisal Team

Team Leader : A. MAHDI ; Principal Financial Analyst, OSGE.2 Team Members : DIAGNE MAMADOU ; Economist : P. KATOMBE, Macroeconomic Consultant, OSGE.2 Sector Division Manager: M. KANGA, OSGE.2 Sector Director : G. NEGATU, OSGE Regional Director : J.M. GHARBI, ORCE

Peer Reviewers I. KOUSSOUBE : Lead Economist, ORWB A.H. KOUASSI : Economist, ORPC O. MANLAN : Principal Country Economist, ORWB

TABLE OF CONTENTS Page

CURRENCY EQUIVALENTS FISCAL YEAR WEIGHTS AND MEASURES LIST OF ACRONYMS GRANT INFORMATION SHEET PROGRAMME EXECUTIVE SUMMARY PROGRAMME LOGICAL FRAMEWORK

I. PROPOSAL ...........................................................................................................1

II. COUNTRY AND PROGRAMME CONTEXT..................................................1

2.1 GOVERNMENT’S DEVELOPMENT STRATEGY AND REFORMS ........................................1 2.2 RECENT SOCIO-ECONOMIC TRENDS AND OUTLOOK ................................................2

III. KEY DESIGN ELEMENTS OF ERSP II .......................................................4

3.1 LINKS WITH THE JISN , ANALYTICAL UNDERPINNINGS ................................................4 3.2 COLLABORATION AND COORDINATION WITH THE OTHER PARTNERS ..........................5 3.3 THE BANK’S COMPARATIVE ADVANTAGES ...............................................................5 3.4 OUTCOMES AND LESSONS OF ERSP I......................................................................6 3.5 LINKS WITH THE BANK’S OTHER ONGOING OPERATIONS ..........................................6

IV. THE BANK’S PROGRAMME ........................................................................7

4.1 PROGRAMME OBJECTIVE ........................................................................................7 4.2 COMPONENTS AND EXPECTED OUTCOMES OF ERSP II ...........................................7 4.3 FINANCING REQUIREMENTS AND SOURCES............................................................14 4.4 PROGRAMME BENEFICIARIES................................................................................14 4.5 PROGRAMME IMPACT ...........................................................................................14

V. PROGRAMME MONITORING AND EVALUATION .................................16

5.1 PROGRAMME MONITORING MECHANISM.................................................................16

VI. LEGAL INSTRUMENTS ...............................................................................17

6.1 INSTRUMENTS ......................................................................................................17 6.2 DISBURSEMENT CONDITIONS ................................................................................17

VII. RISK MANAGEMENT...................................................................................18

VIII. RECOMMENDATIONS.................................................................................19 Annexes A.1 Map of CAR A.2 Government’s Development Policy Letter A.3 Matrix of Measures A.4 Relations with the IMF A.5 Key Economic and Financial Indicators 2004-2013

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A.6 Table of Government Financial Operations 2004-2013 A.7 Summary Assessment of the Impact of the Food Crisis A.8 List of Non-Eligible Goods

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Currency Equivalents

(May 2008)

Currency Unit CFA franc UA 1 US$ 1.62 UA 1 CFAF 685.41 UA 1 1.04 Euros 1 Euro CFAF 655.96 US$ 1 CFAF 422.11

Fiscal Year

1 January - 31 December

Weights and Measures

Metric System

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List of Acronyms ADB : African Development Bank ADF : African Development Fund BDEAC : Development Bank of Central African States BEAC : Bank of Central African States BONUCA : United Nations Peace-Building Support Office in the Central African Republic CAR : Central African Republic CEMAC : Central African Economic and Monetary Community CFAA : Country Financial Accountability Assessment CFAF : Franc of the African Financial Community CTP-PAS : Permanent Technical Committee for Monitoring Structural Adjustment Programmes DRC : Democratic Republic of Congo EITI : Extractive Industries Transparency Initiative ENERCA : Electric Power Company (Energie Centrafricaine) ESPFP : Economic and Social Policy Framework Paper FDD : Defence and Security Forces FURCA : Unified Civil Service Database GDP : Gross Domestic Product HDI : Human Development Index HIPC : Heavily Indebted Poor Countries IDA : International Development Association IGF : Inspectorate General of Finance IPCP : Interim Post-Conflict Programme IMFI : International Monetary Fund JISN : Joint Interim Strategy Note LICUS : Low Income Countries under Stress MDG : Millennium Development Goals MFB ; Ministry of Finance and Budget MPCI : Ministry of Economy, Planning and International Cooperation NEPAD : New Partnership for Africa’s Development NGO : Non Governmental Organization OHADA Organization for the Harmonization of Business Law in Africa OPEC : Organization of Petroleum Exporting Countries PARCPE : Economic Planning Capacity Strengthening Support Project PCCF : Post-Conflict Country Facility PCEP : Post-Conflict Emergency Programme PEA : Harvesting and Management Plan PRGF : Poverty Reduction and Growth Facility PRSF : Poverty Reduction Strategy Framework PRSP : Poverty Reduction Strategy Paper RCCA : Response to the Food Crisis in Africa SAP : Structural Adjustment Programme SDR : Special Drawing Rights SME : Small and Medium-size Enterprises SMI : Small and Medium-size Industries TUPP : Single Tax on Petroleum Products UN : United Nations UNDP : United Nations Development Programme VAT : Value Added Tax WTO : World Trade Organization

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Grant Information Sheet Information on the Beneficiary DONEE : Government of the Central African Republic (CAR) EXECUTING AGENCY : Permanent Technical Committee for Monitoring Structural

Adjustment Programmes (CTP/PAS) Financing of the Government’s Reform Programme in 2008

Source Amount (million UA) Instrument

ADF (ERSP II)

6.5

Grant

ADB World Bank (Economic Management and Governance Reform)

3.0 6.2

Grant Grant

International Monetary Fund (Poverty Reduction and Growth Facility) 14.3 Grant

TOTAL COST 30.0 Schedule – Key Dates (estimated)

Approval of Concept Note

April 2008

Programme Approval September 2008 Effectiveness September 2008 Disbursement of Single Tranche September 2008 Joint Review with Partners February 2009 Audit of the Special Account March 2009 Government’s Completion Report March 2010 Bank’s Completion Report June 2010

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Programme Executive Summary Programme Overview The Economic Reform Support Programme II (ERSP II) is support for the balance of payments of the Central African Republic (CAR). It is an extension of ERSP I, and aims to consolidate its achievements. The goal of ERSP II is to contribute to the achievement of the objectives of CAR’s PRSP concerning growth and poverty reduction. Its specific objective is to support the Government’s reform programme through improved public financial management and enhanced public sector economic governance. Furthermore, ERSP II will contribute to the Bank’s response to the food crisis in Africa. ERSP II, which covers the 2008-2009 period, is financed by a grant of UA 9.5 million, comprising an African Development Fund allocation of UA 6.5 million and a grant of UA 3.0 million from the ADB surplus account in accordance with the fourth measure of the RCAA1. Programme Outcomes ERSP II has two components: (i) contribute to improving public finance management; and (ii) consolidate public sector economic governance. The expected outcomes of ERSP II with respect to improvement of public finance management component are: (i) enhanced budget transparency and compliance with budget orthodoxy; (ii) improved collection of fiscal and customs revenue; (iii) greater security of customs and fiscal revenue at the Treasury and streamlining of the expenditure chain; and (iv) improvement in the financial situation of public enterprises. With regard to the consolidation of public sector economic governance component: (i) operationalization of the institutional mechanism for combating corruption and enhancing transparency; (ii) increased transparency in the management of the productive sectors (forestry, mining and petroleum); (iii) ensuring compliance of the public procurement system with international standards; and (iv) building public investment programming and monitoring/evaluation capacities. Programme Rationale ERSP II is in keeping with the 2007-2008 Joint Interim Strategy Note (JISN) of the Bank and World Bank. It is also consistent with the orientations of the Bank’s 2008-2012 Strategic Plan concerning the strengthening of economic and financial governance in Regional Member Countries. Furthermore, this support for the balance of payments is justified by the persisting twin deficits in the CAR which have deepened in 2008, and the need to consolidate the reforms to contain them. Indeed, the balance of payments deficit is expected to increase from 3.3% of GDP in 2007 to 3.8% of GDP in 2008, and the fiscal deficit (excluding grants) from 2.5% of GDP in 2007 to 4.7% of GDP in 2008. The deterioration in the balance of payments would stem from the widening of the external trade deficit as a result of the soaring prices of oil and cereal products. In fact, an assessment of the impact of the soaring prices of oil and cereal products on the balance of payments of African countries carried out by IMF in June 20082, shows that the CAR is among the 18 African countries most seriously affected. According to the IMF’s assessment, the impact on the trade balance is estimated at -2.5% of GDP in 2008 for the CAR, and consequently the CAR is faced with an urgent need for additional support for its balance of payments in 2008.

1 See document ADB/BD/WP/2008/113 of 15 July 2008. 2 The Balance of Payments Impact of the Food and Fuel Price Shocks on Low-Income African Countries, IMF, 19 June 2008

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The Bank’s Value Added The Bank has developed expertise and gained experience in providing support for the implementation of reforms in the CAR through ERSP I which produced encouraging results. One of the lessons of ERSP I is the importance of coordination among partners in the effective implementation and success of the reforms supported by them. The Bank’s value added is in keeping with this logic of harmonization and collaboration, in accordance with the Paris Declaration. Consequently, the measures supported by ERSP II form part of a joint Bank, World Bank and IMF Programme. ERSP II is designed to take into account the advances led to the approval of the World Bank’s support in May 2008, and helped to maintain a sustained pace of reforms. More specifically, the Bank will draw on its experience in the Economic Planning Capacities Rehabilitation Support Programme (PARCPE) to step up its assistance towards implementation of the PRSP through the preparation and implementation of a Medium-Term Expenditure Framework (MTEF) so as to ensure better allocation of resources, taking into account the Government’s priority choices. Institutional Development and Knowledge Building ERSP II will help to build the capacities of the structures involved in public finance management and regulation of the productive sectors. Indeed, the reforms backed by ERSP II will help to strengthen the customs and tax administrations, and the Treasury. They will also help to establish and operationalize new structures, such as the Public Procurement Regulatory Agency, the National Financial Investigation Agency, the Permanent Anti-Corruption Committee, and the Petroleum Sector Regulatory Organ.

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ERSP II LOGICAL FRAMEWORK

HIERARCHY OF OBJECTIVES EXPECTED OUTCOMES REACH PERFORMANCE

INDICATORS

INDICATIVE TARGETS AND

TIMELINES

ASSUMPTIONS/ RISKS

Goal Contribute to the achievement of PRSP objectives concerning growth and poverty reduction

Impact: More rapid growth Significant reduction in the incidence of poverty

Beneficiaries: The population of the Central African Republic

Impact Indicators: - GDP growth rate - Incidence of poverty as a % (Sources : PRSP Review Report, IMF)

Expected Long-Term Progress: Average annual growth of 5% in 2008-2010 Reduction in poverty from 63.4% in 2007 to 56.6% in 2010

Assumptions Political and security stability consolidated Government’s commitment to pursue reforms Internal and external shocks controlled Continuing support of partners.

Programme Objective Support the Government’s reform programme with regard to improving public finance management, and enhancing public sector economic governance.

Medium-term Outcomes: (i) enhanced budget transparency and

compliance with budget orthodoxy (ii) improved collection of tax and customs

revenue (iii) increased security of customs and fiscal

revenues at the Treasury, and streamlining of the expenditure chain.

