World Bank Documentdocuments.worldbank.org › curated › en › ...(SAL) to Zaire (Credit 1831-ZR) amounting to US$55.0 million equivalent and (Credit A-30-ZR) of the Special Facility

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 11832

PERFORMANCE AUDIT REPORT

ZAIRE

STRUCTURAL ADJUSTMENT LOAN(CREDITS 1831-ZR AND A-30-ZR)

APRIL 27, 1993

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Zaires

1985 - US$1.00 - 561986 - 711987 - 1321988 - 2741989 - 4551990 - 2,0001991 - 63,673

ABBREVIATIONS

ADB - African Development BankAF3CO - South Central and Indian Ocean DepartmentANEZA - Association Nationale des Entreprises du ZaireBOP - Balance of PaymentsCCA - Contribution sur le Chiffre d'Affaires (turnover

tax)CFF - Compensating Financing FacilityFCD - Fonda des Conventions de D6veloppementED - Executive Director (of the Bank)EEC - European Economic CommunityEFF - Extended Fund FacilityGECAMINES - La G6n6ral des Carri4res et des Mines

(State-owned copper mines)IDA - International Development AssociationIMF - International Monetary FundIFC - International Finance CorporationNGO - Non-Government OrganizationOED - Operations Evaluation DepartmentOFIDA - Office des Douances et AccisesOZAC - Office Zairois de Contr6leOZACAF - Office Zalrois du Caf6

PAR - Performance Audit ReportPCR - Project Completion ReportPFP - Policy Framework PaperPIP - Public Investment ProgramSAF - Structural Adjustment Facility (an IMF facility)SAL - Structural Adjustment LoanSDR - Special Drawing RightsSFA - Special Facility for AfricaSPA - Special Program of Assistance for Sub-Saharan

AfricaAFA - Special Facility for Sub-Saharan AfricaUNDP - United Nations Development Program

FISCAL YEAR

July 1 to June 30

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

April 27, 1993

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Performance Audit Report on ZaireStructural Adiustment Loan (Credits 1831-ZR and A-30-ZR)

Attached is a copy of the report entitled "Performance Audit Report on Zaire - StructuralAdjustment Loan (Credits 1831-ZR and A-30-ZR)" prepared by the Operations Evaluation Department.

This PAR draws on a frank PCR stressing the shortcomings of the operation. Probably the mostcontroversial aspect of the Zaire SAL was the reluctance of the Bank to draw the necessary conclusionsfrom the dualism between Government and the Presidency when making commitments on the central issueof public expenditure levels and composition with either the Bank, the IMF or the donors. This was a casein which the Letter of Development Policy was for the Bank a point of arrival in the agreement on theSAL, while given realities on the ground, it was not even a point of departure towards the internalnegotiations with the various ministries and agencies involved in the program-which customarily precedecompletion of negotiations.

Another aspect of the program was a top heavy blanket of reforms affecting most key economicpolicy areas. It clearly overestimated the absorptive capacity of the country, especially in the absence ofa unified and committed economic management team.

In April 1990, following the rejection by the President of the 1990 macroeconomic agreement justagreed by the Government with the Bank and IMF, the Bank elected to suspend processing of the threenew adjustment operations. To be sure, the efforts of the Bank in carrying out an adjustment program inZaire were not entirely wasted. Some white elephants were eliminated, elements of the tax reform wereput in place and, as stressed by the Region, the awareness level of the political and economic distortionsplaguing the country was enhanced while at the same time building up consensus among donors on the needto deal firmly with Zaire's non-compliance with the agreements under the adjustment programs. However,overall the operation is rated as unsatisfactory as the improvements were not commensurate with thefinancial and staff resources allocated.

Finally, the decision to go ahead with the SAL, while motivated by relatively good macroeconomicmanagement of the economy between 1983 and the first half of 1986 and by the legitimate desire of theBank to contribute to the development process of Zaire, was taken against very high odds: already in thesecond half of 1986 the general economic situation of the country was rapidly deteriorating and the doubtsas to the commitment of the Government were clearly indicated in the President's Report. The risksinvolved in the operation were well identified by the Bank but the assessment of the balances of forcessupporting and opposing the reforms should have suggested a less risky strategy grounded in investmentoperations with appropriate policy conditionalities.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contentsmay not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY


ZAIRE

STRUCTURAL ADJUSTMENT LOAN(Credits 1831-ZR and A-30-ZR)

TABLE OF CONTENTS

PAGE NO.

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iBASIC DATA SHEET . . . . . . . . . . . . . . . . . . . . . . . . iiiEVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . v


I. INTRODUCTION.................. . . . . 1

II. THE ADJUSTMENT PROGRAM: 1987-1989. . ........ . . 1

The 1987 Program . . . . . . . . . . . . . . . . . . . 1The 1989 SAL Supplement . . . . . . . . . . . . . . . 2

III. PERFORMANCE................ ... . . . . 2

The 1989 Pre-Effectiveness Mission..... . . . . . . 2The Supervision in March 1988 of the Second

Tranche Release...... . . . . 3Renegotiation of the Second Tranche Release in

March 1989. . ........... . . . . 3The December 1989 SAL Supplement and Ensuing

Coming Apart of the Adjustment Program . . . . 4Conclusions.. .............. . . . . 5

IV. MAJOR ISSUES. . ............. . . . . . . . 6

A. Design................. . . . 6

(i) Overview: Excessive Complexity ofthe Program........ . . . . . . 6

(ii) Insufficient Attention to Ownership . . . . 7(iii) Specific Components of the Program . . . . 7

(a) Tariff and Tax Reform..... . . . . 7(b) Civil Service Reform..... . . . . . 8(c) State Enterprise Reforms..... . . . 8(d) Financial Sector Reform..... . . . 9(e) Public Expenditure........ . . . 9

B. Implementation: Beyond Reasonable Risk . . . . . 10

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (Cont'd)

PAGE NO.

V. LESSONS OF EXPERIENCE. . ........... . . ..11

(i) On Risk-taking: The Need of a Redefinition . . . 11(ii) Avoid Much too Complex and Unrealistic Programs 12

(iii) The Need to Revisit the Concept of GovernmentOwnership of the Program... . . . . . ..12

(iv) Conclusions. . .......... . . . . ..13

PROJECT COMPLETION REPORT. . .......... . . . . . ..15

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE...... . . ..17

II. INTRODUCTION. . ............. . . . . ..17

Background.. ............. . . . ..17IMF Programs. . ............ . . . ..17Role of the Bank. . .......... . . . ..19Role of Other Donors. . .......... . . . ..22

III. SAL PREPARATION AND APPRAISAL. ........ . . . ..22

IV. IMPLEMENTATION............ ..... . . ..25

Effectiveness. . .......... . . . . . . ..25Second Tranche. . ........... . . . ..26SAL Supplement............. .... . .28Collapse of the Adjustment Program..... . . . ..29

V. SUPERVISION................. ... . .31

VI. CONCLUSIONS AND LESSONS LEARNED........ . . . ..32

PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE . . . . 35

PART III: STATISTICAL INFORMATION. ......... . . . . ..45

ANNEXES

1. Final Supervision Report.......... . . ..472. Matrix of Achievements. ......... . . . ..71


ZAIRE


PREFACE

This is a Performance Audit Report (PAR) on the Structural Adjustment Loan(SAL) to Zaire (Credit 1831-ZR) amounting to US$55.0 million equivalent and(Credit A-30-ZR) of the Special Facility for Sub-Saharan Africa (SFA) amountingto US$94.3 million equivalent and a Supplement of (Credit A-30-ZR) amounting toUS$14 million equivalent. The credits were approved in June 25, 1987, and becameeffective September 30, 1987. The credits were closed on December 1989.

The PAR was prepared by the Operations Evaluation Department (OED) and theProject Completion Report (PCR) was prepared by the South-Central and IndianOcean Regional Office. The PAR is based on the attached PCR, the President'sReport, the credit documents, credit and staff files, and IMF reports. OED staffinterviewed present and former Bank staff who had been associated with the workin Zaire, but were unable to visit Zaire due to country conditions.

The PCR provides a satisfactory account and assessment of the projectexperience, and discusses the performance of the Bank and the Borrower executingagencies.

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ZAIRE


BASIC DATA SHEET

LOAN POSITION(Amounts in US$ Million)

As of January 31, 1993Original Disbursed Cancelled Repaid Outstanding

Credit 1831-ZR 55.0 53.99 -- -- 53.99Credit A-30-ZR 94.3 93.54 -- -- 93.54Credit A-30-ZR

Supplement 14.0 14.62 -- -- 14.62

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS

FY88 FY89 FY90

Appraisal Estimate (US M) 82.5 165.0 --Actual (US M) 58.3 147.5 179.0Actual as % of Appraisal 71 89 --Date of Final Disbursement: March 8, 1990

PROGRAM DATES

Original Actual

Initiating Memorandum 02/25/87 02/25/87Letter of Development Policy 06/02/87 06/02/87Negotiations 05/21/87 05/21/87Board Approval 06/04/87 06/25/87Credit Agreement 07/29/87 07/29/87Effectiveness 09/30/87 09/30/87Credit Closing 12/31/88 12/31/89Actual Completion -- 06/30/90

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MISSION DATA

No. of No. of Staff Dateof

Month/Year Weeks Persons Weeks Report

Preparation 03/86 n.a. n.a. n.a. 12/86Appraisal 03/87 n.a. n.a. n.a. 04/87Supervision Total 87/91 n.a. n.a. 206.7 n.a.Completion 09/90 n.a. n.a. n.a. n.a.

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ZAIRE


EVALUATION SUMMARY

Introduction structural adjustment operation fromthe Bank.

1. This is the audit of the Struc-tural Adjustment Loan to Zaire for SAL's Componentswhich IDA Credit 1831-ZR amounting toUS$55 million equivalent and Credit A- 3. Based on a Policy Framework Paper30-ZR of the Special Facility for Sub- (PFP) approved by the Bank and IMFSaharan Africa (SFA) amounting to Executive Directors in April 1987, the$94.3 million equivalent were approved SAL was designed to support reforms inin June 1987 followed by a SAL Supple- the fields of taxation, public expen-ment on SFA Credit A-30-ZR in December diture, civil service, public enter-1989 of US$14 million funded from the prises and in the financial, agricul-positive exchange rate differential in tural and transportation sectors. Athe Special Facility for Sub-Saharan Bank sectoral adjustment loan, sup-Africa (SAF). The purpose of the porting the Government's industrialWorld Bank's SAL was to support the reforms had already been prepared andGovernment's structural adjustment became effective in January 1987.program aimed at stabilization andsustained economic growth. Implementation Experience

2. Following a period of rapid 4. As acknowledged in thegrowth between 1961 and 1974, the President's Report, the SAL was a highresult mostly of favorable copper risk operation, having to face, amongprices, the economy of Zaire deterio- others, a doubtful capacity and will-rated until 1982, due to unfavorable ingness of the Government to implementcopper price trends and weak domestic the program. Already, a pre-effec-policies leading to rising budget tiveness mission had raised seriousdeficits and inflation as well as concern in the Bank about large uneco-increased overvaluation of the cur- nomic investments outside the Publicrency. The situation improved sig- Investment Program (PIP) and politicalnificantly between 1983 and early 1986 interferences threatening the fiscalas a result of a strong stabilization reform. Nevertheless, in Septembereffort, supported by three IMF stand- 1987, the Bank, having received assur-by arrangements, large debt reschedul- ances on these two issues, declareding and drastic reforms of the the loan effective.exchange rate system. Adverse termsof trade during 1986, and lax fiscal 5. The Region maintains that, whilepolicies caused a rapid deterioration being well aware of the risksin the country's economic situation, involved, the relatively good macro-leading to a request for a new stand- economic management during the 1983-86by arrangement with the Fund and a period and the window of opportunity

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provided by the SAL to introduce much SAL supplement, approved by the Boardneeded reforms, tipped the balance in in December 1989.favor of going ahead with the SAL. Inretrospect, however, the Bank could 9. Throughout this period, the Bankhave opted for a lower profile based had however been increasingly con-on investment operations. And this is cerned about the control and compo-particularly true considering that sition of public expenditure. Impor-already during the second half of 1986 tant non-developmental projects werethe economic situation was deteriorat- being carried out outside the PIP,ing rapidly and that some reforms financed mostly through better thancould still be introduced through expected copper prices and higher thaninvestment operations. expected revenue due to the success of

the fiscal reform. In connection with6. Between the end of 1987 and the the SAL supplement operation, the Bankbeginning of 1988, the economic situ- had obtained assurances that the Coy-ation deteriorated, due to an overhang ement would take measures to remedyof unrecorded expenditure from the the public expenditure problems.first half of 1987. The 1987 credit However, in March 1990, the Presidentceiling was surpassed, and in early rejected the 1990 macroeconomic frame-1988 the Government started accumulat- work which the Government had justing arrears on foreign debt, while agreed with the Bank and IMF, whileslipping on fiscal measures agreed stating its intention to continue theupon with the Bank in the framework of public expenditure programs which werethe SAL. As a result, the release of inconsistent with the levies and thethe second tranche, originally sched- spirit of the adjustment program. Asuled for March 1988, was suspended. a result, the Bank, in April 1990,

advised the Government of its decision7. Following (a) the appointment of to suspend the processing of the threea new Prime Minister in late 1988 and new adjustment operations.the introduction of serious stabili-zation measures, including accelerated 10. The three-year effort (1987-1989)devaluation of the currency, rise in by the Bank to introduce serious me-interest rates, taxes and petroleum forms in Zaire through structural andprices; (b) the formulation of a new sectoral adjustment loans did notmacroeconomic framework agreed with succeed particularly due to the Goy-the Bank and IMF, including a revised ement impotence to control publicPIP for 1989-1991; (c) a number of expenditure. This nullified much ofreforms concerning public enterprises; the reforms affecting the exchangeand (d) assurances received from rate, the revenue structure, the pub-Zaire's President that the Government lic enterprise efficiency and thewould adhere to the budget objectives, reorganization of the financial, agri-the Bank, in June 1989, decided to cultural and transport sectors. To-release the second SAL tranche. gether with the massive disruption

caused by political transition, this8. During the second half of 1989 led to an unsustainable balance ofthe Government obtained some success payments situation, a sharp decline inin implementing the agreed upon pro- the welfare of the population andgram, particularly with respect to prospects of a continued decline inreduction in the inflation rate. economic growth.Partly in recognition of this prog-ress, and partly in view of lower than 11. The Region has pointed out that aprogrammed aid disbursements, Bank critical view of the SAL's shortcomingmanagement recommended a $14 million should not obscure its achievements,

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especially with regard to cancella- librium prevailing in 1987, with in-tion/postponement of some important flation levels of 90 percent.non-economical projects increasedawareness of the authorities of the (ii) Insufficient Attention to Owner-many distortions in the system, and shiRbuilding consensus among donors ondealing firmly with Zaire's non-com- 13. In designing the various compo-pliance with the agreements under the nents of the reforms included in theadjustment programs. Certainly, Bank SAL, not enough effort was made toinvolvement produced positive results. assess the likelihood that the select-However, these benefits were not com- ed reforms would find sufficient po-mensurate with the financial and staff litical will for their implementation.resources invested in the SAL. The resulting complexity of the pack-

age is a serious design defect. Pro-MAJOR ISSUES cessing of the SAL supplement early in

1989, compounded the flaw--and wasA. Design even less justifiable given that the

experience during the first and second(i) Excessive Complexity of the Pro- tranche release process should have

gra indicated that Zaire, taking intoaccount the behavior of the Presiden-

12. As indicated earlier, the Zaire cy, clearly would not own the essen-SAL included reforms in the following tial components of the SAL program, inareas: tariff and tax reform, public its original as well as revised formu-investment program, civil service, lation. The Region maintains that inpublic enterprises, financial sector, 1989 there was good progress in imple-agricultural sector and transport mentation of agreed reforms. Thesector. This constitutes a formidable decision to grant a SAL supplement waspackage to be absorbed by any country intended to encourage the continuationand Zaire, at the time of the SAL of the revitalized reform process andformulation, was certainly not as well strengthen the hand of the reformistplaced to implement it than the typi- elements in the Government.cal SAL country. When considering thepackage of public sector related re- 14. The Region has indicated itsforms, the public enterprise reform consistent efforts in seeking andpackage was of lesser priority than often obtaining from the Governmentthe measures affecting the operation formal commitments, as well as up-of the central Government, especially front action--especially before re-since the studies to precede the im- leasing the second tranche. However,plementation of the public enterprise as indicated in the PCR, the Bank wasreform were a major and lengthy pro- often satisfied with formal commit-cess and very little impact was to ments which soon after having beencome from them in the short term. On made showed no intention by the Goy-the other hand, considering the macro- ement of making good on them.economic imbalances that the countrywas facing at the time of the SAL (iii) Specific Components of the Proappraisal mission, the agricultural graand transport sectors did not have tobe included in the SAL. By the same 15. No particular design issues aristoken, the financial sector reform, as with respect to the transport andcorrectly indicated in the Final Su- agricultural sector reforms. Both,pervision Report (para. 58), was high- however, failed to produce the expect-ly vulnerable to the disturbances of ed results. For transport, the mainthe financial and macroeconomic equi- issue was a persistent lack of local

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funds; for agriculture, a negative state-owned enterprises; (b) diminishinvestment climate by the private its share in mixed enterprises; (c)sector. liquidate nonviable state enterprises;

(d) increase efficiency, managerial(a) Tariff and Tax Reform freedom, and accountability through

objective setting and performance16. The objectives of the tax reform audits for public enterprises; and (e)were: (a) broadening of the tax base; change the legal and supervisory(b) improving the incentive structure; framework for the state-managed sec-(c) increasing the elasticity of the tor. Unfortunately, in early 1988 thetax system to inflation. On the minister responsible for public enter-whole, the design of the tax reform prises changed and from there onwardsprogram was too demanding to be imple- the situation rapidly deteriorated.mented by the Zairian administration From March 1989, when the new programwithin a relatively short time. Fur- was agreed upon with the Bank andthermore, it was established without Fund, the lack of progress in stateadequate consultation with the private enterprise reforms became the mainsector and did not take into account obstacle to the second tranchethe Zairian reality of negotiating tax release. Two design issues arise inpayments. Finally, the attempted relation to the state enterprise re-introduction of the value-added tax form. First, Zaire reform program didwas premature. not focus on the enterprises where

most was to be gained from privatiza-(b) Civil Service Reform tion: GECAMINES, the Kilo Moto gold

mines and the MIBA diamond mines. The17. Reform of the civil service aimed first two, however, were being consid-at rationalizing and reducing Govern- ered outside the SAL framework by thement staff, improving the salary Bank and IFC, respectively. Second,structure and enhancing personnel the preparation of this component ofmanagement. The program called for a the SAL was done in secrecy, almostsalary reform not substantially adding exclusively with the Minister of Port-to the public wage bill, a totally folio without securing broader politi-unrealistic target, considering that cal support. Relying on one support-the obtainable 5 percent reduction in ive minister, who soon after wasstaff could not significantly contrib- changed, was a high risk strategy.ute to the financing of the intendedreforms. More seriously, as the final (d) Financial Sector Reformsupervision report clearly states, thereforms would have required strong 19. This component of the program didpolitical support and financial re- not even reach the design stage. Lacksources to cushion the initial impact. of adequate studies at the time of theBoth elements were absent at the time SAL preparation and poor quality ofof Board Approval. the study prepared with the help of

Bank financing, led the Bank to launch(c) State Enterprise Reforms a financial sector operation. Howev-

er, following several missions during18. At the time the structural ad- 1988 and 1989 to prepare the credit,justment program was appraised, the the work was discontinued in 1990 whenGovernment had already made substan- the adjustment program collapsed.tial progress in this area. Under thestructural adjustment program, the (e) Public ExpenditureGovernment was committed to: (a)privatize a substantial part of com- 20. While the composition of publicmercial activities carried out by investment envisaged by the PIP was

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sound, with focus on rehabilitation of course of that year, public expendi-existing infrastructure and greater ture was again running out of controlemphasis on social sectors, it had no as reflected in the December supervi-legal status and this was a major sion mission report. Clearly, anddesign flaw. In contrast with what particularly starting with the momentwas agreed with the Bank, the PIP was immediately following the 1987 approv-not publicized through a circular al of the SAL, the Zaire Governmentletter from the Prime Minister to gave sufficient indications of notministers and managers of state en- owning the program in its criticalterprises. The Government never ac- components, given the dominant role ofcepted the PIP as the exclusive in- the Presidency vis-&-vis the Govern-strument for public investment. As a ment when it came to determine theresult, throughout 1987-1989, uneco- level and composition of public expen-nomic projects were continuously diture. Zaire in the late 80s was alaunched outside the PIP framework. country involving prohibitive risksAs a final touch, in March 1990, the for adjustment lending.Government notified the Bank that thechoice of investment projects was an LESSONS OF EXPERIENCEact of sovereignty and that it haddecided to move ahead with several (i) On Risk-taking: The Need of aprojects which did not comply with the Redefinitioneconomic criteria agreed upon with theBank. Nevertheless, through its dia- 22. The experience with the Zaire SALlogue under the SAL, the Bank, as raises the general issue of risk anal-mentioned in para. 11, succeeded in ysis in structural adjustment loans.eliminating or postponing some impor- A sentence in the Conclusions andtant non-economic projects. Lessons Learned section of the last

supervision report illustrates itB. Implementation: Beyond Reasonable well: "In hindsight, the timing of

Risk this operation was unfortunate becausethe Bank's structural adjustment ef-

21. As clearly stated in the forts were launched in 1986 when thePresident's Report and in the PCR, the Government's commitment to reformBank took a series of risky decisions began to disappear" (para. 44). Thisby presenting the SAL to the Executive is a case in which exercising normalDirectors for approval, by releasing "foresight" should have convinced thethe second tranche and by granting a managers in charge of the loan thatsupplement. These risks did not pay the conditions for a structural ad-off. Were the risks realistically justment operation were not present.assessed? Economic performance at the While the President's Report are moretime of Board presentation was already often than not candid about indicatingdeteriorating at a fast pace, so that the risks as far as the implementationthe Bank was not able to release the of the program is concerned, thesesecond tranche in March 1988. Was the risks are often simply listed. Norelease of the second tranche in June probability coefficient is attached to1989 a calculated risk? As the PCR them and no explicit assessment of thestates, the Government met the formal balance of forces supporting and op-conditions for the second tranche posing reform underlies the decision.release, without, however, making much Therefore, the risks are not reallyprogress on the substance of the re- "calculated". The argument, containedforms. And finally, wasn't the grant- in the Zaire PCR as in many others,ing of the supplement in December that if one had hindsight certain1989too bold a gamble? Already in the programs would not have been launched,

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only holds if reasonable foresight had reforms were out of the Zaire realitybeen exercised at the time of the considering the highly unstable macro-decision. This was probably not the economic situation and having startedcase with the Zaire SAL. with a poor basic study was certainly

of no help; finally, the two sector(ii) Complex and Unrealistic Programs reforms, agriculture and transport,

vs. Governance completely ignored the reality of,respectively, lack of interest by

23. A country, which is in the midst private investors and lack of localof serious disequilibria, with a poor funds by the Government.record of sustained economic gover-nance should not be smothered under a (iii) The Need to Revisit the Conceptthick blanket of reforms affecting of Government Ownershipmost of the key economic policy areaseven if it is led by a unified and 25. The first and single most criti-committed economic management team. cal aspect of the Zaire SAL was theWhere, in addition, leadership is inability of the Bank to draw thefragmented, such an approach is utter- right conclusions from the dualismly unrealistic. It is somewhat sur- between Government and Presidency whenprising that the Bank, in Zaire, be- it came to making commitments with ei-haved as if the SAL was the first ther the Bank, or the IMF, or theoperation in that country. After all, donors. This means that the Bankthe Bank had been carrying out opera- should not have considered the initialtions in Zaire for years, thus having Letter of Development Policy and thethe opportunity to gather the best subsequent second tranche release andpossible fix on the country's absorp- SAL supplement letters as acts reflec-tive capacity. Embarking on a very ting a real ownership by the Govern-complex reform program, only to real- ment of Zaire. And the PCR recognizesize soon thereafter that the country it. Often, the Letter of Developmentwas not ready for that program proved Policy is for the Bank a point ofvery wasteful. Where was the Bank's arrival in the agreement on the SAL,institutional memory at the time of while in fact it represents, even forthe SAL? the most committed Government, a point

of departure towards complex internal

24. As the PCR recognizes, practical- negotiations with the specific minis-ly all the components of the reform tries and agencies from whom the im-program had unrealistic goals within plementation of the program depends.the time frame of the adjustment oper- Neglecting to make sure that thoseation. For tax reform was an issue of ministries and agencies are really onthe responsible departments not being board is a likely cause of seriousequipped to carry it out; in the case disappointment at a later stage. itof public expenditure it was pretend- is as if a funding decision for a daming that the PIP would be the only was granted without appropriate soilchannel for public expenditure, ignor- surveys or engineering designs.ing the reality of a very active Pres-idency with its own program; for pub- (iv) Conclusionlic enterprises the Bank chose an"enclave" approach putting its whole 26. The purpose of SALs is to helptrust on the secretive initiative of a Governments to bear the immediate costcan-do minister, soon to be evicted of complex and much needed reforms.from Government; as to the civil ser- Adoption and implementation of reformsvice, poor design and lack of politi- is not a rapid process. Failure tocal support were the main causes of fully appreciate the time needed forthe failure; the financial sector reform implementation as well as fail-

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ure to understand, once the initial 27. The decision making model wherebytranche of any program has been dis- an economic crisis can, with judiciousbursed, that the Government is not advisory and financial support, elicitable or willing to carry out the re- a commensurate policy response has va-forms, often leads the Bank, as in the lidity. But it cannot be extrapolatedcase of Zaire, to doggedly pursue to situations where the objectivesterile renegotiations with Govern- political and administrative condi-ments, even as the program unravels tions are utterly inappropriate forand eventually collapses. coherent reform design and implementa-

tion.


ZAIRE

STRUCTURAL ADJUSTMENT LOAN

(Credits 1831-ZR and A-30-ZR)

I. INTRODUCTION

1. Mostly as a result of favorable copper prices, the economy of Zaireexpanded rapidly from 1967 to 1974. The expansion led to high investment andforeign borrowing. The poor quality of much of the investment, together with asharp fall in copper prices by 1974 and the failure to adjust economic policiesto the new situation, brought about rising budget deficits and inflation andovervaluation of the currency. Thus, between 1974 and 1982 the economydeteriorated, real GDP per capita declined and external arrears attained SDR 850million by the end of 1982. A strong stabilization program was adopted in 1983and for the following two and a half years, with the support of three stand-byarrangements from the Fund, large debt rescheduling and a drastic reform of theexchange rate system, the economy improved significantly, with GDP growthresuming although below the population growth rate. During the second half of1986, a sharp deterioration in the terms of trade, accompanied by a lax fiscalpolicy and consequent strong monetary expansion caused increases in domesticprices and overvaluation of the currency. At this point both the Fund and theBank were called in, leading to a new stand-by arrangement with the Fund and arequest for structural adjustment operations from the Bank.Y

II. THE ADJUSTMENT PROGRAM: 1987-1989

The 1987 Program

2. The 1987 SAL was approved by the Board in June 1987. The SAL wasdesigned to support reforms in the fields of taxation, public expenditure, civilservice, public enterprises and in the financial, agricultural, andtransportation sectors.! The IDA credit of $55 million and SFA credit of $94.3million were supplemented by Japanese cofinancing to provide a total financingpacking of $165 million.