(iv) improved financial situation of public enterprises

(v) operationalization of institutional anti-corruption mechanism and enhancement of transparency

(vi) enhanced transparency in the management of productive sectors (forestry, mining and petroleum)

(vii) ensuring compliance of the public procurement system with international standards

(viii) building of public investment programming and monitoring capacities

Beneficiaries: State / Economic Operators/ population

PEFA Indicators (2009 PEFA Report) Domestic debt to GDP Increase in tax and customs revenue collected. Increase in the area of productive forests Improved mining and forestry revenues Corruption Perception Index

Medium-Term Progress Expected: PI15 = C in 2008 PI16 = C in 2009 PI17 = C+ in 2009 PI12 = C in 2009 PI12 = C in 2009 PI22 = C+ in 2009 Government domestic arrears for the period prior to 1998 and 1998 to 2004 fully cleared in 2010 (refer to March 2008 Audit of Internal Arrears) Tax pressure rises from 10.2% in 2007 to 12.9% in 2010 The area covered by the Harvesting and

Assumptions Political and security stability consolidated Government’s commitment to pursue reforms Internal and external shocks controlled Continuing support of partners

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HIERARCHY OF OBJECTIVES EXPECTED OUTCOMES REACH PERFORMANCE

INDICATORS

INDICATIVE TARGETS AND

TIMELINES

ASSUMPTIONS/ RISKS

Management Plan increases from 850 000 ha in 2007 to 3.5 million ha in 2010 Proportion of mining revenue in GDP rises from 3% in 2007 to 6% in 2010 Corruption perception index improves from 2% in 2007 to 3% by end 2010

Resources/Activities ADF: UA 6.5 million ADB: UA 3.0 million World Bank: UA 6.2 million IMF: UA 14.3 million

Short-Term Outcomes: Grant disbursement Monitoring and evaluation Audit of accounts

Beneficiaries : Government/ Economic Operators

Short-term Outcome indicators: Number of measures implemented (Source: Executing Agency’s quarterly Report, ERSP II Mid-Term Review Report)

Medium-Term Progress Expected: 50% of planned matrix measures are implemented in 2008. 100% of the measures are implemented in 2009

Assumptions Political Stability Political will to pursue the reforms Technical capacity of the administration to implement the reforms.

* PI: Public Financial Management Performance Indicator according to the PEFA method.

I. PROPOSAL 1.1 Management hereby submits the following report and recommendations relating to the proposal for a grant of UA 9.5 million in the form of balance of payments support aimed at financing the Economic Reform Support Programme (ERSP II) in the Central African Republic (CAR) and responding to the food crisis in Africa. This proposal is in response to the Government’s request of 14 April 2008 for the financing of ERSP II and its short-term financing requirements to cope with the food crisis. It is also in keeping with the 2007-2008 Joint Interim Strategy Note (JISN) of the Bank and World Bank for the CAR. The resources allocated to this programme will come from the performance-based country allocation, and will represent less than 50% of that allocation. 1.2 The goal of ERSP II is to contribute to the achievement of the objectives of the Poverty Reduction Strategy Paper (PRSP) for the CAR in terms of growth and poverty reduction. The specific objective of ERSP II is to support the Government’s reform programme with respect to improving public finance management and enhancing public sector economic governance. 1.3 ERSP II has two components: (i) contribute to improving public finance management; and (ii) consolidate public sector economic governance. The expected outcomes of ERSP II with regard to the improvement of public finance management component are: (i) improved budget transparency and compliance with budget orthodoxy; (ii) increased collection of fiscal and customs revenue; (iii) greater security of customs and fiscal revenue at the Treasury, and streamlining of the expenditure chain; and (iv) improvement in the financial situation of public enterprises. With regard to the consolidation of public sector economic governance component: (i) operationalization of the institutional mechanism for combating corruption and enhancement of transparency; (ii) enhanced transparency in the management of productive sectors (forestry, mining and petroleum); (iii) ensuring compliance of the public procurement system with international standards; and (iv) building public investment programming and monitoring/evaluation capacities. II. COUNTRY AND POGRAMME CONTEXT 2.1 Government’s Development Programme and Reforms 2.1.1 The Government’s strategy is presented in the PRSP for the CAR for the 2008-2010 period, and is based on four pillars: (i) restore security, consolidate peace and prevent conflicts; (ii) promote good governance and the rule of law; (iii) rebuild and diversify the economy; and (iv) develop human capital. The PRSP was validated by CAR’s development partners in October 2007, and constitutes the benchmark framework for programming support from partners which have affirmed their commitment to supporting its implementation. To that end, capacity building actions are ongoing under the Bank’s Economic Planning Capacities Rehabilitation Support Programme (PARCPE), the World Bank’s Low Income Countries Under Stress (LICUS 3) grant, the United Nations Development Programme’s (UNDP) Association of Communications Research and Home Care (ARCAD) Programme, and the African Capacity Building Foundation’s Statistical Capacities Strengthening Programme.

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2.1.2 The PRGF is being implemented satisfactorily, and the results achieved at the first review enabled the CAR to reach the HIPCI decision point in September 2007. The second satisfactory PRGF review was adopted by the IMF Executive Board on 18 June 2008. The Government has set itself a medium-term objective of reaching the HIPCI completion point in 2008-2009, which will require pursuance of reforms to achieve the high remaining number of HIPCI triggers, and to mobilize the domestic and external resources required to implement the PRSP. 2.2 Recent Socio-Economic Trends and Outlook 2.2.1 Over the past two years, CAR’s macroeconomic situation has been marked by real GDP growth from 4.0% in 2006 to 4.2% in 2007. In addition to the restoration of socio-political stability, the recovery in the mining and forestry sectors coupled with anti-corruption measures are all factors which can explain this performance. The CAR also improved its performance in respect of economic convergence in the CEMAC zone in 2007, by meeting the first two criteria relating to basic budget balance and inflation, and by reducing arrears accumulated on domestic and external debt. Also, inflation, which had risen from 2.9% in 2005 to 6.7% in 2006, fell sharply in 2007 (0.9%). 2.2.2 With regard to public finance, significant measures have been initiated under the reform programme, in particular, the integration of revenue offices, cash advance funds and all other resources or charges into the Government’s general accounting system, the restructuring of customs and taxes, and the audit of the Douala Port Single Window. Even though they have not been completed, these reforms helped to improve the level of inland revenues collected in 2007 (up by 14% on 2006). However, the mobilization of tax revenue remains weak (7.3% of GDP) owing to several factors, the most important of which are the shortcomings of the Customs Administration and widespread tax evasion. Expenditure fell by 3% in 2007 compared to 2006, as a result of rigorous management by the Treasury Committee and the preparation of new public expenditure implementation procedures. The improvement in public finance management resulted in a budget deficit (excluding grants) equivalent to about 2.5% of GDP in 2007 compared to 4.4 % in 2006. 2.2.3 The current account deficit (including grants) widened from 2.7% of GDP in 2006 to 4.4% of GDP in 2007 following an increase in the external trade deficit and deterioration in the balance of current transfers as a result of the poor mobilization of external financing in the form of budget assistance or balance of payments support in 2007. The surplus on the capital and financial operations account improved slightly in relation to the previous years, mainly as a result of the inflows of foreign direct investment especially in the mining and tourism sectors. The overall balance of payments has deteriorated from 3.0% of GDP in 2006 to -3.3% of GDP in 2007. 2.2.4 CAR’s debt level improved as a result of the rescheduling agreements concluded with the Paris Club for the 2007-2009 period and the cancellations obtained. Thus, the debt service to exports of goods and services ratio was 67.8% in 2006 and improved to 16.5% in 2007, and the debt outstanding to GDP ratio was 68.1% compared to 72.9% in 2006. 2.2.5 Overall, the social indicators remain below the average for sub-Saharan Africa. The incidence of poverty, which was estimated at 67.2 % in 2003, has barely moved in recent years. The CAR is ranked 171st out of 177 countries in the Human Development Index (HDI). Life expectancy was estimated at 44.7 years in 2007 compared to an African average

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of 54.2 years. The HIV/AIDS prevalence rate, which was 6.2% in 2006 for 15-to 49-year-olds, is the highest in the CEMAC zone. The same trends have been observed for maternal and infant mortality, and the net primary school enrolment rate. The gender gap is very wide, and in 2005 the CAR was ranked 153rd out of 177 countries in the Gender-Specific Development Index. The proportion of public expenditure allocated to the social sectors is inadequate in relation to the alarming poverty situation, which makes it unlikely that the Millennium Development Goals (MDG) will be achieved by 2015. 2.2.6 With regard to the outlook for 2008, it is expected that growth will strengthen under the impetus of the recovery in agricultural, mining (diamonds) and forestry activities, greater public and private sector investment, and the buoyancy of the industrial and services (telecommunications) sectors. The growth rate in real terms could reach 4.9% in 2008. However, the outlook remains fragile because of the inflationary pressure which could increase in the wake of an adjustment of the administered prices of petroleum products and water and electricity rates. In June 2006, the Government took a number of measures aimed at mitigating the negative impact on consumption, and household purchasing power. The first series of measures concerned a reduction in VAT from 19% to 5% for basic staples and building materials3 , a reduction in tax on income and companies from 5% to 2%, and the monitoring of certain essential products throughout the national territory4. 2.2.7 Over the past few months, the CAR has recorded a high inflation on food products such as cassava (60%) which is the staple food of the populations, flour (100%), oil (94%), sugar (50%), rice (43%), milk (43%) etc. The inflationary pressure increased following the increase in fuel prices and water and electricity charges since 1 June 2008. The soaring prices of food and fuel would widen the external trade deficit and worsen the balance of payments deficit in 2008. Indeed, an assessment of the impact of soaring oil and cereals on the balance of payments of African countries, conducted by the IMF in June 2008, shows that the CAR is one of the 18 African countries hard hit. According to the IMF assessment, the impact on the trade balance is estimated at -2.5% of GDP in 2008 for the CAR. The food crisis would also increase poverty which affects about two-thirds of the population of the Central African Republic and would reduce consumption levels leading to diet deficiency and diseases. The soaring prices could lead to social tensions. Popular discontent is developing, and the social situation is volatile. 2.2.8 With regard to public finance, an improvement in inland revenues should continue in 2008 (12% more than in 2007), but expenditures will increase by 29% in 2008 compared to 2007, mainly as a result of increased investment expenditure. The budget deficit (excluding grants) should rise from 2.5% of GDP in 2007 to 4.7% of GDP in 2008.