3. A Policy Framework Paper (PFP) had been previously formulated andapproved by the Bank and IMF Executive Directors in April 1987. The SAL had beenappraised in February of that year, a four month delay with respect to theoriginal schedule. The delay was due to the fact that a meeting of the Zaire'sruling party in October 1986 had endorsed proposals representing a reversal ofthe liberalization measures undertaken since 1983. Following strong

!' A sectoral adjustment loan, supporting the Government's industrial reformshad already been prepared and became effective in January 1987.

1i The specific content of the various reforms is discussed in detail in thesection below on Major Issues.

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representation by the Bank and IMF, President Mobutu visited Washington inDecember 1986, after which the agreed upon content of the SAL was confirmed ina letter by President Mobutu to Mr. Conable dated January 7, 1987.

4. On the basis of the PFP and the Letter of Development Policy to thePresident of the Bank signed by the President of Zaire, the Bank convened theConsultative Group in May 1987 obtaining sufficient indications towards financingthe agreed public investment program. At the same time, the Paris Club and theLondon Club rescheduled a large part of the outstanding arrears and current debtservice obligations under very favorable conditions. In May 1987, the IMP Boardapproved a stand-by arrangement for the equivalent of $129 million, $58 millionfrom the Compensatory Fund Facility (CFF) and a joint annual arrangement underSAP for the equivalent of $75 million.

The 1989 SAL Supplement

5. The disbursement of second tranche of the SAL, envisaged for March1988, was postponed to June 1989 mainly because of high unbudgeted publicexpenditure and overshooting of the monetary financing of the budget deficitagreed with the IMF. A new macroeconomic framework was agreed upon in May 1989.

6. Following the second tranche release, and a temporary favorable turnin macroeconomic policies, in late 1989 the Bank management recommended a $14million SAL supplement, which was approved by the Board in December 1989.

III. PERFORMANCE

The 1989 Pre-Effectiveness Mission

7. The complexity of the program, as indicated in the PCR, and, onemight add, misgivings by the Bank as to the ability of the Government to carryit out, led to a Bank pre-effectiveness supervision mission aimed at making surethat certain conditions were adhered to. These conditions were:

(a) The consolidation of the function of the Office Zairois deContr6le (OZAC) and the Office Zairois du Caf6 (OZACAF) incoffee marketing.

(b) The elimination of earmarking of the turnover tax (CCA) onfinal products so that the full proceeds of this tax would bepaid over to the Treasury.

(c) The initiation of legal proceedings for the liquidation of theInstitut Zairois de Management, the Centre de CommerceInternational, and the Office National de Logement.

(d) The completion and computerization of the census of civilservice positions and staff; the elimination from the payrollof vacant positions.

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The Supervision in March 1988 of the Second Tranche Release

8. Two findings of the pre-effectiveness mission raised serious concernswithin the Bank. First, large uneconomic investments were taking place outsidethe Public Investment Program. Second, political interference threatened thefiscal reform process. Nevertheless, the Bank, having received writtenassurances by the Government in September 1987 on these two issues, declared theloan effective.

9. Partly as a result of an overhang of unrecorded expenditure from thefirst half of 1987, the 1987 credit ceiling to the Government was surpassed.Furthermore, in early 1988, the Government started accumulating arrears onforeign debt (including its obligations to the IMF); it also started slipping onmeasures agreed with the Bank in the framework of the SAL. As a result, releaseof the second tranche, originally for March 1988, was suspended.

10. The economic and fiscal situation deteriorated rapidly during 1988until, in November of that year, a new Prime Minister was appointed. TheGovernment then took serious stabilization measures in late 1988/early 1989,including an accelerated devaluation of the official exchange rate and increasein interest rates, taxes and petroleum prices.

Renegotiation of the Second Tranche Release in March 1989

11. In March 1989, a new macroeconomic framework was agreed with the Bankand the IMF. The specific conditions for the second tranche release were:

(a) Agreement on a revised macroeconomic framework for 1988-91,including the level and composition of the 1988-91 PublicInvestment Program./

(b) Establishment of an oversight structure to supervise publicenterprises; the appointment of its head.

(c) Classification of enterprises to be maintained in the stateportfolio, liquidated, or wholly or partially privatized.

(d) Finalization of a restructuring and reorganization program forpublic enterprises remaining in the state portfolio.

(e) Completion of financial and administrative arrangements forthe retirement of eligible public employees.

As will be discussed later, the Government met these formal requirements,without, however, making much progress on the substance of the reform program.

12. The macroeconomic framework for 1989 as agreed upon in March of thatyear was adapted to the changed economic circumstances in that year; it put

1t Because of the interruption of the program in 1988 these dates were slippedby one year.

renewed emphasis on economic stabilization and removal of economic distortions.To defend the program against the consequences of multiple centers of expenditureauthorization, the Bank urged Zaire's President to make the Prime Minister thesole authority for approving public expenditures. Given the budget overruns onexpenditures for the Presidency in the first quarter of 1989 and plans forinvestment outside the PIP framework, the Bank sought and obtained assurancesfrom the President that, this time, the Government would adhere to the budgetobjectives. On the other components of the program, the Government reconfirmedits initial objectives, redesigned the calendar of measures, and formalized itseconomic program in a second Policy Framework Paper (PFP). On the basis of theseresults, the Bank declared itself "satisfied with the progress achieved by theBorrower in the carrying out of the Program," as required under the terms of thecredit agreement. Bank management informed the Board of its decision to releasethe second tranche by its memorandum IDA/SecM89-207, dated June 7, 1989.

The December 1989 SAL Supplement and Ensuing Coming Apart of the AdjustmentProyram

13. Following the second tranche release, the Government implemented theeconomic program forcefully and exceeded the target for reducing inflation. Atthe same time, lower than programmed aid disbursement- was creatingdifficulties for the Government in meeting and facing its external obligations.Therefore, in December 1989 Bank management recommended a $14 million SALsupplement.

14. However, throughout 1989, the Bank had concerns about the control andcomposition of public expenditures. Although below their 1988 level,nondevelopmental expenditures were again running well above the budget targets.Moreover, the Government was known to be planning new nondevelopmentalexpenditure projects for the 1990/91 period. Among these were an uneconomicextension of the Mobayi hydropower project, expenditures related to the planned1991 Summit Conference for the Francophony in Kinshasa, the triple nationalcelebrations in 1990, and other uneconomic investments prepared outside the PIPframework. Even so, the Bank staff was hopeful that the Prime Minister, who wascommitted to the adjustment program and who had a reputation as a strongadministrator, would be able to control the situation. In 1989, the Governmenthad been able to increase nondevelopmental expenditures while adhering to theagreed ceiling on deficit financing because (a) the fiscal reforms had startedto become effective and had produced higher than expected tax revenues; (b)copper prices were higher than projected, which created windfall tax revenuesfrom the state-owned mining company, Gecamines; and (c) the debt serviceobligations agreed under the June 1989 debt rescheduling were lower thanprojected for that year. By the end of 1989, the Bank became increasinglyconcerned, however, with the composition of public expenditure and thepossibility of large unrecorded extra budgetary outflows. In particular, the

1 Due in part to difficulties in negotiating an Energy Sector Adjustment Creditwith the Bank.

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financial relationship between the Government and state enterprises remainedunclear.-

15. During the supervision mission in December 1989, the Bank staffhighlighted the need to strengthen control on public expenditures and proposedthe following measures: a ceiling on total nondebt expenditures; protection ofa core program of development expenditures; arrangements on the use of possiblewindfall revenues from copper or other sources; measures to increase thetransparency in the use of public resources; reconfirmation of the agreements onthe Public Investment Program, together with the creation of a legal status forit.

16. The staff recommended the SAL supplement only after receivingassurances from the Prime Minister that the Government would remedy the aboveproblems and would agree with the measures proposed by the Bank staff in the 1990program (letter PCR/01/bb/845/89 of the Prime Minister to the Senior VicePresident Operations of the Bank). The Bank also decided that a trial period ofseveral months was necessary to determine the Government's ability to implementthe agreed measures before additional structural adjustment lending could beconsidered. This position was confirmed in a letter dated February 8, 1990 fromthe Regional Vice President to the Minister of Finance (Governor of the WorldBank for Zaire), copied to the Prime Minister.

17. Despite earlier assurances by the Prime Minister, in March 1990 thePresident rejected the 1990 macroeconomic framework which the Government'seconomic team had just agreed with the Bank and IMF staff. The Governmentannounced that it would continue the planned expenditure and investment programscited by the Bank as inconsistent with the letter and spirit of the adjustmentprogram. In the absence of an agreed macroeconomic framework, the Bank suspendedthe processing of three new adjustment lending operations and advised theGovernment of its decision in a letter dated April 17, 1990 from Mr. Isenman(Director AF3) to the Minister of Finance.

Conclusions

18. The three-year effort (1987-1989) by the Bank to introduce seriousreforms in Zaire through Structural and Sectoral Adjustment Loans did not succeedand events in the country over the last two years have confirmed a continuingsituation of total economic disintegration. At the center of the failure of theBank's program, and more important, of the country's development effort, has beenthe impotence in controlling public expenditure and in particular in preventinglarge outlays outside the budgetary framework.

11 The Bank staff had received information about irregular financialarrangements between some state enterprises and the Government, but could notobtain confirmation. In addition, the Bank became concerned about the steepincrease in production costs at Gecamines. Some of the Bank staff's concernsabout financial arrangements between state enterprises and the Governmentintensified when, in 1990, the Government started to pay monthly installments of$10 million to service external debt contracted in 1989 through financialarrangements on which there was no detailed or satisfactory information.

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19. The uncontrollable public expenditure has negated much of the reformsaffecting the exchange rate, the revenue structure, the public enterprisesefficiency, the reorganization of the financial, agricultural and transportsectors. In turn, it has led to an unsustainable balance of payments situation,thus leaving the country open to serious immediate decline in the welfare of thepopulation because of shortages of imported goods and to prospects of continueddecline in growth because of constraints on imported development oriented capitalgoods.

20. The Region has pointed out that a critical view of the SAL'sshortcoming should not obscure its achievements, especially with regard tocancellation/postponement of some important non-economical projects, enhancementof the awareness of the many distortions in the system, and building consensusamong donors on dealing firmly with Zaire's non-compliance with the agreementsunder the adjustment program. Certainly, Bank involvement produced positiveresults. However, these benefits were not commensurate with the financial andstaff resources invested in the SAL.

IV. MAJOR ISSUES

A. Design

(i) Overview: Excessive Complexity of the Program

21. As indicated earlier, the Zaire SAL included reforms in the followingareas: tariff and tax reform, public investment program, civil service, publicenterprises, financial sector, agricultural sector and transport sector. Thisconstitutes a formidable package to be absorbed by any country and Zaire, at thetime of the SAL formulation, was certainly not better placed to implement it thanthe typical SAL country.

22. While there is no doubt that all the areas indicated above were inneed of reforms, this does not mean that all those reforms should have beencarried out at the same time. Considering the macroeconomic imbalances that thecountry was facing at the time of the SAL appraisal mission, certainly theagricultural and transport sectors did not have to be included in the SAL. Andif the concern was to address key sectoral issues, one should remember that anIndustrial Structural Adjustment Loan had been processed just before the SALwhile an Energy Structural Adjustment Loan was already contemplated.

23. By the same token, the financial sector reform was being introducedin the SAL having as a main goal the creation of a market determined financialsystem. As correctly indicated in the Final Supervision Report (para. 58), thisreform was highly vulnerable to the disturbances of the financial andmacroeconomic equilibrium prevailing in 1987, with inflation levels of 90percent.

24. When considering the package of public sector related reforms, anissue of priority intervention in the design of the package arises, especiallytaking into account that the primary objective of the SAL had to be bringinggovernment effective demand to a much lower and controllable level. In this

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respect, the public enterprise reform package was of lesser priority than themeasures affecting the operation of the central government. First, as it regardsselling of government enterprises, the political pressure in the Zaire contextto "undersell" was quite strong, thus reducing the potential gains to theTreasury. Secondly, the studies to precede the implementation of the publicenterprise reform were a major and lengthy process and very little impact was tocome from them in the short term.

(ii) Insufficient Attention to Ownership

25. In designing the various components of the reforms included in theSAL, not enough attention was paid, regardless of the statements of theGovernment as a whole (or of specific ministries and agencies), to the likelihoodthat those reforms would find sufficient political will for their implementation.While the specific ownership issues are discussed below for each of thecomponent, one should raise here what has been an almost pervasive experiencewith the Zaire program.

26. The Bank did not come forward with a realistic assessment of thechances of the SAL program to be implemented and this is a serious design flaw.The culmination of this "neglect" occurred at the time of the SAL supplement latein 1989, when the experience during the first and second tranche release processhad clearly indicated that Zaire, taking into account the behavior of thePresidency, clearly would not own the essential components of the SAL program,in its original as well as revised formulation.1

27. The Region has indicated its consistent efforts in seeking and oftenobtaining from the Government formal commitments as well as up-front action,especially before releasing the second tranche. However, as indicated in thePCR, the Bank was often satisfied with formal commitments which soon after havingbeen made showed no intention by the government of making good on them.

(iii) Specific Components of the Program

28. No particular design issues arise with respect to the transport andagricultural sector reforms. Both, however, failed to produce the expectedresults. For transport, the main issue was a persistent lack of local funds; foragriculture, a negative investment climate by private sector.

(a) Tariff and Tax Reform

29. The objectives of the tax reform were: (a) broadening of the taxbase; (b) improving the incentive structure; (c) increasing the elasticity of thetax system to inflation. On the whole, as indicated in the supervision report(para. 31), the design of the tax reform program was too complicated to beimplemented by the Zairian administration within a relatively short time.

1t The Region maintains that in 1989 there was good progress in implementationof agreed reforms. The decision to grant a SAL supplement was intended toencourage the continuation of the revitalized reform process and strengthen thehand of the reformist elements in the Government.

Furthermore, it was established without adequate consultation with the privatesector and did not take into account the Zairian reality of negotiating taxpayments. Finally, the attempted introduction of the value-added tax waspremature.

30. More specifically, the objective of broadening the tax basis was tobe achieved through reduction in tax exemption, evasion and fraud. In fact, dueto an underlying lack of ownership-- including paramilitary interference with theoperations of the Customs Office--no reform was actually implemented between 1987and 1989 when the new Government was finally able to take strong measures. TheInterministerial Committee for Tax Reform never met until November 1989.Insufficient absorptive capacity is illustrated by the fact that the reform ofthe turnover tax implied taxation of both imported and domestically producedgoods with the resulting double taxation of inputs and end products to beeliminated through a system of tax deductions. As it turned out, the taxadministration was in no position to handle this aspect thus leading to seriousdistortions in the implementation of the reform. While the performance under thetwo other aspects of the tax reform, i.e. incentive structure and elasticity withrespect to inflation was somewhat better, it remains true that it was only in1989 that, thanks to the new management of Tax Departments, the fiscal reformprogram started to show results with both direct and indirect tax receipts havingsharply increased in real terms.

(b) Civil Service Reform

31. Reform of the civil service aimed at rationalizing and reducingGovernment staff, improving the salary structure and enhancing personnelmanagement. With the exception of a small and lower than planned reduction (5percent against 15 percent) in Government staff, the civil service reform did notactually take place. Once again, as clearly indicated in the final supervisionreport, "with hindsight, it is evident that the civil service adjustment programwould not be implemented under the existing circumstances in Zaire". Even asidefrom the lack of political will to adopt the rationalization reform, the programcalled for a salary reform not substantially adding to the public wage bill, atotally unrealistic target, considering that the 5 percent reduction in staffcould not significantly contribute to the financing of the intended reforms.More seriously, as the supervision report clearly states that the reforms wouldhave required strong political support and financial resources to cushion theinitial impact. Both elements were absent at the time of Board Approval.

(c) State Enterprise Reforms

32. At the time the structural adjustment program was appraised, theGovernment had already made substantial progress in: (a) returning nationalizedenterprises to the private sector; (b) liquidating loss-making state enterprises;(c) removing the monopoly of the state oil company; (d) restructuring the state-owned copper mines; and (e) reducing interference in the management of mixedenterprises. The agricultural marketing boards had been eliminated andpreparation of program contracts with some of the larger public utility companieshad begun. Under the structural adjustment program, the Government was committedto: (a) privatize a substantial part of commercial activities carried out bystate-owned enterprises (except those considered of strategic importance, such

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as public utilities and copper exploitation); (b) diminish its share in mixedenterprises; (c) liquidate nonviable state enterprises; (d) increase efficiency,managerial freedom, and accountability through objective setting and performanceaudits for public enterprises; and (e) change the legal and supervisory frameworkfor the state-managed sector. The latter aim included a reform of procedures formanagement selection and remuneration that had been the exclusive domain ofZaire's President. A study program was launched to give detailed guidance andaccelerate the reforms.

33. Expectations for state enterprise reforms were high considering theGovernment past performance in this area and the dynamic personality of theminister in charge. Unfortunately, in early 1988 the minister changed and fromthere onwards the situation rapidly deteriorated: some of the measures actuallytaken, such as ordering public enterprises to use state banks only in financialtransactions, were in clear conflict with the reform principles. From March1989, when the new program was agreed upon with the Bank and Fund, the lack ofprogress in state enterprise reforms became the main obstacle to the secondtranche release.

34. Two design issues arise in relation to the state enterprise reform.First, Zaire reform program did not focus on the enterprises where most was tobe gained from privatization: the Kilo Moto gold mines, the MIBA diamond minesand GECAMINES.2 These enterprises remained under less than transparent publicmanagement, operating at a low level of efficiency. Second, and more criticalis that the preparation of this component of the SAL was done in secrecy, almostexclusively with the Minister of Portfolio without sufficient broader politicalbacking. Relying on one supportive minister, who soon after was changed, wasclearly a very high risk decision.

(d) Financial Sector Reform

35. This component of the program did not even reach the design stage.Lack of adequate studies at the time of the SAL preparation and poor quality ofthe study prepared with the help of Bank financing, led the Bank to launch afinancial sector operation. However, following several missions during 1988 and1989 to prepare the credit, the work was discontinued in 1990 when the adjustmentprogram collapsed.

(e) Public Expenditure

36. The formulation of a Public Investment Program was the centerpieceof the SAL considering that, as mentioned earlier, low quality and uncontrollablepublic investment had been at the origin of macroeconomic disequilibria in thepast. The composition of public investment envisaged by the PIP was sound, withfocus on rehabilitation of existing infrastructure and greater emphasis on socialsectors.

21 The Region points out that GECAMINES's privatization was sought in thecontext of the Rehabilitation Loan and that IFC was taking the lead in thedialogue on Kilo Moto's privatization.

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37. The main problem with the PIP was that, as stressed in thesupervision report, it had no legal status and this was its major design flaw.In contrast with what agreed with the Bank, the PIP was not publicized througha circular letter from the Prime Minister to ministers and managers of stateenterprises. One can easily agree with the statement in the supervision reportthat the "PIP was treated almost as an internal planning document to satisfy theBank". The Government never accepted the PIP as the exclusive instrument forpublic investment. As a result, throughout 1987-1989, uneconomic projects werecontinuously launched outside the PIP framework. As a final touch, in March1990, the Government notified the Bank that the choice of investment projects wasan act of sovereignty and that it had decided to move ahead with several projectswhich did not comply with the economic criteria agreed upon with the Bank.

38. One cannot help registering at this point a certain contradictionbetween the above recount of the weakness of the PIP as an instrument of publicexpenditure quality control, and statements in the supervision report to theeffect that the PIP "proved to be an efficient instrument in screening nonviableinvestments ("white elephants")... .the PIP procedures provided an opportunity fora technical approach to problems of choice and allowed the Bank to recommend tothe donors higher projects and balance of payments support for Zaire" (para.37).i

B. Implementation: Beyond Reasonable Risk

39. As clearly acknowledged in the President's Report, the SAL was a highrisk operation which was going to face problems of corruption, rent seeking, taxevasion and fraud, lack of investor confidence, holdings of capitals abroad, anddoubtful capacity and willingness of the Government to implement the program.In the PCR, it is further stated that "the Bank took a series of calculated risksby presenting the SAL to the Executive Directors for approval, by releasing thesecond tranche and by granting a supplement. These risks did not pay off" (para.9).

40. Were the risks really calculated? This is the single most importantissue concerning the implementation of the program. Starting with the initialSAL presentation to the Board in September 1987, one should note that theeconomic situation in the country at that time was already deteriorating at afast pace, as proven by the fact that the Bank was not able to release the secondtranche in March 1988--and this was based on the analysis of the February 1988supervision mission.

41. Was the release of the second tranche in June 1989 also a calculatedrisk? As the PCR already states, Zaire made quick progress in fulfilling theformal conditions for the second tranche release. The PCR also states that theGovernment met these formal requirements, without, however, making much progresson the substance of the reforms. It further states that given the budgetoverruns on Presidential expenditures in the first quarter of 1989 and plans forinvestment outside the PIP framework the Bank sought and obtained assurances from

1' As indicated in para. 20 above, some non-economical projects were eithercanceled or postponed.

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the President that the Government would adhere to the budget objectives. On thebasis of these results the Bank declared itself "satisfied by the progressachieved by the Borrower in the carrying out of the program" and informed theBoard of its decision to release the second tranche.

42. And finally, was the granting of the supplement in December 1989 acalculated risk? Already in the course of that year, and notwithstanding theapparent determination of the new Government to put things in order, publicexpenditure was again running out of control as reflected in the Decembersupervision mission report. It is ironic that the $14 million supplement wasfully disbursed in March 1990, i.e., in the same month when that Government whohad the trust of the Bank rejected the agreed upon 1990 macroeconomic frameworkand decided to continue with the investment program that the Bank considered incontrast with the spirit of the SAL agreement.

43. Clearly, and particularly starting with the moment immediatelyfollowing the 1987 approval of the SAL, the Zaire Government gave sufficientindications of not owning the program in its critical components. The Bank waswell aware of the dominant role of the Presidency vis-&-vis the Government whenit came to determine the level and composition of public expenditure. ClearlyZaire in the late 80s was a country where the Bank could not take calculatedrisks.

44. The Region maintains that, while being well aware of the risksinvolved, the relatively good macroeconomic management during the 1983-86 periodand the window of opportunity provided by the SAL to introduce much neededreforms, tipped the balance in favor of going ahead with the SAL. In retrospect,however, the Bank could have opted for a lower profile based on investmentoperations. And this is particularly true considering that already during thesecond half of 1986 the economic situation was deteriorating rapidly and thatsome important reforms could still be introduced through investment operations.

V. LESSONS OF EXPERIENCE

(i) On Risk-taking: The Need of a Redefinition

45. The experience with the Zaire SAL clearly raises the general issueof risk analysis in structural adjustment loans. A sentence in the Conclusionsand Lessons Learned section of the last supervision report illustrates it well:"In hindsight, the timing of this operation was unfortunate because the Bank'sstructural adjustment efforts were launched in 1986 when the Government'scommitment to reform began to disappear (para. 44)". This is a case in whichexercising normal "foresight" should have convinced the Bank that the conditionsfor a structural adjustment operation were not there.

46. In more general terms, the President's Report are more often than notcandid about indicating the risks as far as the implementation of the program isconcerned. However, these risks are simply listed. No probability coefficientis attached to them. Therefore, they are not really "calculated", not even invery elementary terms such as more/less than fifty percent chance for the program

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to succeed. The Zaire SAL, if such simple risk-analysis had been applied, wouldhave shown a marginal probability of success.

47. The argument, contained in the Zaire PCR as in many other, that ifone had hindsight certain programs would not have been launched, only holds ifreasonable foresight had been exercised at the time of the decision. In OED'sjudgment, this was not the case with the Zaire SAL.

(ii) Avoid Much too Complex and Unrealistic Programs

48. It is unwise to cover a country, which is in the midst of seriousdisequilibria, has a poor record of sustained economic governance and whereefficient bureaucracy is the exception rather than the norm, with a thick blanketof reforms affecting most of the key economic policy areas if only because thecountry's fragile institutional set up is likely to suffocate as a result. Thisis not an issue of excessive number of conditions. It is a question ofstretching scare management resources over too many areas simultaneously. It issomewhat surprising that the Bank behaved as if the SAL was the first operationin Zaire, embarked on a very complex reform program, and then (as stated in thePCR) came to realize that the country was not ready for that program. Even more,surprising, the Bank, at the time of the SAL processed an Industrial Structuralloan which was fraught with difficulties. Yet, the Bank had been carrying outoperations in Zaire for years, thus having the opportunity to gather the bestpossible fix on the country's absorptive capacity. Where was the Bank'sinstitutional memory at the time of the SAL? Again, shouldn't the institutionalmemory provide a critical input in determining the so-called "calculated risk"?

49. As the PCR recognizes, practically all the components of the reformprogram had unrealistic goals within the time frame of the adjustment operation.The lack of realism was the combined result of different factors: for tax reformwas an issue of the responsible departments not being equipped to carry it out;in the case of public expenditure it was pretending that the PIP would be theonly channel for public expenditure, ignoring the reality of a very activePresidency with its own program; for public enterprises the Bank chose an"enclave" approach putting its whole trust on the secretive initiative of a "can-do" minister, soon to be evicted from government; as to the civil service, poordesign and lack of political support were the main causes of the failure; thefinancial sector reforms were out of the Zaire reality considering the highlyunstable macroeconomic situation and having started with a poor basic study wascertainly of no help; finally, the two sector reforms, agriculture and transport,completely ignored the reality of, respectively, lack of interest by privateinvestors and lack of local funds by the Government.

(iii) The Need to Revisit the Concept of Government Ownership of the Program

50. The Zaire SAL could very well be used as a case study in inadequateunderstanding by the Bank of what Government ownership of the program means. Thefirst and single most critical aspect was the inability of the Bank to eitherunderstand or to take into account in its decisions the dualism betweenGovernment and Presidency when it came to making commitments with either theBank, or the IMF, or the donors. This dualism was pervasive in matters of publicexpenditure control, with the Presidency appropriating resources destined to the

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budget and financing its own programs. This means that whenever the Government,through its Prime Minister, agreed with the Bank on a given program, it was morethan often negated by contrasting decisions at the Presidency level. This meansalso that the Bank should not have considered the initial Letter of DevelopmentPolicy and the subsequent second tranche release and SAL supplement letters asacts reflecting a real ownership by the Government of Zaire. And the PCRrecognizes it. The temptation to accept at face value Government commitments isstrong but it is often more the result of a "legal" approach to Bank/countryrelations than the reflection of a true economic dialogue on policy reforms.

51. The issue of ownership arise also with respect to specific componentsof the program, in particular public enterprises, and financial and transportsector reforms. In these areas the Bank failed to reach, prior to theformulation of the Letter of Development Policy, a clear understanding with theministers and/or agencies involved. Often, the Letter of Development Policy isfor the Bank a point of arrival in the agreement on the SAL, while in fact itrepresents, even for the most committed Government, a point of departure towardscomplex internal negotiations with the specific ministries and agencies from whomthe implementation of the program depends. Neglecting to make sure that thoseministries and agencies are really on board is the cause of seriousdisappointments at a later stage.