3 The products concerned: wheat flour, milk, frozen fish, 26/100 and 32/100 sheet metal, cement and refined oils. 4 The products concerned are: food products, construction materials, and other products such as household soap, bicycles and mopeds, hoes, etc

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2.2.9 The current account deficit is expected to deepen considerably in 2008 to 6.4% of GDP compared to 4.4% of GDP in 2007, despite a strong mobilization of external financing. However, the surplus on the capital and financial operations account is expected to improve considerably compared to the previous year, mainly due to inflows of foreign direct investment. An overall balance of payments deficit equivalent to 3.8% of GDP is forecast for 2008. The improvement in the debt ratios observed since last year is expected to continue in 2008, with the debt service to exports of goods and services ratio at 16.8 % and the debt service to budget revenue ratio at 21.3%. III. KEY DESIGN ELEMENTS OF ERSP II 3.1 Links with the JISN, Analytical Underpinnings 3.1.1 ERSP II is in keeping with Pillar I of the 2007-2008 JISN, which aims to support economic recovery, as well as to strengthen governance and build technical capacities in the public sector. Even though the JISN was adopted in December 2006 before the finalization of the 2008-2010 PRSP for the CAR, its objectives are in keeping with the Government’s priorities, and its two pillars are fully consistent with the four pillars of the PRSP: (i) restore security, consolidate peace and prevent conflicts; (ii) promote good governance and the rule of law; (iii) rebuild and diversify the economy; and (iv) develop human capital. ERSP II is also in keeping with the orientations of the Bank’s 2008-2012 Strategic Plan for Strengthening Economic and Financial Governance in its Regional Member Countries. Mid-Term Performance Review The Mid-Term Review Report shows that the JISN has partially attained its goal of assisting the CAR to recover and lay the foundations of sustained and shared economic growth. Indeed, even though the economy is on the road to recovery, the growth rate (around 4% since 2006) is fairly low for a post-conflict country, and the socio-economic situation of the population remains a cause for concern with an incidence of poverty estimated at over 67%, and a low HDI which ranks the CAR 171st out of 177 countries. Significant progress has been made with respect to the three specific objectives of Pillar I, namely increased volume of external aid to sustain recovery, improved governance and efficiency of the public sector, and facilitation and support for recovery of the key sectors. Four of the six intermediate outcomes expected in 2008 had already been achieved by March 2008. These results made it possible to reach the HIPCI decision point in September 2007, and contributed to the second satisfactory PRGF review in March 2008. Pillar II, which aims to support pro-poor human development through the restoration and consolidation of social capital and capacities at community level and the delivery of social services, has also achieved significant results which remain, however, inadequate compared to the huge requirements of the country during the post-conflict period. Five of the seven intermediate outcomes planned for 2008 under this pillar had already been achieved in March 2008. The Bank, World Bank, IMF and the Government agreed that a change in strategy was not desirable for the remaining period given that the pillars and objectives remain valid and in conformity with the PRSP priorities, and the context of the CAR does not justify a change in the choice of priority sectors. Furthermore, the lessons learnt from the implementation of the JISN show that the Bank’s intervention for the remaining period of the JISN should support pursuance of reforms so as to reach the HIPCI completion point in 2008-2009.

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3.1.2 The main analytical underpinnings of ERSP II are the MEPCI and MFB Organizational and Institutional Audit prepared by the Bank, the diagnosis made in the 2007 Public Expenditure and Financial Accountability (PEFA) report on the performance measurement of public finance management in the CAR, and the provisional audit of the Treasury prepared by the Inspectorate General of Finance (IGF). These documents reveal two findings, in particular: (i) public finance management is marked by loss of credibility of the budgetary process, due, on the one hand, to the fact that in the absence of compatible budgetary and accounting nomenclatures, it is difficult to determine the credibility of forecasts in relation to budget authorizations and, on the other, to the fact that budget implementation is not adequately controlled by the Treasury since some expenditures of the revenue collection offices and cash advance funds are made outside that structure; and (ii) the procurement system does not guarantee transparency and equity. Other analytical works have enriched the programme, in particular: (i) the Trade Integration Diagnostic Study; (ii) the Debt Management Performance Evaluation; and (iii) reports on the fight against corruption in the CAR prepared by UNDP and Transparency International. 3.2 Collaboration and Coordination with the Other Partners 3.2.1 ERSP II was designed in collaboration with the World Bank during the joint preparation mission of February 2008, during which a common matrix of measures was prepared. The ERSP II appraisal mission was preceded by a joint Bank-World Bank JISN review mission, which re-affirmed the crucial importance of support to reforms. 3.2.2 In 2008, the World Bank awarded an amount of ten million US dollars in respect of its Economic and Governance Management Support Programme. This amount has been fully disbursed. The prior actions, as well as the measures backed by ERSP II, come from the common matrix, but were adjusted so as to take into account the progress that allowed for approval by the World Bank, and to maintain a sustained pace of reforms. With regard to the IMF, the second satisfactory review permitted the disbursement of an amount of US$ 14 million out of a total of US$ 23.3 million allocated for 2008. 3.2.3 The common matrix of measures is also fully consistent with the reforms backed by the IMF’s PRGF. Indeed, several of the PRGF criteria are supported by ERSP II. Consequently, the joint reviews under the PRGF and the PRSP implementation will constitute a framework for consultation and harmonization with the other partners. 3.3 The Bank’s Comparative Advantages 3.3.1 The Bank has developed expertise and gained experience in providing support for the implementation of reforms in the CAR through ERSP I which produced encouraging results. One of the lessons of ERSP I is the importance of coordination among partners in the effective implementation and success of the reforms supported by them. Consequently, the Bank’s value added is in keeping with this logic of harmonization and collaboration, in accordance with the Paris Declaration. More specifically, the Bank will draw on its experience in the Economic Planning Capacities Rehabilitation Support Programme (PARCPE) to step up its assistance towards implementation of the PRSP through the preparation and implementation of a Medium-Term Expenditure Framework (MTEF) so as to ensure better allocation of resources, taking into account the Government’s priority choices (refer to paragraph 4.2.25).

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3.4 Outcomes and Lessons of ERSP I 3.4.1 ERSP I, approved in 2007, aimed to implement the Government’s medium-term reform programme, in conformity with the 2006-2008 ESPFP. ERSP I also benefited in December 2007 from a supplementary financing from the surplus generated by the CAR’s external debt clearance operation. ERSP I comprised two components: (i) improvement and strengthening of public finance management, and (ii) strengthening of good governance. The ERSP completion report has been finalized, and the outcomes of this first programme are encouraging in light of the reforms undertaken. Indeed, 12 of the 17 common outcomes with the World Bank and IMF have been fully achieved, i.e. an implementation rate of 70%. The other measures are at an advanced stage of implementation. In terms of impact, the outcomes of ERSP I contributed to the achievement of the second satisfactory PRGF review in June 2008, as well as to the maintenance of the macroeconomic framework over the 2007-2008 period, even though public finance remains fragile. 3.4.2 The measures implemented include, in particular: audit of the Single Window, audit of the Treasury and domestic debt, reorganization of the customs administration and placing it under the sole oversight of the Ministry of Finance and the Budget, the introduction of a new budgetary classification for the 2008 fiscal year, the preparation of new procedures for implementing public expenditures in order to better contain, among others, spending on cash advances, adoption of a decree on the general regulation of public accounting to define the rules for the management of public funds and assets, preparation of the simplified procedure which aims to unify management of employment and the payroll under the civil service reform, preparation of an information system master plan, adoption of the new public procurement code, revision of the forestry code, initiation of the process for accession to the EITI, establishment of anti-corruption mechanisms, etc. There was slippage on the implementation of some measures owing to ongoing preliminary studies with the support of CAR’s partners. Such is the case with, in particular, the revision of the mining code, the operationalization of the new public procurement code, the establishment of a new accounting classification, and the signing of a memorandum of understanding on cross liabilities between the Government and parastatal enterprises. 3.4.3 The main lessons learnt from the implementation of ERSP I are as follows: (i) the political will and commitment of the Government are key factors for the implementation of reforms and their ownership by all the social stakeholders; (ii) coordination among donors backing the reforms is a vital asset in the implementation and success of these reforms; (iii) the determination of a reasonable implementation rate for the measures which takes into account the context of a post-conflict country as well as the institutional capacity and human resources is a guarantee of the sound implementation of the measures and adherence to the schedule. These lessons have been taken into account in the design and preparation of ERSP II.

3.5 Links with the Bank’s Other Ongoing Operations 3.5.1 With a grant of UA 3.3 million, the Bank financed PARCPE, which has a significant technical assistance component. This technical assistance, which will continue until 2009, is helping to build the capacities of the administrative structures in macroeconomic and sector planning, public investment programming, debt management, preparation of the national accounts, collection of socioeconomic data, and PRSP monitoring. Consequently, some ERSP II measures will therefore be supported by PARCPE, especially with regard to capacity building in public investment programming and monitoring, support for the implementation of procurement procedures, and improved external debt management.

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IV. THE BANK’S PROGRAMME 4.1 Programme Objective 4.1.1 The goal of ERSP II is to contribute to the achievement of the objectives of CAR’s PRSP concerning growth and poverty reduction. Its specific objective is to support the Government’s reform programme through improved public finance management and enhanced public sector economic governance. 4.2 Components and Expected Outcomes of ERSP II 4.2.1 The Programme, which covers the 2008-2009 period, focuses on two components: (i) improvement of public finance, and (ii) consolidation of public sector economic governance. Component A: Improvement of Public Finance 4.2.2 The establishment of an efficient public finance management system is a prerequisite for socioeconomic stability, economic development and poverty reduction in the CAR. The Bank intends to support these actions with a view to: (i) improving budget execution and monitoring, (ii) strengthening the accounting system and improving Treasury operations and their monitoring, (iii) improving fiscal and customs administration; and (iv) reducing domestic arrears to public enterprises. A.1 Improving Budget Execution and Monitoring 4.2.3 According to the organizational and institutional audit of the MFB, and the CFAA and PEFA reports, monitoring of budget execution remains weak as a result of: (i) the existence of several exceptional procedures which undermine the reliability of the accounting systems of all the operations; (ii) internal control weaknesses; and the (iii) absence of quarterly monitoring reports, which would make it possible to assess the utilization of public resources and distribution of credit in light of the government’s strategic orientations in poverty reduction. 4.2.4 Consequently, and in order to improve budget monitoring and execution, the Government has adopted new procedures for budget execution and their related texts. The new budget classification was adopted in 2008, and the Government has established a new procedure for managing public expenditures by reducing the number of exceptional procedures and regulating cash advances. It has also appointed key personnel of the General Directorates responsible for the Budget and Public Treasury. The accounting nomenclature is considerably behind schedule due to internal administrative procedures, and it will only be finalized in 2009. 4.2.5 During 2008-2009, ERSP II will therefore support reforms aimed at improving budget execution and monitoring. To do so, the Government will have to: (i) produce a quarterly budget execution monitoring report, from the commitment to payment authorization stages for the priority Ministries (Health, Education, Agriculture, Infrastructure/Equipment); and (ii) prepare the 2008 Audited Budget Law, which is one of the key objectives of the Government’s programme. The preparation of quarterly budget execution reports for the key

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Ministries will be monitored regularly by the Government, and the reports will be transmitted periodically to the Bank. In view of the ongoing preparatory work, particularly the accounting nomenclature which will only be completed in 2009, the 2008 Audited Budget Bill could only be prepared and tabled before Parliament in early 2009. The strengthening operations scheduled by the development partners, in particular the World Bank’s LICUS III, will help to fully integrate expenditures into the budget chain so as to finalize an administrative account and begin preparation of the 2008 Audited Budget Bill. A.2 Strengthen the Accounting System and Improve Treasury Operations and

Monitoring 4.2.6 The CFAA and PEFA reports, as well as the provisional audit of the Treasury, revealed weaknesses in the Treasury’s accounting and operations monitoring system. These include: (i) the non-existence of a single Treasury account, with different accounts operating either at the BEAC or in commercial banks, opened in the name of the Treasury or other public bodies; (ii) the retention of revenue collected by certain Ministries and its direct use to meet their own expenses; and, (iii) payment of interest rates of about 15% to 18% to commercial banks in Bangui which, in reality, are responsible for a high proportion of the State’s cash flow. The Treasury does not necessarily control these accounts whose movements are not found under the Government’s operations. It is important to make the Treasury the sole Government cash office and restore its credibility, because the plethora of accounts undermines the centralization of revenues, and consequently the Treasury’s performance. Therefore, following an inventory recommended by the IMF, measures have been taken to close 515 out of a list of 130 accounts (55 of which are not managed by the Treasury). 4.2.7 As regards the credit accounts, the following two actions will be taken prior to submission of ERSP II to the Bank’s Board of Directors, and will be completed by 15 August 2008: (i) Closure of all the credit accounts with commercial banks which receive Government revenue, and transfer of the balances to the Treasury account; and (ii) closure of transit accounts in favour of the Treasury account. 4.2.8 The IGF will inventory the debit accounts, many of which have few transactions but continue to generate bank interest charges for the State budget. Submission of the IGF’s preliminary report on the State’s debit accounts with commercial banks is a prior action to presentation of the programme to the Bank’s Board of Directors. In a second stage, the IGF report will be complemented by an independent external audit with a view to consolidating the Government’s debt owed to commercial banks. The audit report will propose a method and final Action Plan for the closure and restructuring of the Government’s accounts with the commercial banks. 4.2.9 The Bank intends to support the Government in its efforts to enhance transparency in the management of public resources. Pending preparation of the new accounting nomenclature and integration of all the small items of expenditure of the income-generating Ministries, the prior actions to permit the successful implementation of this measure are to: (i) integrate all categories of accounts not taken into account in the public accounting but identified by the Treasury audit, and (ii) determine an entry balance during the first quarter of 2009 to make the new accounting nomenclature effective. These measures will be monitored under the Programme.