(iv) Conclusion

52. The purpose of SALs is to help Governments to bear the immediate costof complex and much needed reforms. First, failure to understand that a givencountry is not yet ready to make good on the reforms required by the quickdisbursing structural adjustment venue is, as in the case of Zaire, at the rootof many unsuccessful SAL programs. Second, adoption and implementation ofreforms is not a rapid process. There has to be by the Bank a willingness togive Government room for initiating and carrying out these reforms at a realisticpace. Failure to fully understand the time needed for the reform implementationis often the first mistake that the Bank is likely to make. Failure tounderstand, once the initial tranche of any program has been disbursed, that theGovernment is not able or willing to carry out the reforms is a second frequentmistake that often leads the Bank to doggedly pursue sterile renegotiations withGovernments even as it is witnessing the collapse of the program.

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PROJECT COMPLETION REPORT

ZAIRE


May 14, 1991

Country Operations DivisionSouth-Central and Indian Ocean Department

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ZAIBZ


PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

I. PROJECT IDENTITY

Name: Structural Adjustment LoanCredit Numbers: 1831-ZR and A-30-ZR

RVP Unit: AfricaSector: SAL

Subsector: SAL

II. INTRODUCTION

Background

1. Zaire's first years after Independence (1960) were a time ofsevere turmoil. But the political situation stabilized, and in 1968-73 thecountry enjoyed relatively fast growth. World prices for copper -- (theeconomic mainstay) were exceptionally high; the private sector was stillcapable of responding quickly to opportunity; production rose 7 percent ayear. Even during this period, however, economic management becameincreasingly deficient. A series of ill-considered projects added to thepublic debt, though not to economic growth. In 1973-74, nationalizationsand forced transfers of foreign-owned assets to Zairian citizens seriouslydamaged the business climate. When the Government reversed this decision,

many entrepreneurs who had left did not return, and private investmentsremained low. In 1976, plunging copper prices sent the economy intodecline. GNP per capita fell, inflation soared, infrastructuredeteriorated, and the foreign debt was not serviced. The Government askedthe IMF assistance to redress the situation. Economic programs designedwith the IMF's help dominated the period 1976-86. In 1986, the World Bankassumed a major role in the structural adjustment dialogue and followed itwith quick-disbursing adjustment operations. This part of the historicaloverview is covered in the sections below.

IMF proarams

2. Between 1976 and 1989, the IMF approved eight Stand-byoperations and one Extended Facility. Six of these arrangements werecanceled or could not be fully drawn. The two recurring problems were(1) lack of budget discipline, and (2) large fluctuations in world copperprices. After each agreement on a new program, Zaire obtained substantialIMF balance of payments assistance and debt rescheduling. Without a

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resolution of the basic problem of budgetary discipline, however, progress

toward economic stabilization was reversed each time a program fell

through. The final result of the interventions was that Zaire remained in

serious economic difficulty despite balance of payment support and debt

rescheduling -- two elements that now weigh heavily in the country's

external debt problem.

3. The 1983-85 IMF program was an exception; it left a heritage ofstructural reform in substantial liberalization of the trade, price,interest, and exchange rate regimes. In 1983, Zaire devalued its currency

by 70 percent in foreign currency terms; the following year, it establisheda flexible exchange rate policy with rates close to those in the free

market. Although the parallel market was still officially illegal, for allpractical purposes it was tolerated. The higher cost of imports waspassed on to consumers by the removal of ex-ante price controls. Import

licenses for most products were provided by the commercial banks on a

routine basis. Stricter budgetary and monetary policies dampened the

inflationary impact of the initial devaluation.

4. While Zaire reversed market-oriented exchange rate policies ontwo occasions (1986 and 1988), the real effective exchange rate remainedthrough July 1990, at levels lower than in 1984. The Government maintained

price controls on certain "strategic" commodities. In a futile effort tocontain inflation, controlled prices occasionally were frozen. Many localgovernment authorities continued to control food prices. These moves

caused constant difficulties for traders and producers but were ineffective

in controlling inflation or profit margins. For most products, most of the

time, the economy functioned at market prices. The one important

achievement of the 1983-85 period was that the principle of a "managed"

market economy became well established.

5. Weaknesses in the 1983-85 economic programs were these:

(1) The programs focused on control of the monetaryfinancing of the budget deficit, and did not definecomprehensive public expenditure policies; as a

result, they could not prevent the erosion of public

expenditure on human resources and economic

development and the growth of nondevelopmental

expenditure.

(2) In 1983, the Government removed import duties on food

and industrial inputs to reduce the inflationaryimpact of devaluation and to promote supply response.This measure left the agricultural sector withnegative levels of effective protection while givingsome parts of the manufacturing sector an excessivelevel of protection.

(3) The improved economic incentives did not yield the expected

supply response from the private sector.

After the collapse of the 1986/88 stand-by arrangement in 1986, the IMFconcluded two more Stand-by arrangements, this time combined with funds

- 19 -

from the IMF's Structural Adjustment Facility (SAF). Neither arrangementcould be fully drawn because, among other reasons, the Government did notadhere to the ceilings on monetary financing of budget deficits.

Role of the Bank

6. Since 1978, the Bank has assisted the Government with thepreparation and financing of yearly updated Public Investment Programs(PIPs). Several times in the early 1980s, the Government asked the Bankfor a Structural Adjustment Loan. During 1984-86 the overall net resourcetransfers (after debt relief) to Zaire dropped to a yearly average outflowof $25 million, compared with a net inflow of $235 million a year during1980-83. However, the Bank was not convinced of the Government's resolveand ability to implement comprehensive economic programs. The Bank sawproblems in channeling its potential balance of payments support to theprivate sector, given the weak capacities of the Zairian administration.

In 1985, the Bank reconsidered and decided to proceed with adjustment

lending to Zaire. This decision was prompted by three considerations:first, the Government had shown commitment to reform under the IMF-supported program and had successfully stabilized the economy since 1983;second, the Bank had noted that the net resource flows had become negativeand concluded that sustained economic growth was impossible without asubstantial increase in foreign aid; and third, the Bank staff projected along period of depressed copper prices that would lead to major declines inforeign exchange earnings and would prevent the economy from recovering.

The Bank was instrumental in lining up donor support through the 1987meeting of the Consultative Group for Zaire and, later, in the form of

cofinancing of the SAL and increased bilateral balance of payments (BOP)

support in the framework of the Special Program of Assistance for Sub-

Saharan Africa (SPA).

7. The Industrial Sector Adiustment Credit. Instead of supportinga full-fledged structural adjustment program, the Bank opted for a phasedapproach, building analytical and implementation capacity in Zaire through

an Industrial Sector Adjustment Credit (ISAC) and thus preparing the way

for a full-fledged SAL in a second phase. The industrial sector was

selected because of the Government's demonstrated willingness to implement

trade incentive reforms and because of the need to correct for over-

protection in the manufacturing sector and underproduction in theagricultural sector. Under this credit, BOP support was restricted to

imports of inputs and spare parts for the industrial sector; this helped

ease concerns about private sector access to the provided foreign exchange.

In response the Government maintained that Zaire's problems could not beresolved by a sectoral approach; it renewed its request for a full SAL.

8. In June 1986, the Industrial Sector Adjustment Credit equivalentto $20 million from IDA and $60 million from the Special Facility for Sub-

Saharan Africa (SFA) was approved by the Executive Directors. In addition,

the U.K and Belgium granted a total of $5.7 million. The program had fourcomponents: (1) reform of import tariffs, (2) reform of the turnover tax,

(3) elimination of ex-post price controls, and (4) elimination of export

taxes and simplification of export procedures. Most of these componentswere also included in the later SAL for supervision purposes and follow-up.

- 20 -

By October 1986, however, Zaire's ruling party had grown increasingly

dissatisfied with the negative net resource transfers to the country; itdenounced the principles underpinning the economic program. The economicand financial situation deteriorated rapidly, and the IMF could not reach

an agreement on a viable macroeconomic framework for 1987. As aconsequence, the Bank postponed the effectiveness of the ISAC.

9. In January 1987, agreement was reached on a new macroframeworkprogram. Expectations were high. The Bank showed confidence in theGovernment's new economic management team, believing it could deliver onthe Government's commitments. The ISAC became effective the same month.

The Bank tripled its lending program to Zaire and advanced the Board

presentation of the SAL to June 1987. Many of the ISAC measures werequickly introduced and the second tranche of the ISAC was released in April1987. The last disbursements took place in December 1987. Through promptchanges in the lending program and strong efforts in the Consultative Groupfor Zaire, the Bank was instrumental in increasing the net resourcetransfers to Zaire from negligible amounts in 1986 to $329 million in 1987.

10. The Operations Evaluation Department (OED) review of the ISAC in1990 considered this operation a failure. This judgement was based largely

on later developments under the SAL-financed program as discussed in thefollowing sections of this report. The OED concluded that better

preparation would have avoided certain errors in turnover tax changes and

would have led to a better appreciation of the effects of tax fraud andexemptions that made the tariff reform largely ineffective. The

elimination of the ex-post price controls and simplification of export

procedures never took place. In the OED's view, greater foreign exchange

availability allowed the industrial companies to restock but did not

trigger a substantial increase in capacity utilization or investment. And,

according to the review, the eventual policy slippage could have been

foreseen at the time of design, given the Government's erratic record of

implementation in 1986. In hindsight, it is true that insufficient reform

commitment by the highest authorities was the major cause for reform

failure under the ISAC.

11. Economic Management and Institutional Development Project. In

parallel with the SAL, the Bank presented a technical assistance project

for macroeconomic management to the Executive Directors in June 1987. This

project included technical assistance for macroeconomic analysis, further

strengthening of the three-year rolling PIP process, introduction of a new

nomenclature for the budget, improvement of expenditure procedures, reform

of the tax system, streamlining of procurement procedures, public

enterprise privatization and monitoring, the establishment of basic

economic statistics, and strengthening of the State audit office.

12. The project was well-designed and the organizational setup was

sound, but resources for supervision were insufficient, in particularduring FY89. The project was successful in recruiting foreign consultants

and producing the programmed studies. Substantial impact was achieved inthe fields of tax reform, strengthening of the PIP process, and revision ofthe national accounts. These activities are still supported by the

project. Work on the new budget nomenclature and on expenditure control

was technically completed but only partly implemented; misallocation of

- 21 -

public resources and lack of transparency in budget execution remained the

stumbling block to structural adjustment throughout 1987-90 (para. 37).

The work of the macroeconomic advisor, though appreciated by the

authorities, had no lasting impact. As to procurement procedures, the

consultant concluded that the Government should implement existing rules

and regulations.

13. Sectoral Adiustment Credits. Almost as soon as the SAL became

effective, the Bank started to prepare a series of sectoral adjustment

operations. The purpose was to (1) support social objectives in the

adjustment process, (2) remedy perennial shortages in petroleum supplies

(in particular in rural areas) and the underfinancing of road maintenance

(petroleum taxes), and (3) deepen the adjustment program in the financial

sector. These three operations were expected to be followed with a second

SAL. In March 1990, when the adjustment program went off the track, the

Bank suspended further work on sectoral adjustment operations. The

following paragraphs summarize the Bank's experience with the preparation

of the suspended sector operations.

14. The social sectors had low Government priority and had not been

covered under the 1983-86 IMF-supported program or under the SAL. Social

expenditures had been eroded by high inflation and budget cuts, while the

budget share of nondevelopmental expenditures had grown steadily. The

decrease in public spending on the social sector had been in part

compensated by greater cost recovery from beneficiaries of health and

education services, but the steep decline in per capita income had undercut

the ability of users to pay for these services, which led to falling social

indicators. The proposed Social Sector Adjustment Credit was expected to

help reverse this trend and strengthen the largely private management of

education and health care institutions. A good part of this program will

be implemented as a traditional investment project approved by the

Executive Directors in December 1990.

15. The proposed Energy Sector Credit was expected to finance

priority assistance for petroleum procurement, marketing, and pricing; to

provide technical assistance to the power utility; and to ensure adequatelocal cost financing for road rehabilitation and maintenance through an

earmarked levy on fuels. Negotiations began in October 1989 and agreement

seemed to have been achieved on the major issues when Zaire's delegation

left Washington. The following month, however, the Government took steps

to strengthen the role of the state oil company in petroleum procurement

and marketing, which contradicted positions agreed to during negotiations.

This action and the deterioration of macroeconomic management in early 1990

forced the Bank to suspend further processing of the Credit. A small

technical assistance credit to the power utility is under preparation,however.

16. The proposed Financial Sector Credit was expected to deepen the

financial sector reform strategy outlined in the SAL. It aimed at

supporting a market-determined financial system, improving financial

intermediation, strengthening the supervision of the banking system, and

helping rehabilitate or privatize several state enterprises in financial

disarray. The high levels of inflation prevailing in Zaire made thisprogram difficult to pursue. The operation was pre-appraised in 1989. But

- 22 -

further work was suspended after March 1990, when the Government and the

Bank could not agree on a macroeconomic framework for 1990.

Role of Other Donors

17. The Bank stayed in close contact with the principal donorsduring preparation and supervision of the SAL. While several donors were

strongly supportive of the Government's renewed structural adjustment

efforts and increased their levels of BOP support, others remained

skeptical of Zaire's commitment and ability fully to implement the program.

Bank missions cooperated with technical assistance teams financed by donors

such as France (Department of Taxation), the EC (Customs Office), the US(financial sector reforms), the UNDP (state enterprise and civil service

reform), the African Development Bank (ADB) (public investment planning),

and Belgium (social sectors). This technical cooperation was expanded

further in November 1989, when the Bank invited all major donors to

participate in the comprehensive public expenditures review that was

expected to underpin the next phase of adjustment.

18. The Resident Representative in Kinshasa organized informalcoordination among the donors. After each SAL supervision mission, theBank briefed the local representatives of the principal donor countries ororganizations in Zaire. The Bank also used the semi-annual SPA meetingsfor discussions among the donors on the progress made with Zaire's

structural adjustment program. Through the SPA mechanism, the Bank was in

a position in 1989 to help mobilize the additional BOP support critical to

the success of the adjustment program. Indications of aid were obtained

from Japan, the USA, Germany, and the ADB.

19. During the 1987-89 period, the donor community broadly supported

the positions taken by the Bank and the Fund regarding the inadequacies of

program implementation. In March 1990, when the Bank suspended further BOP

support to Zaire, all donors followed.

III. SAL PREPARATION AND APPRAISAL

20. The program of measures supported under the SAL was identified

in March 1986 with the aim of following the ISAC with a broad-based

adjustment program. Zaire's economic team was led by the Minister of

Planning, a competent economist, who later became Vice Premier for Economic

Affairs and Prime Minister. He had selected a strong team of technicians

(mainly from the planning ministry staff) to cover the different components

of the program. After the 1986 identification mission, studies in key

adjustment areas were completed including on: (1) the tax system

(improvement of budget receipts, taxes on production and consumption,

turnover tax and import duties, taxation on the petroleum sector, and

parafiscal taxes), (2) public expenditures (reorganization of the publicinvestment administration, cohesion of investment and recurrent

expenditures, a new budget nomenclature, programming of public expenditures

in education, remuneration and employment in the civil service), and (3)

the banking sector. Other studies were planned or launched but, given

- 23 -

their complexity, could not be finalized before Board presentation and wereincorporated in the action program.

21. The SAL appraisal was initially scheduled for November 1986. InOctober 1986, however, a meeting of Zaire's ruling party endorsed severalproposals that would have represented a reversal of the economicliberalization measures undertaken since 1983. Following strongrepresentations by the Bank and the IMF, President Mobutu of Zaire visitedWashington in December 1986, accompanied by key members of his economic

team. After meetings between the Zairians and the senior management ofboth institutions as well as intensive technical discussions, a mutuallyagreed aide-memoire was confirmed in a letter by President Mobutu to Mr.Conable, dated January 7, 1987. This letter and the aide-memoire werereviewed with Zaire's principal donors at an informal donors' meetingconvened by the Bank and the IMF. Subsequently, work on a Policy FrameworkPaper (PFP) and the preparation of the SAL were resumed at an acceleratedpace in view of Zaire's urgent need for BOP assistance. In April, the PFPwas approved by the Bank and IMF Executive Directors and provided the basis

for an IMF Structural Adjustment Facility arrangement. The SAL wasappraised in February and presented to the Executive Directors in June

1987. Throughout this period close contacts were maintained with the donor

community. Donors were generally supportive of Zaire's structuraladjustment efforts and eager to help the country expand the considerable

progress made since 1983 in creating a market economy. Nevertheless, basedon Zaire's past performance, it was recognized that the risk of policyslippage was significant and that careful monitoring and follow-up by all

parties would be required.

22. The proposed package of structural adjustment measures was

comprehensive and included all the elements normally found in such

programs: reforms in the incentive system; fiscal policies, particularlythe Public Investment Program; state enterprise restructuring andprivatization; reforms in the financial, agricultural, and transportsectors. The package responded to structural weaknesses in the economy asidentified in earlier phases of preparation. The Government took a numberof up-front actions, establishing an organizational framework for SALimplementation, streamlining agricultural credit procedures, consolidating

certain earmarked funds into the general treasury account, and adjusting

the exchange rate system in line with IMF recommendations. Conditions of

credit effectiveness focused mainly on fiscal, institutional, and civilservice reforms, while the second tranche conditionality focused on stateenterprise reform and the macroeconomic framework for the second year ofthe program. The details of the adjustment program were developed incooperation with a capable and highly motivated group of technicians.Other than the negotiating team, however, few people in Zaire understoodthe objectives and implications of the program. The World Bank helped

disseminate the new policies by sponsoring a seminar in Kinshasa; the Bankwas counting on the political goodwill it had created with the ISAC. But

Zaire's private sector had not been enthusiastic about the ISAC reforms,fearing reduction in protection and tax privileges. And though thePresident of the Republic had expressed commitment to the objectives of theprogram, there was lingering opposition from vested interests among his

personal council of policy advisors. This opposition surfaced two months

after credit approval, when political intervention almost wrecked the

- 24 -

relatively successful reform program in OFIDA, the customs office (para.

31). The political forces in favor of market-oriented economic managementused the political leeway offered by the adjustment program to pursuereforms to the maximum, in most cases without much public debate. In

particular, the component dealing with public enterprise reform finalized

during SAL implementation was developed in an atmosphere of great secrecy;

even members of Technical Secretariat entrusted with SAL preparation and

implementation were not aware of the details of the proposed program.

23. One of the constraints in the reform process was the limited

implementation capacity of the administration. The Government tried to

address this problem by concentrating the work in a small core of competentcivil servants. This approach added to the relative isolation of the

group.

24. The President's Report on the SAL, dated May 29, 1987,identified problems of corruption, rent-seeking, tax evasion and fraud,

lack of investor confidence, holdings of capital abroad, and doubtfulcapacity and willingness of the Government to implement this program. Thereport proposed that the Bank should take a calculated risk in view of theGovernment's demonstrated willingness to pursue politically difficult

economic actions and its ability to mobilize national support. It also

expressed the view that financial backing from the international community

would depend upon the Government's continued adherence to the program. In

hindsight, the Bank overestimated the political strength of the dynamicadjustment team it was negotiating with. The most critical issue in thisrespect was the team's inability to control public expenditure. It shouldalso be noted that the program went off-track in 1988, when growing exportrevenues from copper made Zaire less dependent on BOP aid.

25. The dual structure of political authority in Zaire, where mostdecision power is centered in the Presidency rather than in the Cabinet,

can be cited as the single most disruptive factor. Zaire's President

signed the Letter of Development Policy but did not appear to takepolitical "ownership" of the economic program. This attitude emerged later

as the "sovereignty issue," according to which the Presidency preservedthe right to initiate current and capital expenditures outside normalbudgetary procedures. To pay for these expenditures, the Minister of

Finance then had to cut legitimate budgeted items to meet the program'smacroeconomic target.

26. The appraisal team also overestimated the confidence of the

private sector in the new agreement. Macroeconomic forecasts projected anincrease in domestic investment of 12 to 18 percent of GDP in a single yearbased on the expected response of the private sector (the public investmentprogram was to be cleaned of costly projects not economically justified).Private investment was slow to materialize; the private sector responded

cautiously to the improved incentive framework.

27. A positive social impact from adjustment was expected for the

rural poor on the strength of improved economic conditions in the

agricultural sector (devaluation, tariff protection, price liberalization,

better maintenance of rural roads). Urban poor were to benefit from a

trickle down of the benefits of economic growth. The program did not

- 25 -

include special measures to protect vulnerable groups. In the event,unplanned overruns on nondevelopmental expenditure followed by socialexpenditure cuts (or erosion through inflation) undermined socialconditions in Zaire far beyond the possible negative impact that someadjustment policies might have had.

28. Despite these weaknesses, the adjustment program provided clear

policy direction and a two-year calendar of measures that was to be updated

and expanded in follow-up operations. The new policy orientations wereoutlined in a Letter of Development Policy to the President of the WorldBank signed by the President of Zaire and in a Policy Framework Paper datedApril 17, 1987 (SecM87-140), approved by the Bank and IMF ExecutiveDirectors. On the strength of the new agreement, the Bank convened theConsultative Group in May 1987 and obtained aid indications sufficient tofinance the agreed public investment program. In the same month, the ParisClub and the London Club rescheduled a large part of the outstandingarrears and current debt service obligations under conditions that were, atthat time, considered highly favorable. On May 15, the IMF Board approveda Stand-by arrangement for the equivalent of $129 million, $58 million from

the Compensatory Fund Facility (CFF), and a joint annual arrangement under

the SAF for the equivalent of $75 million. On June 25, 1987, the ExecutiveDirectors of the Bank approved the Structural Adjustment Credit for anequivalent of $165 million, with effectiveness in September 1987. Overallcommitments for BOP support received by Zaire in 1987 (including debtrelief) amounted to $1.6 billion, compared with $1.1 billion in 1986.

IV. IMPLEMENTATION

Effectiveness

29. The Government requested that the Credit be declared effectiveon the planned date and submitted the necessary documentation. Given thecomplexity of the program, however, the Bank decided on a pre-effectivenesssupervision mission. The conditions for effectiveness were as follows:

(1) The consolidation of the functions of the OfficeZairois de Contr6le (OZAC) and the Office Zairois du

Caf6 (OZACAF) in coffee marketing.

(2) The elimination of earmarking of the turnover tax(CCA) on final products so that the full proceeds ofsuch tax would be paid over to the treasury.

(3) The initiation of legal proceedings for the liquidation of

the Institut Zairois de Management, the Centre de CommerceInternational, and the Office National de Logement.

(4) The completion and computerization of the census of civilservice positions and staff; the elimination from thepayroll of vacant positions.

30. The Government fulfilled conditions (1) to (3) and obtained atemporary waiver for (4). Regarding (1), the Government harmonized

- 26 -

OZAC/OZACAF procedures and thereby fulfilled the legal agreement, but itdid not merge the two institutions as expected by the Bank. Later, the

Bank recommended to the Government that it proceed with the merger in the

framework of state enterprise reform and export promotion policies. Littlehappened until 1989, when the International Coffee Agreement collapsed and

coffee prices came down, compelling the Government to reduce somewhat the

high OZAC and OZACAP fees on coffee exports. As to the screening of theGovernment's payroll (4), the surveys did not provide an adequate basis tostop paying alleged "ghost workers"; for this reason the due date of thecondition was postponed by one month and incorporated as a condition forsecond tranche release. In reality, the implementation delays on thisaction point took more than a year. At the time of the second trancherelease, 25,300 "ghost-workers" had been removed from the payroll.

31. The Bank was concerned about two findings of the pre-

effectiveness supervision mission -- that important uneconomic investmentswere taking place outside the Public Investment Program (PIP) and that

political interference threatened the fiscal reform process. The missionagreed with the Government on a plan of action that would remedy thesediversions from the program. One investment outside the PIP was a largehospital in Kinshasa for high-cost medical treatment; the building designwas unsuitable, the contracted price was more than twice the estimatedbuilding cost, and exploitation was unaffordable without large statesubsidies. Before declaring the SAL effective, the Bank received a letterfrom the Deputy Prime Minister dated September 30, 1987, reconfirming thatthe PIP would be the sole vehicle for investment projects committing theState of Zaire and that all ceilings agreed in relation to the PIP would berespected (this referral to the agreed ceiling under the SAL of $15 milliona year for investments with only political justification). The letter alsocommunicated the decision of the Council of Ministers that furtherconstruction or payments related to the hospital would be "incompatiblewith a rational use of the country's resources." Following this letter,work on this project was effectively stopped. In another letter of theDeputy Prime Minister (no.0114/CAB/VPCE/SPN/mup.n/87), dated September 22,1987, the Government confirmed that it had ended the interference ofsecurity forces in OFIDA, the Customs Office; although OFIDA's exclusiveresponsibility for the collection of import duties was never legallyreinstated, 2/ no further abuses on the part of the security forcesoccurred. Allegations of corruption concerning the leader of the EECtechnical assistance team in OFIDA were proven to be totally unfounded and

were dropped.

Second Tranche

32. The 1987 IMF ceiling on credit to the Government was surpassed,in part because of an overhang of unrecorded expenditure from the firsthalf of 1987. In early 1988, the Government started accumulating arrearson foreign debt (including on obligations to the IMF). It also started

slipping on measures agreed with the Bank in the framework of the SAL.

2/ In August 1987 the Civil Guard was mandated to scrutinize theoperations of OFIDA and collect import duties and fines.

- 27 -

Efforts continued on some components of the program, but on others noprogress was made: measures were passed without consulting the Zairiantechnicians (e.g., lowering of the turnover tax); consultants' reportsoften remained without follow-up; earlier adjustment measures were reversed(e.g, allowing the differentiel between the official and parallel exchangerates to widen above the agreed maximum); occasionally, half-way measureswere taken to satisfy the agreed adjustment calendar without any realadjustment taking place. At the end of the year, sizable unbudgetednondevelopmental expenditures were again discovered. Inflation was above80 percent. The economy deteriorated, particularly when the Governmenttried to contain inflation by freezing controlled prices (among whichpetroleum products) and by keeping the official exchange rate substantiallylower than the prevailing free-market rates. It had became apparent thatthe Prime Minister lacked the political mandate to manage economic policyaccording to program objectives, especially with regard to publicexpenditure.

33. In November 1988, a new Prime Minister was appointed; he had led

the Cabinet during the 1983-85 adjustment period, and Bank expectationswere high that he would be able to implement the program. He demonstrated

his commitment to reform through a series of politically sensitive up-frontmeasures in late-1988/early-1989, among which were accelerated devaluationof the official exchange rate and increases in interest rates, taxes, and

petroleum prices. By March 1989, consumer prices and the exchange rate onthe parallel market stabilized; the gap between the official exchange rate

and parallel rate fell to acceptable levels (below 10 percent), and the

private oil companies could improve supplies. In March 1989, a new

macroeconomic framework was agreed upon with Bank and Fund staff, followingpersonal assurances to the Bank's Regional Vice President by Zaire's

President that he would respect the agreed budget and PIP. Zaire madequick progress in fulfilling the formal conditions of second tranche

release.

34. The specific conditions for second tranche release were the

following:

(1) Agreement on a revised macroeconomic framework for 1988-91,including the level and composition of the 1988-91 PublicInvestment Program. 3/

(2) Establishment of an oversight structure to supervise

public enterprises; the appointment of its head.

(3) Classification of enterprises to be maintained in the stateportfolio, liquidated, or wholly or partially privatized;

(4) Finalization of a restructuring and reorganization

program for public enterprises remaining in the stateportfolio.

1/ Because of the interruption of the program in 1988 these dates were

slipped by one year.