5 The total amount of the 60 accounts with credit balances was CFAF 2.5 billion; the total amount of the 19 accounts with debit balances was CFAF 15.7 billion.

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A.3 Improve Fiscal and Customs Administration 4.2.10 The Government has made significant progress in the fiscal and customs administrations to improve revenue collection and centralize it at the Treasury. It has reorganized the customs administration, and placed it under the sole oversight of the Ministry of Finance. It has also audited the Douala Single Window. According to the preliminary findings of this audit, customs revenues from the Port of Douala, after pre-inspection, are paid into a commercial bank in Douala and subsequently transferred to commercial banks in Bangui. This circuit reduces the liquidity available to the Government which is automatically withdrawn by the commercial banks through mechanisms to offset Government debts owed to the commercial banks. Furthermore, as emphasized above, the very high interest rates of the commercial banks penalize the Government. 4.2.11 In order to tighten control of customs revenue at the Douala Single Window, the Government decided to redeploy Treasury agents to all the Ministries generating minor expenditure. Since 2008, 5 revenue officers have already been deployed, and the operation resulted in a revenue collection rate of 95% of the estimated amount for 2007. There are still some income-generating Ministries not covered by the officers whose minor revenues are taken into account by a simple declaration of one of the Department’s employees. The IGE has audited all the Ministries to identify additional sources of minor revenues. ERSP II proposes that the customs revenue office of Douala be transferred to the BEAC in Douala, which has already opened an account for that purpose. The transfer of the customs revenues to the account opened with the BEAC in Douala is a prior action required by the Bank before the programme is presented to the Board. 4.2.12 Furthermore, in 2008, the SYSTEMIF and ASYCUDA taxable bases will be updated, the two software packages used by the Taxation and Lands Department and the Customs Department respectively, on the basis of the findings of the surveys on the identification of taxpayers at the national level. The SYSTEMIF data will be transferred to ASYCUDA, the only system retained as the sole issuer of customs receipts for imports at the Port of Douala. The countrywide comprehensive survey of taxpayers is being financed by UNDP. On the basis of the findings of the survey, ERSP II proposes to update the data in the database of the Taxation and Customs Departments, and to subject the taxpayers identified to the tax system in force. It also proposes networking the Inspection Company (BIVAC) and the Customs and Taxation Departments so as to harmonize data on foreign trade transactions and ensure their traceability. A.4 Reduction in Domestic Arrears owed to Public Enterprises 4.2.13 The Government has accumulated significant arrears on consumption bills towards some public enterprises: SOCATEL (telecommunications), SODECA (water) and ENERCA (electricity), weakening their cash flows and making it impossible for them to pay their taxes to the Government. To remedy the situation, an audit of the settlement of bills owed by the Government and its services to these enterprises and taxes that the enterprises must pay to the Government has been conducted for the period before 2004. This audit was justified by: (i) the inconsistency between the budget allocated to these expenditure lines and the real level of consumption, which led to such significant State arrears, (ii) the existence of invoices made out to the Government that do not correspond to expenditure legally covered by the Government; (iii) debts accumulated by the decentralized organs, and; (iv) tax arrears

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accumulated by the enterprises. With regard to arrears covering the period from 2005-2007, an audit was entrusted to the IGF under the supervision of the Ministry of Finance to: (i) finally stop cross liabilities; (ii) agree on how to clear such debts; (iii) avoid the accumulation of arrears; and (iv) earmark an allocation corresponding to the Government’s requirements, and begin to clear the debts in the 2009 budget. All the cross liabilities should be consolidated, and then agreements signed between the Government and the enterprises concerned with a view to settlement. Component B: Strengthening Public Sector Economic Governance 4.2.14 The Government intends to step up its efforts in combating corruption, and guarantee optimal management of natural resources so as to create an enabling business environment for private investment which will revitalize economic activity. The Bank intends to support concrete actions with a view to: (i) strengthening the formulation, coordination and monitoring of Government policies against corruption and for transparency; (ii) operationalizing the procurement reforms; (iii) strengthening governance in the productive sectors (forestry, mining and oil); and building public investment programming and monitoring capacities B.1 Strengthening the Formulation, Coordination and Monitoring of Government Policies against Corruption and for Transparency. 4.2.15 The CAR is considered as one of the countries where corruption is widespread. This worrisome situation calls for the strengthening of reforms concerning governance. Structural reforms have already been initiated in the justice sector to build the capacity of the justice system in combating financial and commercial crimes: appointment of a State Counsel and establishment of a financial service at the Ministry of Justice responsible for initiating proceedings in the event of financial corruption; creation of a justice financial pole responsible for prosecuting financial delinquency, and recently a Permanent Anti-Corruption Committee, tasked with operationalizing the fight against corruption and enhancing transparency and visibility in this key area. The publication of an Order designating the members of the Permanent Anti-Corruption Committee to complete official arrangements for its effective operation is a prior action required by the Bank before presentation of the programme to the Board. 4.2.16 In efforts to limit fraud and embezzlement, the Government has decided to systematically apply the Law governing the Declaration on the Disclosure of Assets before the end of the Programme. This Declaration, including sanctions and a verification system, is enshrined in the Constitution for members of the Government. The donors want it to be extended to cover senior civil servants and managers of public enterprises. To that end, the Declarations will be formalized and standardized, specifying the nature and extent of the property to be declared and the scope of the Declaration. The Minister of Justice has been called upon to propose a constitutional bill that will be tabled before the National Assembly. ERSP II will support the Government to ensure compliance with the Assets Declaration and its credibility by: (i) setting a standard format for the Declaration adapted to international standards, (ii) providing practical instructions on how to complete the Declaration; and (iii) providing for sanctions in the event of delays or false statements. Administrative sanctions seem appropriate in this regard. The Government will be supported by UNDP in implementing these actions which should be completed before the end of ERSP II.

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4.2.17 The Government, also concerned about transparency in its decision-making and wishing to heighten the visibility of the reforms, has decided to improve information available to the general public on the Ministry of Finance Website which exists already. This will concern, in particular: (i) mining and forestry concessions; (ii) Treasury reports; (iii) quarterly and annual budget implementation reports; (iv) the Finance Law; (v) annual reports of the Anti-Corruption Committee; (vi) the Anti-Corruption Strategy; (vii) the new Procurement Code, the Forestry and Mining Codes; (viii) the Constitution and the United Nations Convention against Corruption; and (ix) the Assets Declaration Form and practical instructions on how to fill complete it. B.2 Operationalization of the Procurement Reforms 4.2.18 The procurement system in force since 2003 has serious shortcomings, in particular: a legal and regulatory framework which is non-compliant with international standards, the absence of a regulatory organ for public procurement, the non-existence of procurement planning and appeals organ, and the absence of an information system on public procurement. A public procurement strategy was therefore prepared in 2006, and a Public Procurement Code prepared and submitted to the Government which validated it on 28 March 2008. The Code will be presented to Parliament by end 2008 for approval. The Bank will support the authorities’ efforts to operationalize the Code by: (i) appointing new members of the General Directorate for Procurement and the Regulatory Agency; (ii) producing procedures manuals and standard formats to be used, and; (iii) operationalizing the procurement services in the four key Ministries (Education, Health, Agriculture, Equipment/Infrastructure) which should produce an activity report at each year-end. The Bank is already assisting the Government with a procurement expert under PARCPE to work on the internalization of the procurement strategy. The appointment of the new members of the General Directorate for Procurement and the Regulatory Agency is a condition for disbursement of the single tranche. B.3 Strengthening of Governance in the Forestry and Mining Sectors 4.2.19 In efforts to confirm the option of rational and sustainable management of forestry resources, major actions have been initiated to strengthen governance in the forestry and mining sectors. In the forestry sector, the following measures have been taken: improved conditions for granting forest concessions, revision of the market values of the different wood species, and finalization of the new Forestry Code. Furthermore, an audit will be conducted on BIVAC and the Forestry special account; the TORs of the audit have already been prepared. The legal and regulatory provisions in the sector, as well as the situation of companies holding logging permits have also been reviewed. The review showed that some companies are non-compliant with Government regulations (delays in paying taxes owed to the Government, non-compliance with fiscal obligations). A list of companies which have not adhered to the payment schedule for forestry taxes has been drawn up, and they are issued with regular reminders to regularize their situation. The settlement of debts of enterprises in the forestry sector is sometimes hampered by the existence of cross liabilities between these enterprises and the Government. 4.2.20 Furthermore, it has been decided that henceforth industrial forest exploitation will require a harvesting and management permit (PEA). Since 2006, the Government has undertaken to revise the Forestry Code, and decided to suspend the granting of new permits prior to promulgation of the new Forestry Code and its implementing texts. This new Code,

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which is being finalized, will introduce new provisions, particularly on the role of the indigenous populations, the economic and ecological importance of the forest, and the management of community forests taking into account the interests of the established communities. It will improve the readability of the regulations, enhance transparency and strengthen competition in the allocation of forest harvesting rights. 4.2.21 In the mining sector, the Government has continued to control the regularity of the allocation of mining rights. There has been considerable delay in the revision of the 2003 Mining Code, and in early 2008 the process had barely commenced with the preparation of the terms of reference for the sector audit. A draft Action Plan drawing on the recommendations of the National Dialogue Workshop, and the Mining Sector Conference, already exists; it will be finalized on the basis of the conclusions of the mining sector audit following its completion. Then draft conventions will be prepared by a panel of experts with a view to achieving transparency in the mining sector. The purpose of these conventions will be to define relations between the Government and mining companies, and to define the conditions for establishing a semi-public mining company. Following its adoption by the Government, the Mining Code as well as a summary of the mining conventions and detailed information on the allocation of mining bonuses to the State accounts will be posted on the Government’s website. The process of accession to the EITI is at an advanced stage with the support of the ADB. Indeed, the Government made an official declaration of intent to accede to the process in August 2007; it established an ad hoc Committee and organized national workshops with the participation of representatives of all segments of society in February and April 2008 to present the objectives of the EITI and define a strategy for implementing the process. The Bank is supporting this process through the financing of a consultant and the launching workshop. The second phase will integrate and validate the comments of the participants, and present the sector plan of action. B.4 Strengthening of Governance in the Petroleum Sector 4.2.22 A regulatory organ has been established and its Board of Directors and Director-General appointed. The regulatory organ’s role is to regulate the petroleum market in order to: (i) control the quality of operators involved in the market on the basis of criteria set out in the regulatory texts; (ii) control product quality; (iii) regulate competition on the oil market in the CAR, and (iv) establish a price structure in conformity with international rates, which takes into account the State’s obligations. In 2008, the members of the new Regulatory Agency will be appointed by decree. This new structure should enable the Government to generate an adequate level of revenues in relation to the sector’s activities. The soaring oil prices on the international market in 2008 prompted the Government to decide in June 2008 to monitor some staple goods throughout the national territory, and to review VAT rates and the tax income and companies levied at the border. It also prepared a new structure for petroleum prices in June 2008. ERSP II will support the Government’s efforts to make the regulatory organ effective by appointing all the personnel required on the basis of the established organization chart, with a view to operationalizing the structure. Furthermore, the Government has just set new pump prices for petroleum products, by road and river as from 1 June 2008. 4.2.23 There is currently no structure to control the quality of petroleum products imported into the CAR. The Bank will carry out a joint action with the other development partners of the CAR to support the Government’s actions in this sector, in general. To that end, the partners recommended to the Government to proceed with the signing of a contract