- 28 -

(5) Completion of financial and administrativearrangements for the retirement of eligible public

employees.

As will be discussed later, the Government met these formal requirements,without, however, making much progress on the substance of the reformprogram.

35. The macroeconomic framework for 1989 was adapted to the changed

economic circumstances in that year; it put renewed emphasis on economic

stabilization and removal of economic distortions. The implementation ofdifficult up-front measures confirmed the Government's willingness to moveahead with the program. To defend the program against the consequences ofmultiple centers of expenditure authorization, the Bank urged Zaire'sPresident to make the Prime Minister the sole authority for approvingpublic expenditures. It also negotiated a $180 million limit on theGovernment's nondebt foreign exchange expenditures _/ (about twice theamount spent in 1986 but less than half that spent in 1988). Given thebudget overruns on Presidential expenditures in the first quarter of 1989

and plans for investment outside the PIP framework, the Bank sought andobtained assurances from the President that, this time, the Government

would adhere to the budget objectives. On the other components of theprogram, the Government reconfirmed its initial objectives, redesigned thecalendar of measures, and formalized its economic program in a secondPolicy Framework Paper (PFP). On the basis of these results, the Bank

declared itself "satisfied with the progress achieved by the Borrower inthe carrying out of the Program," as required under the terms of the credit

agreement. Bank management informed the Board of its decision to releasethe second tranche by its memorandum IDA/SecM89-207, dated June 7, 1989.

SAL SuRlement

36. Following the second tranche release in May 1989, the Government

implemented the economic program forcefully and even exceeded the target

for reducing inflation. New management in the Customs office brought about

a remarkable change in mentality and strong improvement in revenues. Debt

service obligations agreed upon under the June 1989 Paris and London Club

agreements were respected, as were the payment obligations to the IMF. On

the other hand, aid disbursements were lower than programmed, partly due to

difficulties in the negotiation of the Bank's proposed Energy Sector

Adjustment Credit (para. 15); these problems became more severe on November3, 1989, when the Government took several dispositions in conflict with thenegotiation results achieved a month earlier. Given the country's

performance -- but also considering the problems that a short-fall in BOP

aid could create for the Government in respecting the 1989 overall credit

4/ Excluding foreign financed investment.

- 29 -

ceilings 5/ and in facing the steeply increased debt service obligations

in early 1990, Bank management decided to recommend a $14 million SAL

supplement to the Executive Directors. The supplement was funded from the

positive exchange rate differentials in the Special Facility for Sub-

Saharan Africa (SFA). The processing of the supplement started in July

1989. The Executive Directors approved it by the end of the year, after

the Prime Minister formally reassured the Bank that the Cabinet would

pursue its program and take measures to correct the misallocation of public

resources that had taken place earlier in the year (letter No.

PCE/01/bb/845/89).

Collapse of the Adiustment Program

37. Through 1989, the Bank had concerns about the control and

composition of public expenditures. Although below their 1988 level,

nondevelopmental expenditures were again running well above the budget

targets. 6/ Moreover, the Government was known to be pursuing new

nondevelopmental expenditure projects for the 1990/91 period. Among these

were an uneconomic extension of the Mobayi hydropower project,

expenditures related to the planned 1991 Summit Conference for the

Francophony in Kinshasa, the triple national celebrations in 1990, and

other uneconomic investments prepared outside the PIP framework. Even so,

the Bank staff was hopeful that the Prime Minister, who was committed to

the adjustment program and who had a reputation as a strong administrator,

would be able to control the situation.

38. In 1989, the Government had been able to accommodate higher

nondevelopmental expenditures within the agreed ceiling on deficit

financing because (1) the fiscal reforms had started to become effective

and had produced higher than expected tax revenues; (2) copper prices were

higher than projected, which created windfall tax revenues from the state-

owned mining company, Gecamines; and, (3) the debt service obligations

agreed under the June 1989 debt rescheduling were lower than projected for

that year. By the end of 1989, the Bank became increasingly concerned,

however, with the composition of public expenditure and the possibility of

large unrecorded extra budgetary outflows. In particular, the financial

relationship between the Government and state enterprises remained opaque.The Bank staff had received information about irregular financial

arrangements between some state enterprises and the Government, but could

not obtain confirmation. In addition, the Bank became concerned about the

steep increase in production costs at Gecamines. Some of the Bank staff's

concerns about financial arrangements between state enterprises and the

5/ The overall credit ceiling is determined as a function of available

counterpart funds in Zaire originating from BOP aid; if the balance

of payment aid is unexpectedly low, the credit ceilings imposed on

individual commercial banks have suddenly to be reduced, which is not

always possible.

6/ The size of this overrun became more clear in 1990, when substantial

financial arrangements outside normal budget procedures were

discovered.

- 30 -

Government intensified when, in 1990, the Government started to pay monthly

installments of $10 million to service external debt contracted in 1989

through financial arrangements on which there was no detailed or

satisfactory information. These financial arrangements also affected theGovernment's performance as to the limit on nondebt foreign exchange

expenditures. Officially the Government exceeded the ceiling on recordedforeign exchange expenditures in 1989 by only a small margin. But public

expenditures had an exceptionally high import content in that year, which

suggests that the official ceiling on nondebt foreign expenditure was

circumvented through recourse to extra budgetary sources of foreign

exchange and public sector purchases from the local distributors ofimported goods.

39. During the supervision mission in December 1989, the Bank staffhighlighted the need to strengthen control on public expenditures andproposed the following measures: a ceiling on total nondebt expenditures;protection of a core program of development expenditures; arrangements onthe use of possible windfall revenues from copper or other sources;measures to increase the transparency in the use of public resources

(monthly treasury plans and statements of budget execution); reconfirmationof the agreements on the Public Investment Program, together with the

creation of a legal status for it. Bank staff also insisted upon areduction in the unit-production cost of Gecamines; during the precedingtwo years, such costs had risen to the point where the company had becomeone of the world's highest-cost producers. The staff recommended the SAL

supplement (para. 36) only after receiving assurances from the Prime

Minister that the Government would remedy the above problems and wouldagree with the measures proposed by the Bank staff in the 1990 program(letter PCE/01/bb/845/89 of the Prime Minister to the Senior Vice President

Operations of the Bank). The Bank also decided that a trial period of

several months was necessary to determine the Government's ability to

implement the agreed measures before additional structural adjustmentlending could be considered. This position was confirmed in a letter dated

February 8, 1990 from the Regional Vice President to the Minister ofFinance (Governor of the World Bank for Zaire), copied to the Prime

Minister.

40. Despite earlier assurances by the Prime Minister, in March 1990the Government rejected the 1990 macroeconomic framework prepared by the

Zairian technical team and the Bank and IMF staff. The Governmentannounced that it would continue the planned expenditure and investment

programs cited by the Bank as inconsistent with the letter and spirit ofthe adjustment program. During this period, the Government also started tobuild arrears on external debt to bilateral creditors. In the absence ofan agreed macroeconomic framework, the Bank suspended the processing of

three adjustment lending operations and advised the Government of itsdecision in a letter dated April 17, 1990 from Mr. Isenman (Director AF3)

to the Minister of Finance.

41. It could be argued whether or not the Bank was right incommitting the SAL supplement when the credibility of the Government was

low. After ample consideration, responsible Bank staff decided to acceptonce more -- but for the last time -- Zaire's solemnly stated objectives of

adherence to the program. The staff were aware that the Cabinet broadly

- 31 -

supported the adjustment program and that, with a strong political mandate,

it could quickly remedy the deteriorating situation as it had demonstratedin early 1989. A new series of measures would have justified thecommitment of important amounts of aid in the pipeline, limiting the needfor personal sacrifices by the Zairian people. By the end of 1989, theBank had eliminated all possible excuses the Government might have had forbreaking the program on grounds of negative resource transfers, of crushingdebt burden, or of high social cost of adjustment. The Bank succeeded infocusing the attention of the Zairian people and the internationalcommunity on the single most important issue. This issue was the lack of

priority for economic and human development in the use of public resourcesand the high level of unbudgeted nondevelopmental expenditure that upsetmacroeconomic balances and depleted the funds available for development. Inlate 1989, the Bank made a last-ditch attempt to salvage the structuraladjustment program. It continued providing financial support to the limitsof feasibility, without compromising on the key development issue --thecomposition and quality of public expenditure. Unfortunately, the

Government officially communicated to the Bank its intention to proceed

with its planned nondevelopmental expenditures, which it considered amatter of national sovereignty.

V. SUPERVISION

42. The structural adjustment loan was closely supervised, with fouror five missions a year and several visits of Zairian delegations toWashington. Supervision was intensive whether the program was on-track or,

as in 1988, off-track. Most supervision was carried out through parallel

missions with the IMF. In February 1988, much attention had to be devoted

to recasting the program and stabilizing the economy. At that time, the

Government stopped working on the civil service and state enterprise reformcomponents, which lacked full support within the Cabinet. The Government

continued to work with the Bank on protection policies, fiscal reforms,financial reforms, energy policy, and reforms in the agricultural andtransport sectors. The Government also laid the groundwork for socialadjustment policies. While formal SAL supervision was focusing on the coremacroeconomic issues, the preparation of sectoral adjustment credits was

deepening the policy dialogue.

43. The main supervision problem was the existence of a parallelGovernment policy agenda outside the agreed macroeconomic framework. TheBank had its dialogue with the Cabinet, but important decisions were takenat the level of the Presidency. A few high-level policy discussions tookplace with the President of the Republic. The Resident Representative

established contacts with members of the President's personal council ofpolicy advisors --but was unable to prevent derailment of the program. In

some cases, the Bank was forced to request changes in measures already

signed by the President; this invariably made policy dialogue moredifficult. In few instances, political interference in technicalassistance work (reform of the Customs agency) and supervision work(missions to the Mobayi project and to Gecamines) could be solved by theCabinet. But throughout SAL implementation, dual authority over economicmatters remained a persistent problem.

- 32 -

VI. CONCLUSIONS AND LESSONS LEARNED

44. The World Bank hesitated a long time before extending structural

adjustment lending to Zaire because the Government had an inconsistent

record of implementing agreed programs and policies. The transformation

from a centrally managed to a market oriented economy took place during the

1983-85 period and could be entirely financed by debt rescheduling and IMF

resources. In 1986, after the Executive Directors approved the ISAC,

another program interruption occurred. But in 1987, the Government

appeared to take all steps necessary to ensure satisfactory implementationof the program. Given (1) the generally good performance during 1983-95,

(2) the obvious need for positive net resource transfers to Zaire, and (3)

the Cabinet's commitment to the program, the Bank took the calculated riskto give financial support to the ongoing adjustment program. In hindsight,the timing of this operation was unfortunate, because the Bank's structural

adjustment efforts were launched in 1986 when the Government's commitmentto reform began to disappear. The off-and-on economic adjustment thatfollowed was particularly damaging for Zaire's credibility with the donorcommunity, private sector confidence, and the welfare of the Zairian peoplein general.

45. At the time of SAL appraisal, the Bank team for Zaire had well

identified the country's economic problems and the risks involved in the

operation, though it may not have been sufficiently ready with workablesolutions. The program represented a mixture of broad policy objectives,

similar to those in other SALs, and many measures of minor importance,

numerous studies, and an agenda of action whose timing and feasibility

were, in hindsight, somewhat unrealistic. The studies and recommendationson fiscal reform showed weaknesses in applicability; the consultant studyon the financial sector was rejected by the Bank of Zaire; the studies forthe state enterprise component were unfinished at the time of Board

presentation and were never fully digested by the Zairian decision makers;the census of the civil service provided an inadequate basis for theremoval of "ghost workers," a necessity for SAL effectiveness. The

specific second tranche conditionality was easy to observe without

necessarily making progress on the substance of reforms. In the end, thesecond tranche condition on a revised and acceptable macroeconomicframework turned out to be the main instrument that allowed the Bank tomeasure continuing commitment of the Government to the adjustment program.

46. Problems with unbudgeted capital expenditures had existed in thepast and reemerged soon after the approval of the credit by the ExecutiveDirectors. The appraisal team had attempted to remedy this abuse bystrengthening the PIP procedures and introducing a $15 million ceiling onnoneconomical projects. Initially, the Bank succeeded in getting adequateremedies. However, the unbudgeted expenditures on which the Bank had nodetailed information turned out to be sizable and derailed the adjustmentprogram. The root of the problem lay in dual authority --by the Presidencyand by the Cabinet-- over public expenditures. In 1988, the Bank delayed

the release of the second tranche for lack of agreement on a macroeconomic

framework for the ongoing year. In March 1989, the basis was laid for anew macroeconomic framework which was officially confirmed two monthslater, but it was designed mainly to re-stabilize the economy. To improve

- 33 -

performance on public expenditures, the new framework set a ceiling forforeign exchange expenditures by the Government, insisted on exclusiveauthority of the Prime Minister over public expenditures, and emphasizedtransparent budget planning and execution, the absence of which had earliermade it impossible to monitor public expenditures adequately.

47. When the suspicion arose that, in 1989, unbudgeted

nondevelopmental expenditures had remained a major problem despite repeatedassurances from the highest authorities, the Bank insisted that the 1990

macroeconomic framework should include specific remedies. It proposed a

ceiling on overall expenditures combined with the protection of a core of

development expenditures, thereby implicitly limiting the nondevelopmentalexpenditures. The Government did not accept this approach and did notapprove the new macroeconomic framework as worked out at technical level

between Zairian representatives and the IMF and Bank staff. The Governmentalso announced that it would pursue investment projects outside the PIPframework. The Government financed the growing budget deficits by

accumulating arrears on its foreign debt.

48. The main lesson to be learned from the SAL is that programdesign, specificity of conditionality, and more intense supervision cannotby themselves substitute for a genuine Government commitment to theprogram. As one example, the newly proposed conditionality on publicexpenditures is not a solid guarantee against reoccurrence of largeunbudgeted nondevelopmental expenditures; such expenditures can also be

financed from unrecorded tax revenues, short-term loans abroad, or directfinancing from revenue sources not controlled by the treasury (for example,public enterprises).