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with an internationally renowned firm control the quality of petroleum products locally. Furthermore, the Government of the Central African Republic will ensure that it brings the legislation governing the country’s petroleum sector into line with international practices. B.5 Building of Public Investment Programming and Monitoring/Evaluation Capacities 4.2.24 Public investment programming plays a strategic role in the implementation and evaluation of poverty reduction initiatives. Taking account of this aspect requires a strong linkage between the PRSP objectives and public investment programming. Under the PRSP implementation, the Government intends to prepare the Medium-Term Expenditure Framework (MTEF), which will improve the effectiveness of public actions and ensure the consistency of strategic choices with the multi-year budget framework. The preparation of the MTEF, backed by the PARCPE, should provide an opportunity to revisit the public investment programming system with a view to ensuring rational allocation of budgetary resources, in keeping with the Government’s priority choices. However, the public investment programming and monitoring process requires the preparation of a Procedures Manual. To that end, the Bank will assist the Government with the preparation of a Procedures Manual and its distribution to the different stakeholders involved in the public investment programming and monitoring/evaluation process. The following actions will be carried out by the Government with the backing of the Bank: (i) preparation of the Public Investment Programming and Monitoring/ Evaluation Procedures Manual; (ii) organization of operationalization and validation workshops for the Manual; (iii) adoption of the procedures Manual by the Cabinet Meeting; and (iv) training of Government employees. 4.2.25 The following measures must be implemented by the Government before

presentation of ERSP II to the Board of Directors.

i) Closure of all credit accounts in commercial banks receiving State revenues, and transfer of the balances to the Treasury account (paragraph 4.2.7);

ii) Closure of transit accounts in favour of the Treasury account (paragraph 4.2.7);

iii) Submission of the IGF preliminary report on debit accounts of the Government

with commercial banks (paragraph 4.2.8);

iv) Transfer of forestry revenues (BIVAC) to the Treasury account (paragraph 4.2.7);

v) Updating of the SYSTEMIF and ASYCUDA taxable base on the basis of the

findings of the nationwide taxpayer surveys (paragraph 4.2.12);

vi) Transfer of customs revenue from the Douala Single Window to the BEAC in Douala (paragraph 4.2.11);

vii) Initiation of work on networking the taxable database of the Taxation and

Customs Departments and the pre-inspection company (BIVAC) (paragraph 4.2.12); and

viii) Publication of an Order appointing the members of the Permanent Anti-

Corruption Committee (paragraph 4.2.15).

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4.3 Financing Requirements and Sources 4.3.1 The financing requirements in terms of external resources for the programme period, 2008-2009, is estimated at UA 227.5 million (cf. balance of payments in Technical Annex 2), and is mainly due to the current account deficit of UA 192.9 million (84.8%), debt amortization of UA 34.1 million (15.0%), and the replenishment of official reserves to the tune of UA 0.4 million (0.2%). The financing identified for 2008, amounting to UA 203.5 million, covers almost 89.5% of requirements and mainly comprises: (i) UA 24.9 million corresponding to official transfers; (ii) UA 49.2 million under exceptional financing; (iii) UA 48.6 million for the financing of projects/programmes (including the expected Bank financing); and (iv) UA 80.8 million for other financing, including private capital. The residual financing requirement is estimated at UA 23.9 million. This residual requirement will be financed by disbursements in respect of IMF’s PRGF. At the multilateral level, the external financing sources for the Government’s 2008 programme are presented in the Table below:

Sources Amount in US$ Amount in UA

ADF/ADB 15.3 9.5

World Bank 10 6.2

IMF* 23.3 14.3

Total 48.6 30.0 (*) The amounts of the IMF contribution correspond to disbursements in respect of the PRGF. 4.4 Programme Beneficiaries 4.4.1 The programme should benefit the entire population of the Central African Republic through its contribution to the achievement of the PRSP objectives in terms of growth and poverty reduction. The direct beneficiaries of the programme are the sector Ministries (MEPCI, MFB, Ministry of Mines and Energy, Ministry of Forestry and Wildlife, etc.), the Ministry of Rural Development, farmers, the structures responsible for good governance and combating corruption, and the private sector. 4.5 Programme Impact Impact on Economic and Financial Performance 4.5.1 The ERSP II-backed reforms will contribute to consolidating growth, easing inflationary pressure, improving the mobilization of Government resources, and alleviating the CAR’s debt burden (cf. paragraphs 2.2.8 – 2.2.11). More specifically, it is expected that growth will increase by 5% over the 2008-2010 period, that Government revenues will rise (11.7% of GDP in 2009 compared to 10.2% in 2007), that domestic debt will decline and that there will be a significant improvement in the public debt ratios (debt service to exports of goods and services ratio down from 23.1% in 2007 to 16.8% in 2008 and the outstanding debt to GDP ratio down from 68.1% in 2007 to 61.7% in 2008).

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Impact on Governance 4.5.2 The second component of ERSP II is specifically intended to consolidate economic governance in the public sector. The implementation of reform measures recommended in the areas of budget management and public procurement should give fresh impetus to good governance practices. The budget expenditure monitoring and control mechanism will help to improve transparency and rigorous public financial management. The proposed reforms concerning the integration of the accounting and budget nomenclatures will enable the Treasury to produce reliable budget execution reports on a regular basis, and give more visibility to the structure’s operations. In addition, the new public procurement, mining and forestry codes will strengthen the legal and regulatory framework of the public procurement system, and consequently ensure transparency. It will also help to strengthen equity and competition, and thus restore private sector confidence for business development and increased private, and particularly foreign, investments that will foster sustainable growth. The structures created in effort to combat corruption, as well as the Regulatory Organ in the petroleum sector, are also aimed at significantly enhancing governance. Impact on Poverty 4.5.3 As a result of sustained efforts to implement reforms aimed at improving the macroeconomic framework and supporting budgetary discipline, ERSP II will help to improve the efficacy of poverty reduction-related expenditures in accordance with the PRSP guidelines. Poverty already affects about 72% of the rural population and 63% of the national population. The soaring food prices will increase poverty in urban and rural areas. All the segments of the population are concerned. By improving the efficiency of public finance and the Government’s ability to implement its budget priorities, the programme will impact positively on poverty reduction. Furthermore, the domestic debt clearance operation will enable the Government to release resources to finance actions in the areas of education and health. Pursuance of efforts to clearance the Government’s domestic debts, including the regular payment of the salaries of civil servants and Government employees, will have a real positive impact in terms of income redistribution and job protection. All these actions should help to reduce the incidence of poverty from 63.4% in 2007 to 56.6% in 2010. As already indicated, the preparation of the MTEF should provide an opportunity to review the public investment programming system so as to ensure rational allocation of budgetary resources, especially in favour of the social sectors.

Impact on Capacities and Institutional Development 4.5.4 The CAR has received considerable technical assistance from its partners to implement the reform programme. Thus the Bank, under its PARCPE financed in 2006, is contributing to effective transfer of knowledge and skills to the CAR counterparts. The experts seconded to the Ministries responsible for economic management and to the revenue offices will help to remedy the technical weaknesses of CAR managers. Similarly, the training provided by these experts through seminars and other workshops will gradually create a critical mass of managerial staff capable of pursuing the reforms. ERSP II also focuses on the need to provide the newly established or existing structures with material resources including IT equipment and adequate human resources to enable them to play their role, as well as on training, especially in the revenue offices. These actions will enhance the credibility of the structures and maximize the Programme’s impact on capacities and institutional development.

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Environmental Impact 4.5.5 ERSP II will support measures with a positive environmental impact. Thus, with regard to forestry, the abolition of special logging permits and the granting of permits by competitive bidding will ensure transparency and prevent uncontrolled forest harvesting. Similarly, the Government has introduced taxes on felling and reforestation in order to sanction operators who do not comply with the regulations on forest replenishment. With regard to the mining sector, uncontrolled mining could be on the rise again with the allocation of new mining permits to partners, in the absence of a new Mining Code. The finalization and implementation of the new mining and forestry codes will help to mitigate these risks. The Bank and World Bank will prepare a sector study in 2008 with a view to developing a strategy that will take into account an analysis of the environmental impacts of extractive industries in the CAR and propose regulatory and institutional reforms to improve control of the impacts. Impact on Gender 4.5.6 The gender situation in the CAR is generally marked by inequalities in all areas and at all levels, because of the sociopolitical crisis that has destabilized families and caused gender imbalances in terms of access to and control of resources and the participation of women in decision-making bodies. Indeed, the low number of women in the public administration (13%, including 4% senior managerial staff and 3.6% middle-level managerial staff) and female adult illiteracy (66.5% in 2006 compared to 35.2% for adult males) have been exacerbated by the country’s socio-political crisis. The net school enrolment rate for girls is in the region of 37% compared to almost 45% for boys. With less than one Euro per day, a person in the Central African Republic now eats only one meal a day. This situation is compounded by the soaring prices, which reduce the purchasing power of the most vulnerable groups of the population, and naturally women and children who are the hardest hit. 4.5.7 Most of the measures, as well as those concerning related programmes of the other partners supporting the Government’s reform programme, will have an indirect impact on gender. Indeed, as a result of the actions to consolidate peace and restore security, the return of the populations to the rural areas, and the recovery of economic activities will benefit rural women by improving their living conditions and incomes. Furthermore, the ESRP-backed measures, particularly those relating to the stabilization of public finance, will give the Government more room for manœuvre in carrying out gender promotion activities. Thus, the proposed increase in budgetary allocations in favour of the social sectors will impact positively on basic social infrastructures, and therefore on the schooling of children, especially girls, in the rural community. V. PROGRAMME MONITORING AND EVALUATION 5.1 Programme Monitoring Mechanism 5.1.1 The Programme Executing Agency is the Permanent Technical Committee for Monitoring Structural Adjustment Programmes (CTP-PAS) which will be responsible for the technical monitoring and coordination of the implementation of the measures retained under ERSP II, and will also submit quarterly programme status reports to the Bank and the other partners involved in the programme. It will monitor disbursement and procurement-related issues. The CTP-PAS has acquired considerable experience in the implementation of donors’

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programmes in the CAR. This structure, which monitored the implementation of ERSP I, comprises a chairman and Permanent Secretariat. It will be reinforced by the representatives of the Ministries involved in ERSP II. 5.1.2 Procurement: Under this grant, goods and services will be procured in conformity with the Bank’s guidelines and in accordance with the following terms and conditions: (i) imports of a value equal to or above UA 1,000,000 by the public sector will be subject to international competitive bidding, while those with a value below that threshold will be procured on the basis of local or international shopping; (ii) all imports of goods and services by the private sector or public enterprises of a commercial nature will be governed by the commercial standards in the CAR and accepted by the ADF and ADB; as regards the import of agricultural inputs, the ADF and ADB authorize the purchase of inputs to be used in the Central African Republic, from a selected eligible supplier, in accordance with competitive procedures acceptable under the procurement rules of a multilateral bank, a United Nations institution or a co-financing partner. 5.1.3 Disbursements: The grant will be disbursed in a single tranche subject to fulfillment of the conditions stipulated to that effect. The disbursement will be made to a special foreign exchange account of the Public Treasury opened in BEAC by the Government. 5.1.4 Audit: The Central African Government must, no later than six months following disbursement of the single tranche of the grant, conduct an audit of the special ERSP II account which will be entrusted to the General Inspectorate of Finance. This structure, already used by the other donors, has been given more qualified staff and logistics with EU assistance. 5.1.5 Monitoring and Evaluation Mechanism: ERSP II will be monitored and evaluated by all CAR’s development partners, including the Bank. Macroeconomic stability is evaluated on the basis of IMF assessments. The Country Office of the World Bank and the headquarters of the Bank and World Bank will exchange views regularly to assess the implementation status of the reforms, and will organize a joint mid-term review mission of the programme. The programme’s outcomes will be evaluated on the basis of the common matrix of the partners involved. The Bank’s Regional Office in Cameroun will also assist in ensuring close monitoring of the programme implementation in coordination with the other partners in the CAR. VI LEGAL INSTRUMENTS 6.1 Instruments 6.1.1 The instrument is an ADF grant of UA 6.5 million and a grant of UA 3.0 million from the ADB surplus account (subject to approval by the Board of Governors), in the form of balance of payments support. 6.2 Disbursement Conditions 6.2.1 The grant resources will be disbursed in a single tranche following fulfillment by

the Donee of the following conditions:

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i) Opening of a special foreign exchange account of the Public Treasury by the Government at the Bank of Central African States (BEAC) (paragraph 5.1.3); and

ii) Appointment of new members of the General Directorate of

Procurement and the Regulatory Agency (paragraph 4.2.18). 6.2.2 Good Practices: The grant disbursement conditions have been reduced in conformity with the good practices recommended by the Bank. These conditions, as well as the actions prior to submission of the programme to the Board, have been determined in agreement with the Government and its partners. The disbursement in a single tranche in 2008 is justified by the impact of the soaring prices of oil and food products on the balance of payments. VII. RISK MANAGEMENT 7.1 Five major risks have been identified, which could impede the proper implementation of the programme, and prevent it from achieving its objectives and improving its performance and mitigating its impacts: (i) the security situation in the country; (ii) the political risk; (iii) the macroeconomic risk; (iv) the fiduciary risk; and (v) the risk related to institutional capacity and shortage of human resources. 7.2 The two main risks are those related to security and political stability in the country. In order to mitigate these risks, the Government has affirmed its resolute will to consolidate the political and security situation, and, to that end, has pursued contacts with some rebel groups with a view to organizing an Inclusive National Dialogue as soon as possible. Furthermore, the EU and French forces, alongside the CEMAC forces, are gradually deploying along CAR’s northern border. These efforts significantly improved the security situation in 2007. However, the political and security situation remains fragile, for the population has not yet witnessed any direct spin-off following the re-engagement of the international community and reforms. Furthermore, the freeze on salaries and recruitment and the Government’s failure to clear salary arrears, as well as the lack of transparency in natural resources management, may be sources of discontent and social conflict. The Government will have to seek the commitment of all the social partners to support the reforms in the country in a sustainable manner in order to preserve social peace, which is a guarantee for security. 7.3 The macroeconomic and fiduciary risks are real. In order to minimize them, the Government of the Central African Republic has worked closely with its partners to define a medium-term macroeconomic framework and obtain an increase in external financing to offset the low mobilization of revenue. Endogenous risks, such as budgetary slippages, could affect the programme. Rigorous macroeconomic management will therefore be necessary to create conditions that will foster sustained economic growth. To that end, the control and monitoring of budget execution and implementation of the CFAA Plan of Action, as well as the recommendations of the PEFA report, will help to mitigate the macroeconomic risks. The resources made available to the Government will be subject to a special account audit in accordance with Bank procedures, thus helping to mitigate the fiduciary risk.

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7.4 Furthermore, the programme implementation rate in the CAR, coupled with any deterioration in the external environment and the soaring oil and food prices, should be carefully monitored. Despite reaching the decision point, if the reforms are not pursued in a sustained manner and if the CAR does not receive substantial financing from its partners, the deterioration of the economic situation will have serious sociopolitical consequences, which could threaten the country’s stability. To mitigate this risk, the Bank will have to step up its efforts jointly with the Bretton Woods institutions to ensure coordination and synchronization of greater support from the partners, and mobilize substantial financing to assist the CAR in reaching the completion point. 7.5 Institutional capacities and human resources are still limited in the CAR despite substantial technical assistance from its partners. The partners’ technical assistance programmes partially contribute to mitigating this risk by ensuring, through training (seminars and workshops), effective transfer of skills to their counterparts in the Central African Republic. VIII. RECOMMENDATIONS 8.1 In light of the foregoing, it is recommended that the Board of Directors should extend to the Government of the Central African Republic an ADF grant of UA 6.5 million and a grant of UA 3 million from the ADB surplus account (subject to approval by the Board of Governors) to implement the reforms contained in the Government’s medium-term programme and presented in the Development Policy Letter and matrix of measures appended hereto, as well as to contribute to the Government’s efforts towards solving the food crisis.

Annex I

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APPRAISAL REPORT

Map of CAR

This map has been prepared by the African Development Bank Group for the convenience of the readers of the report to which it is attached. The denominations used and the boundaries shown on this map do not imply on the part of the Group and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.

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DEVELOPMENT POLICY LETTER OF THE GOVERNMENT OF THE CENTRAL AFRICAN REPUBLIC FOR 2008-2009

INTRODUCTION Within the context of re-engagement by the International Community, the Central African Republic has benefited from the support of its main development partners which have demonstrated their solidarity through the clearance of multilateral arrears, the conclusion of a programme supported by the Poverty Reduction and Growth Facility (PRGF) for the 2007-2009 period, and the rescheduling of the debt owed to bilateral creditors who are members of the Paris Club. The support of these donors has made it possible to finalize the Poverty Reduction Strategy Paper (PRSP) for the 2008-2010 period, a reference framework for the reconstruction of the country and consolidation of sustained economic growth with a view to effectively reducing poverty. This letter reflects the will of the Government of the Central African Republic to undertake appropriate reforms to put the country back on the path to development. It has been prepared on a participatory basis, involving all segments of the country’s population, as well as both internal and eternal partners. The PRSP focuses on four pillars: (i) restoration of security, consolidation of peace and prevention of conflicts; (ii) promotion of good governance and the rule of law; (iii) reconstruction and diversification of the economy; and (iv) development of human capital through improved access of the population to basic social services, mainly education and health care, so as to reduce maternal, infant and child mortality, as well as control the HIV/AIDS pandemic. The PRGF-supported programme concluded with the International Monetary Fund (IMF) is consistent with the PRSP implementation and focuses mainly on improving public financial management with a view to enhancing the credibility of the budget policy. The satisfactory implementation of the PRGF programme enabled the country to reach the decision point of the Enhanced Heavily Indebted Poor Countries Initiative in September 2007, thereby allowing the CAR to benefit from interim relief of 90% of its multilateral debt service since 14 January 2008. This relief will enable it to regularly ensure its debt servicing and benefit from fresh concessionary loans from the development banks. We have also requested our official creditors to maintain positive net transfers so as to ensure fair treatment of all creditors, as well as the financial viability of the programme. The second PRGF review, which has just been completed, is satisfactory and indicated that the Government is committed to pursuing the implementation of reforms. The results obtained confirm an improvement in the country’s economic and financial situation. The economy experienced an upturn between 2006 and 2007 marked by the consolidation of social stability, a gradual return to sustained economic growth, and control of inflation. Real GDP grew from 4% in 2006 to 4.2% in 2007. The inflation rate dropped from 6.6% in 2006 to 1.6% in 2007. This economic recovery initiated over the past two years (2006-07) as a result of the reforms implemented by the Government has led to the gradual stabilization of public finances.

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MACROECONOMIC AND BUDGETARY FRAMEWORK The assumptions underpinning the 2008 Budget Bill are based on the economic prospects for 2008 and the mid-term achievements of the execution of the 2007 budget. In 2008, economic prospects will depend on the consolidation of socioeconomic stability with the gradual return of security in the interior of the country, macroeconomic stability with enhanced confidence of economic operators, the recovery of commodity prices, stabilization of petroleum prices, the pursuance of reforms initiated by the Government with the support of its development partners, and the launching of operations to rebuild basic infrastructures, and the consolidation of relations with International Financial Institutions in the wake of the Brussels Round Table of 26 October 2007. The orientation of economic policy towards poverty reduction and consolidation of sustained economic growth requires, in particular, adequate mobilization of budgetary resources. Implementation of this policy will allow for the achievement of an economic growth rate of 4.8% in 2008 with an investment rate of 11.2% and a tax burden of 11.0%. This growth level is expected to be sustained by the recovery of primary sector activities with a growth rate of 5.4%. In addition, the secondary sector will achieve a growth rate of about 24.2% as a result of the launching of major works in 2008. The growth rate of the tertiary sector is expected to be 4% in 2008. Against this backdrop, GDP at current prices is estimated at CFAF 877.6 billion in 2008. This level is expected to be achieved through: (i) support to cotton production with the establishment of the new cotton company backed by financing from the French Development Agency; (ii) improvement in the productivity of forestry companies as a result of the reallocation of old permits and intensification of the activities of SCAD, SEFCA and SCAF; (iii) the effective start-up of AURAFRIC operations; (iv) resumption of major road construction projects (Bouar Gara-Mboulaï, the rehabilitation of roads in Bangui); v) the continued expansion of telephone coverage in the interior of the country; and (vi) the ongoing public finance reforms. Regarding revenue, the fiscal revenue forecasts for 2008 are based on those for 2006 and 2007 revised upwards. This is because the recovery in revenue observed in 2008 and sustained by the provisions of the 2006 and 2007 Finance Laws, coupled with spontaneous developments and implementation of a series of administrative structural measures, have produced estimates of domestic resource levels of CFAF 98.5 billion, excluding external financial support. The structural measures concern the Government revenue collection offices. With regard to the General Directorate of Taxes, the efforts made in 2006 and 2007 must be consolidated and improved through: (i) broadening of the VAT base by removing VAT exemptions with the exception of transactions carried out by organizations operating on external financing, making those taxed at the minimum rate also liable for VAT and trading tax on the basis of their turnover, and the generalization of VAT deduction at source; (ii) intensification of targeted controls including stock controls, (iii) reporting of lease contracts known to be fictitious, and (iv) the systematic verification of logs bound for Douala.

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In addition to the impact of these measures, mention should be made of the incidence of the above-mentioned economic activities on the tax base: (i) establishment of the new cotton company with assistance from the French Development Agency; (ii) the effective start of operations of URAMINES-CAR and AURAFRIQUE; (iii) the impact of the regular payment of wages on consumption; and (iv) the opening up of forestry activities to new companies. As regards the General Directorate of Customs, improvements will relate to: (i) increased duties on timber, (ii) building the capacities of the Single Window in its role in ensuring the security of import flows, (iii) strengthening border teams for tracking imports into the interior of the country, (iv) acceptance of goods at the container terminal, (v) increased ownership of the ASYCUDA ++ computer tool, (vi) encouragement of the significant recovery in river traffic, (vii) pursuance of the reforms, (viii) control over oil taxes aimed at neutralizing the negative impact of the tax on petroleum products (TUPP) on government revenue, (ix) upward adjustment of the rate of export duty for logs, diamonds and rough gold; and. (x) excise duty on bulk wine, ethylic alcohol and tobacco at customs points. As regards the General Directorate of the Treasury, the Collection and Enforcement Department will consolidate its achievements by: (i) broadening the collection base in Ministries so as to improve collection of minor expenditures, (ii) mobilization of counterpart funds of Japanese grants to finance spending on the health, education and agriculture sectors, and (iii) mobilization of funds following the reassessment of the telecommunications fee. The contribution of external resources to investments rose from CFAF 27.8 billion in 2007 to 31.4 billion in 2008. They are solely comprised of subsidies to investment projects totaling 31.4 billion francs. This increase in external financing is due to the carry over to 2008 of the major road projects started behind schedule in 2007, and by projects in the electric power and water sectors. Furthermore, activities planned on external financing are predominantly in the social sectors. With regard to expenditure, Government expenditure is up 10% in relation to 2007. It rose from CFAF 136.8 billion in 2007 to CFAF 150.9 billion. The rigidity factors are significant; for example, compliance with community standards so that the budget deficit does not exceed 3% of GDP. The context is not very favourable for achieving this objective in light of the volume of debt service which remains high (31.5% of domestic resources) and new expenditure items to be covered. THE GOVERNMENT’S REFORM PROGRAMME With a view to guaranteeing the consolidation of economic growth and improving the social environment, the Government has undertaken to implement measures aimed at improving public financial management and governance.

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With regard to budget implementation and monitoring In order to improve the implementation and monitoring of the 2008 Budget which was adopted in conformity with the new budget nomenclature, the Government introduced a new procedure for the efficient management of public expenditures, and will appoint the heads of the General Directorates responsible for the Budget and Public Treasury. It intends to pursue monitoring with the production of a quarterly budget execution report from the commitment to payment authorization stages for at least four key Ministries (Equipment-Infrastructure, Education, Health and Agriculture), and then table the 2008 Audited Budget Bill before Parliament, which is one of the basic objectives of the programme. The strengthening operations planned under LICUS III will allow for the comprehensive integration of expenditures into the budget chain in order to finalize an administrative account and prepare the 2008 Audited Budget Law. With a view to strengthening the accounting system and improving monitoring of Public Treasury operations, the Government immediately closed inactive and settled accounts held in commercial banks. It also finalized the new accounting nomenclature and appointed Treasury officers in all Departments generating minor expenditures. However, in addition to the immediate closure of settled or dormant accounts, the reform programme proposes to carry out an audit of accounts that are still active in commercial banks. These accounts will be classified according to their nature, closure dates and their balances. Furthermore, an independent audit will review these accounts, and carry out a counter-audit of accounts with deficits to be cleared by the Government, and propose a method and final action plan for the closure and reorganization of Government accounts with commercial banks. To enhance the State’s credibility, we intend to proceed with the preparation of the government accounts for 2008. This constitutes a vital measure to improve transparency in public resources management. Apart from the operationalization of the new accounting nomenclature and the integration of all the menus of the revenue-generating Departments, the preliminary work to successfully implement this measure entails: (i) integrating all categories of accounts not covered in the public accounts and which were identified during the Treasury audit, and (ii) adjust the new nomenclature to integrate these accounts. It is also planned for IGF to begin an audit of domestic debts for 2005 to 2007 in order to establish an opening balance for 2008. The Trust Fund (LICUS III) includes modules to set up the required training courses, and to enable Treasury Agents to carry out this preparatory work. With regard to Revenue The Government is committed to improving the fiscal and customs administration. It has, therefore, decided to use ASYCUDA ++ to issue customs receipts for imports at the Port of Douala in Cameroon. Customs revenues at the Port of Douala are paid into a commercial bank in Douala following pre-inspection and, subsequently, transferred to commercial banks in Bangui. This reduces the amount of liquidity available to the State due to automatic

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withholding by commercial banks under the procedures for offsetting State debts to commercial banks whose interest rates are very high. The Government undertakes to transfer the customs revenues to BEAC and to concurrently implement a strategy to reduce and consolidate debt to commercial banks. On UNDP financing, the Government is completing an exhaustive countrywide survey of taxable citizens. The survey is being finalized, and on the basis of its findings the budget support programme is proposing to update the data base of the Directorate of Taxes and Customs and to make potential taxpayers subject to the tax system in force. In order to harmonize data on external trade transactions and improve their traceability, the budget support programme proposes that a computer link be established between the inspection company and the Directorates of Taxes and Customs. This activity will be financed under LICUS II. With regard to Improvement of the Public Sector and Governance In order to guarantee strengthening of the formulation, coordination and monitoring of government policies to fight corruption as well as optimal natural resource management, we have established a Permanent and Operational Anti-Corruption Committee at the Prime Minister’s Office. The fight against corruption will be intensified with the establishment of the Committee, which will be tasked with: (i) preparing a national anti-corruption strategy; (ii) drawing up an annual programme of anti-corruption actions to be carried out by the Government; and (iii) producing, publishing and disseminating to the general public an annual report on the efforts made by government in combating corruption. These measures aim to strengthen and coordinate the Government’s efforts and improve transparency and visibility in this key area. The Committee will include Government technicians from the key Ministries as well as representatives of the employers and civil society. The members of Government submitted their Assets Declarations to the Constitutional Court in 2007, in conformity with Law No. 44 of the Constitution of 24 December 2004. However, as the law does not stipulate any standard format for the Declaration, the declarations are not harmonized. Similarly, though the declaration has to be submitted to the Constitutional Court within 60 days of assuming office, the law does not make provision for sanctions in the event of default. It would be necessary to enhance the value of the Assets Declaration by: (i) determining a standard format for it (ii) providing practical instructions on how to fill out the Declaration; and (iii) envisage sanctions for delays or false statements, specifying the form and content of the Declaration and transitional provisions, among others. To that end, it was agreed with the Government that a Presidential decree on the disclosure of assets was necessary to reinforce this transparency measure. The Government will be supported by UNDP in the implementation of this measure. A public procurement strategy was prepared in 2006 with technical assistance provided by the World Bank. A revised draft code is ready and a legal expert has been recruited to finalize the Code. Another procurement expert from the African Development Bank is working on the internalization of the procurement strategy. Once the new

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Procurement Code has been adopted by the National Assembly, the next stages will consist in operationalizing the reforms by: (i) appointing the new members of the General Directorate of Procurement and the Regulatory Agency; (ii) producing procedures manuals and standard formats to be used; and (iii) operationalizing the procurement services in the four key Ministries (Equipment/Infrastructure – Education-Health- Agriculture) and producing a year-end activity report. Lastly, no documents have been uploaded on the Website of the Ministry (www.finances-rcagouv.com), thereby limiting the utility of the site. In an effort to improve transparency and enhance the visibility of State reforms, it has been agreed to increase the information available in the public domain by uploading the following documents: (i) mining and forestry concessions; (ii) Treasury reports; (iii) quarterly and annual budget execution reports; (iv) the Finance Law; (v) annual reports of the Anti–Corruption Committee; (vi) the anti-corruption strategy; (vii) new procurement, forestry and mining codes; (v) the Constitution and United Nations Convention against Corruption; (vi) form and practical instructions on how to fill out the Assets Declaration form. LICUS II and UNDP will contribute to the financing of this measure. To improve governance in the forestry sector, the Government has published a list of companies which have not adhered to the payment schedule for the payment of forestry taxes, and suspended the allocation of all new forestry permits until the new Forestry Code is promulgated. This is because a review of the legal and regulatory provisions in the forestry sector, as well as the situation of companies holding logging licenses, has revealed that some companies are not in good standing vis-à-vis the Government. Two examples have been observed: (i) active companies which are behind in the payment of taxes owed to the State, and which have three months to settle these taxes if the State decides on a moratorium, and (ii) new companies which have not honoured their fiscal obligations (equivalent to three months rent) within the timeframe stipulated in the decrees allocating them (14 days after the allocation decree). The texts in force stipulate that in the latter case, the permits should be revoked. We have proposed the strict enforcement of these regulations. Under the HIPC Initiative, and in order to confirm the option of rational and sustainable forest resource management, the Government, in 2006, undertook to review the Forestry Code with a view to improving the readability of the regulations as well as transparency and competition in the allocation of forest harvesting rights. Nevertheless, some permits were allocated following competitive bidding launched during 2007 pursuant to orders Nos. 003/MEFCPE/DIRCAB/DGEFCP/DIAF and 006/MEFCPE/DIRCAB/DGEFCP/DIAF of January and March 2007 respectively. The Government has suspended all new granting of permits until promulgation of the new Forestry Code. With a view to improving governance in the petroleum sector downstream, the Government has issued an official text establishing the new regulatory agency and has undertaken to appoint the members of the new regulatory agency responsible for controlling the pricing structure of petroleum products by end 2008.

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The role of the regulatory agency is to regulate the oil market in order to: (i) control the quality of the operators involved in the market by means of criteria established on the basis of regulatory texts; (ii) control product quality; (iii) regulate competition in the petroleum market in the CAR, and (iv) establish a pricing structure in conformity with the international prices that will enable the State to generate an adequate level of revenue in relation to the sector’s activities. The reform support programme suggests that for the agency to be effective, its personnel should be appointed on the basis of the established organization chart and should perform the duties assigned to them. A financing mechanism has been identified by the Government for the operation of the regulatory organ, and the World Bank will provide technical assistance for capacity building at the regulatory agency. In order to assure the quality of petroleum products imported into the CAR, we will sign a contract with an internationally renowned firm to carry out quality control of petroleum products on the spot. The Government is committed to bringing legislation governing the petroleum sector downstream into line with international practices on terms which are deemed satisfactory by the World Bank. To that end, the World Bank will provide the Government with the necessary expertise to achieve that objective. Building Public Investment Programming and Monitoring-Evaluation Capacities

The improvement in public investment programming and management initiated under the strengthening of good governance in the public and economic sector aims to review the institutional framework of public spending and renew and rationalize the instruments and procedures. Taking all these aspects into account requires a strong link between the objectives of the PRSP and public investment programming. The establishment of the Medium-Term Expenditure Framework (MTEF) should provide an opportunity to overhaul the public investment programming system. This constitutes a prerequisite for the optimal use of resources drawn under the HIPC initiative. These initiatives will be supported by the ADF-financed Planning Support Project (PARCE). To that end, the following measures will be taken by the Government, backed by its partners including the Bank: (i) publication of the Public Investment Programming and Monitoring/Evaluation Procedures Manual; (ii) organization of workshops for the operationalization and validation of the manual; (iii) adoption of the Procedures Manual by the cabinet Meeting; and (iv) training of Government employees. EXPECTED OUTCOMES The expected outcomes of this programme that we intend to extend over the medium term are first of all better coordination and harmonization of the activities of the development partners around the Government’s main priorities, as set out in the PRSP. We also aim at significant improvement in all areas of public financial management, not only at the level of the budget but also regarding accountability. We attach special importance to the improvement of public finance management through the smooth execution of the 2008 Budget and preparation of a fundamental reform of the civil service, which, in our view, constitutes a key element of our economic and social reform programme. With regard to governance, we intend to improve the business climate, which should translate into increased private investment, both national and foreign, especially in the forestry sector which could

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become an effective development pole in the future. Lastly, in the area of public resources management –both financial and natural – we aim to significantly improve governance in general and transparency, particularly concerning taxation.

INSTITUTIONAL FRAMEWORK FOR IMPLEMENTATION OF THE PROGRAMME

The programme will be implemented by existing structures which have demonstrated their capacity in the management of previous programmes, in particular, the two IMF-backed post conflict programmes, and the first phase of the Economic Reform Support Programme (ERSP I). They include the CTP-PAS. They will be bought together under an Inter-Ministerial Steering Committee comprising the Ministers involved in implementing the programme. These include, in particular, the Minister of State for Mines and Energy, the Minister of Forestry, the Minister of Justice, the Minister of Infrastructure, the Minister of Transport and Civil Aviation, the Minister of Finance and Budget, and the Minister of State for Planning, Economy and International Cooperation, who chairs the Committee. The Steering committee defines the strategic orientations of the works to be executed by the two programme management structures which report to it periodically through Government monitoring reports on the Programme’s implementation.

CONCLUSION

The Government of the Central African Republic seizes this opportunity to reiterate its commitment to efficient implementation of the programme described in this Development Policy Letter within two years. It is convinced that the efficient and satisfactory implementation of the programme will contribute to the recovery of the national economy on a sound and sustainable basis with a view to reducing poverty. In view of the reforms already implemented and in light of the objectives set in this programme and the outcomes achieved during the ERSP I and the PRGF-backed Programme, which are highly encouraging, the Government of CAR invites you to favourably consider its request of 14 April for a grant of US$ 10,000,000 in the form of balance of payments support, to finance the implementation of the reforms contained in the Economic Reform Support Programme II (ERSP II). ERSP II will seek to deepen these reforms in focus areas such as improved management of Government finance and natural resources, as well as other aspects of governance. To that end, it will contribute to improved governance (Pillar II of the PRSP), the preparation of diversification, and increased production (Pillar III of the PRSP) through provisions concerning improved security of investors in the forestry and hydrocarbon sectors. In the areas selected, it will entail laying the foundations and building the capacity of the State to pursue the restructuring of the country, while restoring confidence. In order to send a strong signal, the restoration of confidence will depend on the immediate adoption of a package of measures prior to submission of the grant proposal to the Board of Directors of the African Development Fund, which, if approved, signed and effective, would be disbursed in a single tranche.

With the implementation of the PRGF and ERSP II reforms, as well as the programmes of other development partners of CAR, we sincerely hope to reach the completion point of the enhanced HIPC Initiative as soon as possible since our external debt is now sustainable. Sylvain MALIKO

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COMMON MATRIX OF MEASURES OF THE WORLD BANK-AFRICAN DEVELOPMENT BANK PROGRAMME

Objective of Budgetary Programme jointly financed by WB and ADB

World Bank Prior Actions (by end March 2008)

ADF Prior Actions to be Completed by End August Following Stages to be Completed in 2008/2009

Outcome Indicator

A. IMPROVE PUBLIC FINANCE Improve budget execution and monitoring

Adopt new budget procedures and promulgate the related texts, and appoint key personnel at the Budget and Treasury Directorates as provided for in the new organization chart of the Ministry of Finance

Produce quarterly budget execution reports (from commitment to payment authorization stages) for the Ministries of Health, Education, Agriculture and Equipment/Infrastructure Preparation of the 2008 Audited Budget Law

Improvement in PEFA indicators as follows PI16 = C in 2009 PI17 = C+ in 2009 PI 12 = C in 2009 PI 21 = B in 2009

Immediate closure of dormant and settled Treasury accounts held in commercial banks

(i) Closure of dormant credit accounts and payment of their balances to the Treasury account; (ii) suspension of Transit accounts in favour of the Treasury account; (iii) submission of the preliminary IGF audit report on State debit accounts with a view to consolidating State debts to commercial banks.

Independent audit of active debit accounts with commercial banks Validation by IGF of the audit of domestic arrears for 2005, 2006 and 2007

- All inactive accounts closed by end 2008 - The balances on Treasury accounts paid back to the Treasury account by end 2008 - 10% reduction in stock of domestic arrears by end 2007.

Strengthen the accounting system and improve Treasury monitoring operations

Finalization and validation of the accounting nomenclature Redeploy Treasury agents to all Departments generating minor expenditure

Decree adopting the new accounting nomenclature Prepare the Government accounts for 2008

Improvement in PEFA indicators as follows: PI14 = C in 2009 PI15 = C in 2008 PI22 = C+ in 2009

Improve tax and customs administration

Use ASYCUDA to issue customs receipts for imports at the Port of Douala

Transfer customs revenue from the Douala Single Window to the account opened with BEAC. Update the SYSTEMIF and ASYCUDA taxable base on the basis of the findings of the countrywide surveys on taxpayers Transfer forestry revenue (BIVAC) to the Treasury account; Networking of data of the taxable base of the Tax and Customs Directorate and the pre-inspection company (BIVAC)

2009: Taxes/GDP according to IMF projections 10% reduction in the total stock of State arrears in relation to the end 2007 stock of arrears.

Tax burden up from 10.2% in 2007 to 12.9% in 2010.

Reduce domestic arrears to public utilities

Audit of cross-liabilities between SOCATEL, SODECA and ENERCA and the State by IGF and include a provision in the 2009 budget for the partial clearance of the debt

Audit of cross-liabilities between SOCATEL, SODECA and ENERCA and the State finalized in 2009

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COMMON MATRIX OF MEASURES OF THE WORLD BANK-AFRICAN DEVELOPMENT BANK PROGRAMME

Objective of Budgetary Programme jointly financed by WB and ADB

World Bank Prior Actions (by end March 2008)

ADF Prior Actions to be Completed by end August

Following Stages to be Completed in 2008/2009

Outcome Indicator

B. GOVERNANCE IN THE PUBLIC AND ECONOMIC SECTOR

Strengthen formulation, coordination and monitoring of Government anti-corruption policies

Decree establishing a Permanent Operational Anti-Corruption Committee at the Prime Minister’s Office

Issue an order appointing the members of the Permanent Anti-Corruption Committee

Production of an: (i) annual programme for 2009; (ii) annual report for 2008 ; and (iii) anti-corruption strategy Submission of the Assets Declaration for 2008 in conformity with the new decree by all officials concerned Adoption of texts concerning the Assets Declaration by members of Government including sanctions and a system of verification; prepare a standard form for the Declaration and practical instructions for filling out the form. Improve transparency in respect of information accessible to the general public

Corruption perception index improves from 2% in 2007 to 3% by end 2010 Website containing: (i) mining and forestry concessions; (ii) Treasury reports; (iii) quarterly and annual reports on the mining and forestry sectors (iv) Budget Act; (vi) new Procurement Code, Forestry Code and Mining Code.

Operationalize the procurement reforms following adoption of the new Code

Adoption of the new Code

Appoint the new members of the General Procurement Directorate and Regulatory Agency Operationalize the procurement services in the four key Ministries (Equipment/Infrastructure – Education-Health - Agriculture) and produce an annual activity report. Procurement effected in conformity with the new Code Carry out a review of the new Procurement Procedures (post-procurement review)

Systematic launching of competitive bidding following the new Procurement Code in 2009

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COMMON MATRIX OF MEASURES OF THE WORLD BANK-AFRICAN DEVELOPMENT BANK PROGRAMME

Objective of Budgetary Programme jointly financed by WB and ADB

World Bank Prior Actions (by end March 2008)

ADF Prior Actions to be Completed by end August

Following Stages to be Completed in 2008/2009

Outcome Indicator

Transparency in the mining sector Strengthen governance in the forestry sector

Process of accession to EITI speeded up Produce the list of companies which do not adhere to the schedule for payment of forestry taxes and revoke permits of those who do not comply with the regulations in force or the other provisions of the Allocation Decrees. Suspension of the granting of new permits pending the promulgation of the new Forestry Code and its implementing texts

Implement the EITI conventions Determine cross liabilities between the State and operators in the forestry sector and restore a regular VAT flow to be paid by operators

Proportion of mining revenue in relation to GDP rises from 3% in 2007 to 6% in 2010 The area covered by the Harvesting and Management Plan increases from 850,000 ha in 2007 to 3.5 million ha in 2010.

Strengthen governance in the petroleum sector downstream

Adoption of a decree establishing and appointing the members of the new Regulatory Agency

Sign a contract with a pre-inspection agency to control the quality of imported petroleum products. Establish legislation for the downstream petroleum sector in conformity with international practices

At least two operators working in the importation and distribution of petroleum products in conformity with national regulations and satisfactory control of petroleum products in 2009.

Strengthen public investment management, programming and monitoring and evaluation.

(ii) Organization of operationalization and validation workshops (iii)Adoption of the public investment management, programming and monitoring-evaluation procedures manual

Manual prepared, disseminated and operational in 2009

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CAR: Relations with the IMF

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ANNEX 5 CENTRAL AFRICAN REPUBLIC

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Principal Economic and Financial Indicators for 2004-2013

ANNEX 6 Page 1 of 3

CENTRAL AFRICAN REPUBLIC Economic Reform Support Programme II

APPRAISAL REPORT

Table of Government’s Financial Operations for 2004-2013

(CFAF Billion)

ANNEX 6 Page 2 of 3

CENTRAL AFRICAN REPUBLIC Economic Reform Support Programme II

APPRAISAL REPORT

Table of Government’s Financial Operations

(in % of PIB)

ANNEX 6 Page 3 of 3

CENTRAL AFRICAN REPUBLIC Economic Reform Support Programme II

APPRAISAL REPORT

Balance of Payments for 2004-2013

CENTRAL AFRICAN REPUBLIC Economic Reform Support Programme II

APPRAISAL REPORT Annex 7

SUMMARY ASSESSMENT OF THE IMPACT OF THE FOOD CRISIS Impact Over the past few months, the CAR has recorded high inflation on food products such as cassava (60%) which is the staple food of the populations, flour (100%), oil (94%), sugar (50%), rice (43%), milk (43%) etc. The inflationary pressure increased following the increase in fuel prices and water and electricity charges since 1 June 2008. The soaring prices of food and fuel would widen the external trade deficit and worsen the balance of payments deficit in 2008. Indeed, an assessment of the impact of soaring oil and cereals on the balance of payments of African countries, conducted by the IMF in June 2008, shows that the CAR is one of the 18 African countries hard hit. According to the IMF assessment, the impact on the trade balance is estimated at -2.5% of GDP in 2008 for the CAR. The food crisis would also increase poverty which affects about two-thirds of the population of the Central African Republic and would reduce consumption levels leading to diet deficiency and diseases. The soaring prices could lead to social tensions. Popular discontent is developing, and the social situation is rather volatile. Causes In addition to external factors, the food crisis has been compounded by a combination of internal factors: (i) the CAR is a big importer of agricultural and food products; (ii) low production and poor marketing channels; and (iii) the lack of organization of the sectors, etc. Government Response To address the situation, the Government in June 2008 took a number of measures to mitigate the negative impact of the soaring prices on the consumption and purchasing power of households. The first series of measures concerned the reduction of VAT from 19% to5% on staple foods and building materials, the reduction of income and corporate tax from 5% to 2%, and surveillance of staple products throughout the country. Initial solutions The budgetary situation of the CAR does not allow it to adopt a sustainable tax exemption or price subsidy policy. The only sustainable alternative is to increase local supply of agricultural and food products through: (i) the building of operational capacities; and (ii) support for the establishment of production and marketing infrastructures. Financing Requirements The short-term financing requirement would amount to CFAF 22 billion (equivalent to UA 32.6 million); it would cover: (i) the production and distribution of improved seeds (CFAF 650 million); (ii) fertilizers and pesticides in the cereal production zones (CFAF 1.4 billion); (iii) treatment instruments (CFAF 73.5 million); (iv) building the capacities of extension structures (CFAF 2.2 billion); (v) capacity building of the planning organ, monitoring and evaluation (CFAF 500 million); (vi) support for the development of short cycle livestock (CFAF 400 million); (vii) the rehabilitation of roads in high agricultural production areas (CFAF 14 billion); and (viii) revitalization of animal draught cultivation (CFAF 1.8 billion).

CENTRAL AFRICAN REPUBLIC Economic Reform Support Programme II

APPRAISAL REPORT Annex 8

LIST OF NON ELIGIBLE GOODS

1. Military and para-military goods 2. Luxury products and goods 3. All types of industrial waste and 4. Expenses relating to the goods which form part of groups or sub-groups of the

Standard International Trade Classification (SITC) or other groups or sub-groups under SITC future review framework, are excluded from the list of eligible imports.

GOODS CLASSIFICATION 112. Alcoholic beverages; 121. Raw or non-manufactured tobacco, tobacco wastes; 122. Manufactured tobaccos (even containing tobacco substitutes) 525. Radio-active and associated products; 667. Natural or cultured pearls, similar, raw or cultured stone gems 718. Nuclear reactors and their parts and spare parts, unspent combustible

products (nuclear reactor cartridges); 897. Gold, silver, platinum group metal jewellery (excluding watches and watch

cases) and related articles (including set precious stones); and 971. Non-commercial gold (excluding mineral or concentrated gold).