49. The Bank could consider future adjustment lending to Zaire onlyif the Government were ready to open its public expenditure program to fullscrutiny -- and only after the Government had demonstrated politicalcommitment to adjustment through a prolonged period of satisfactoryimplementation of measures in line with the country's developmentpriorities.

- 35 -


ZAIRE


PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

(Government: Office of the Prime Minister)

AUDIT REPORT AND ANALYSIS OF FUTURE PROSPECTS

I. INTRODUCTION

After several attempts to stabilize and liberalize the country'seconomy, the Government asked the World Bank in 1984 for assistance with thepreparation of a structural adjustment program, together with balance of paymentssupport.

In 1986, the Bank responded to the Government's request with asectoral agenda: a first program for the industrial sector was designed and putinto effect in the second half of that year. This program was supported by aquick-disbursing credit in the amount of US$80 million, known as ISAC (IndustrialSector Adjustment Credit).

The program gave place a few months later to an overall structuraladjustment program, together with balance of payments assistance in the amountof US$165 million.

The structural adjustment program was designed to support the Five-Year Economic and Social Development Plan. Its objectives accordingly coincidewith those of the Five-Year Plan in the area of economic growth and ofreorientation and rationalization of the public management; it also reflects thestrategies and policies of the Five Year Plan, particularly in such areas aseconomi liberalization, integration and diversification of the economy, as wellas monetary and budgetary policy.

Following a brief statement of the objectives, strategies and contentof the structural adjustment programs that have been under way in Zaire since1986, the following will briefly evaluate results and weaknesses, beforesuggesting a few aveues to be explored with a view to improving future programs.

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II. BRIEF EVALUATION OF THE DIFFERENT STRUCTURAL ADJUSTMENT PROGRAMS

2.1 ISAC (Industrial Sector Adjustment Credit)

2.11 Background

The crisis has taken a heavy toll on the industrial sector. Thesector's capacity is seriously underutilized, owing, in particular, to theinadequate supply of foreign exchange necessary to finance purchases of rawmaterials and spare parts abroad and also to the unfavorable system of fiscalincentives.

2.1.2 Objectives of the ISAC

The objectives of the ISAC were to:

- remove the constraints mentioned above, with a view to generatingsustained growth in the industrial sector;

- foster the development of a competitive and efficient industrialsector, promote exports, strengthen the ties between agriculture andindustry and among industries, and generate increased employment.

The program thus aimed to strengthen industrial policy, givingspecial emphasis to the diversification and promotion of nontraditional exportsand to an effective import substitution strategy, along with a more appropriatesystem of incentives favoring the maintenance of existing assets and orientingthe sector toward procesing activities geared to making intensive use of localinputs.

2.1.3 Strategies

To achieve those objectives, the Government introduced reform in thefollowing areas:

- export promotion, through the elimination of administrativebottlenecks and the elimination of export taxes on industrialproducts;

- liberalization of the prices of manufactured good, includingelimination of ex-port price controls;

- reform of import tariffs through rationalization and simplificationof the customs duty structure, strengthening of OFIDA,standardization of the import turnover tax and the tax on localproduction;

- reform of the system of taxation applicable to industrialenterprises.

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2.1.4 Financing and progress of the operation

The ISAC, concluded in 1986, was disbursed in 1986 and 1987 in anoverall amount of US$80 million. The operation took place in three phases, eachone comprising a number of reforms.

The first phase, consisting or presentation of the project to theWorld Bank's Executive Directors, was conditional upon the accomplishment ofmeasures designed to effect ex-port liberalization of industrial prices, theadoption of customs duty of a minimum of 10% and a maximum of 60%,standardization of the CCA (turnover tax), consolidation of the FCD tax in theGovernment Budget, and signature of a Declaration of Industrial Policy.

The second phase, entailing the release of 50% of the credit, wasconditional upon simplification of export procedures and the abolition of allexport taxes on manufactured good. The last phase required the establishment ofa program and timetable for the introduction over a three-year period of anominal protection rate of 30%, as well as a program to rationalize the systemof taxation applicable to industrial enterprises.

2.1.5 Brief evaluation of the ISAC

The ISAC supplied the industrial sector with the foreign exchangeneeded to import the spare parts, inputs and other items essential to helptrigger an increase in capacity utilization and improve the sector's performanceon both the domestic and the external market.

The following conclusions may be drawn from the survey conducted bythe Planning Ministry:

(a) Production and employment

- production increase, between 1986 and 1987, of 9% in Kinshasa and14.2% in the regions, in real terms;

- increase in employee numbers, 3.8% in Kinshasa and 17.4% in theregions.

In general, the ISAC helped prevent a decline in production.

(b) Alleviation of the foreign exchange shortage

The alleviation of the foreign exchange shortage contributed somewhatto the relative stabilization of the exchange rate during the second and thirdquarters of 1987. In the opinion of the enterprises and of the banks, however,the amount of US$80 million was insufficient, covering only part of the demand.

Generally speaking, the ISAC yielded rather modest results, aswitness the continued heavy distortions in the incentive structure.

The poor performance results partly from the delayed and inadequatesupport from the World Bank, and from an underestimation of Zaire's balance of

- 38 -

payments requirements and of the magnitude of the economic crisis.

Nevertheless, the program did succeed in giving a clearer idea of theproblems faced by the industrial sector.

2.2 Overall Structural Adlustment Program

2.2.1 Background

The Government asked for the support of the World Bank and the IMFto extend structural reform to the other sectors of the economy. Implementationof the various programs started in 1987, was suspended in 1988, and resumed inMay 1989.

2.2.2 Oblectives

- to achieve sustained growth while maintaining internal and externalequilibria;

- to achieve a growth rate of 3.3% in 1989 and 3.5-4% in 1990;

- to reduce the inflation rate from 94% in 1988 to 75% in 1989, 20% in1990 and 15% in 1991;

- to establish the budget deficit at 15% of GDP in 1989 and reduce it

gradually thereafter;

- to reduce the current account deficit of the balance of paymentsfrom the SDR 650 million (14.2% of GDP) projected for 1990 to SDR600 million (11.5% of GDP) in 1992.

2.2.3 Program content

The Structural Adjustment Program, which contains a set of economicreforms designed to fit in with the First Five-Year Plan (1986-1990), aims to getproduction back on track by supporting private initiative through moreefficiently organized economic management. The following policies were definedfor the sectors concerned:

External sector

Exchange rate: freely operating;

External debt: better conditions for future reschedulings and limitation onnonconcessional borrowing,

External assets: gradual increase in net official reserves and more rationaluse of foreign exchange by the public sector.

- 39 -

Public sector

Reorganization with a view to mobilizing income and controllingexpenses, rationalization of public investment, restructuring of publicenterprises, and reform of the civil service.

Monetary sector

Positive interest rate policy.

Production

Exchange rate determined by market forces, liberalization of foreigntrade, tariff reforms, price liberalization, regular adjustment of prices ofpublic transportation, road rehabilitation, liberal dividend repatriation policy,elimination of transportation monopolies, regular adjustment of prices forpetroleum products.

2.2.4 Financing and Implementation of the Structural Adjustment Program

(a) Structural Adjustment Credit

About 10% of the reforms contained in a matrix of reforms weresupported by credit agreements amounting to US$165 million, in the form of quick-disbursing BOP aid.

The funds are broken down as follows, by origin:

- US$55 million from IDA;

- US$95 million from the Special Facility for Sub-Saharan Africa;

- US$15 million from a Japanese grant.

The first tranche (US$82.5 million) was disbursed in September 1987after the agreed conditions had been met. Zaire had to fulfill certain formalconditions to allow the releasing of the second tranche of the StructuralAdjustment Credit, which took place in May 1989 within the framework of the newSAF program, following a suspension in December 1987.

These conditions included:

- preparation of the macroeconomic framework for 1988-1991, includingthe level and composition of the PIP;

- establishment of an oversight structure to supervise publicenterprises, and appointment of its head;

- classification of public enterprises to be maintained in theGovernment portfolio, liquidated, or wholly or partially privatized;

- finalization of a restructuring and reorganization program for

- 40 -

enterprises remaining within the Government portfolio;

- completion of administrative and budgetary arrangements for theretirement of eligible civil servants;

- adjustment of oil product prices.(b) SAF (Structural Adjustment Facility)

The first and second agreements were concluded in 1987 and June 1989,respectively. An SDR 58 million disbursement too place in 1987. Since thecriteria for implementation were met, apart from the one relative to new externalborrowings of one to five years, for which a waiver was granted, Zaire was ableto withdraw SDR 162 million (US$202 million) from the IMF under the 1989 program.

2.2.5 Overall assessment of the program

The reforms

The various reforms in the areas of customs tariffs, prices, taxationand export promotion have yielded modest results, and distortions persist in theincentive structure, due mainly to the proliferation of special exemptions aswell as to the unfavorable economic and regulatory environment.

In the area of tariffs, reforms are following a normal course. Theband of nominal protection ranges from 15% to 45%. The liberalization processbegun in 1983 with the abolition of ex-ante price controls was not extended toex-post price controls as proposed under the ISAC.

Measures were taken to eliminate export taxes and simplify thecomplex administrative procedures (source of bottlenecks) affecting exports.

The most striking successes of the program were:

- the establishment of effective public investment programming througha three-year rolling PIP;

- pursuit of the customs tariff reform process begun under the ISAC,geared to greater standardization;

The obstacles to completion of the reforms in the other fields arisefrom two sets of factors:

- the difficulties involved in maintenance of the macroeconomicequilibria and stabilization of the economy, both being essentialprerequisites for an adjustment policy;

- the institutional problems resulting from lack of capacity on thepart of the pertinent authorities to handle the design andexecution of reforms.

- 41 -

Impact of the Structural Adjustment Program on the economy

With respect to assessment of the impact of the Structural AdjustmentProgram on the economy, the effects are not really perceptiv1e as yet, since theprogram, designed to produce medium-term economic recovery, has only recentlybeen put into effect. We should not lose sight of the fact that solution of thestructural problems will be a slow, and in some cases lengthy, process.

Based on a macroeconomic analysis, however, the following commentsmay be offered:

Taking into account the stabilization and adjustment programs, wenote that at no time since 1980, in the periods before or after the above-mentioned programs, did real growth reach the 4% threshold regarded as a minimumby the Five-Year Plan. The growth rate was lower than projected.

However, during the years 1984-1987, when the programs were underway,a cumulative growth rate of 10.2% was recorded, against a low 2.3% for the years1980-1983 preceding finalization of the programs. The effect of the programs ongrowth, even if insufficient, would thus be positive.

Developments were relatively more favorable in the area of inflationand money. The inflation rate was brought down from 94% in 1988 to 56% in 1989.In addition, the parallel exchange rate stabilized following the heavy drop inmonetary financing of the budget deficit, combined with increased foreigncurrency sales by Banque du Zaire on the exchange market.

The gap between the official exchange rate and the parallel rate wasreduced to 10% in conformity with the program.

The reveues mobilized by OFIDA and the DGC increased considerably,with results in 1989 exceeding projections by 101.5% and 105.4%, respectively.

The money supply experienced a relatively moderate (60.4%) increasefrom Z 169,851 million in December 1988 to Z 277,404 million by the end ofDecember 1989; this had a favorable impact on the stabilization of the inflationrate, particularly during the second half of 1989.

The Banque du Zaire's lending rate rose by 10 points in February 1989and by 15 points in April of the same year, becoming positive in real terms inJune 1989.

A point that should be stressed, and one noted also by the WorldBank, is that one of the major weaknesses of the program's results consists inthe inadequacy of public spending management.

III. FUTURE PROSPECTS: SUGGESTED CHANGES OF APPROACH

From an in-depth analysis of the process of preparation and of theconditions of implementation of the Structural Adjustment Program, it appearsthat, when all is said and done, the program's failure was the result first of

- 42 -

all of an oversimplified diagnosis of the existing situation and, subsequently,of an uneven distribution of responsibilities between the Government, which bearsthe ultimate responsibility for the country's economic management, and thedonors, who gave the impression that their advice was enough to bring the countryout of its crisis.

A change of approach is therefore essential in order that morerealistic and more suitable programs may be designed and implemented. Theexperience acquired during execution of the Structural Adjustment Program willserve as a useful lesson. Changes will need to be made:

- at the level of preparation of the macroeconomic framework;

- in terms of getting the partnerts to participate in macroeconomicstrategy preparation.

3.1 Preparation of the macroeconomic framework

The following proposals should help fill the gaps observed inexecution of the Five-Year Plan (1986-1990), which served as a basis for theStructural Adjustment Program. To become elements of an overall macroeconomicstrategy, these proposals will need to be incorporated into the philosophy of thecountry's economic and social development program.

To this end, efforts should be made to:

(a) Bring about economic diversification.

In order to link the aims of the Structural Adjustment Program to theproduction growth objectives of the eocnomic and social development program, andnot simply at the theoretical leve, steps should be taken to identify productionand investment goals, including financing strategies and incentives formobilizing private sector energies.

(b) Lay the bases for social mobilization.

For this purpose, there needs to be a clear definition of therelationship between the development of production and improvements in socialwelfare. The social component of the program should therefore be more exhaustiveand include elements of policies in areas such as wages, agricultural producerprices, and the development of economic initiative.

(c) Devine the content of liberalization.

The expression "economic liberalization" [liberalisme economique] hasbeen interpreted in a variety of ways. In future, its meaning should beestabished within the Zairian context.

(d) Define approaches in the monetary, budgetary, fiscal and financialareas.

- 43 -

In order to better appreciate the contribution of monetary policy toeconomic and social development, it is necessary to reconcile short-termobjectives, defined solely by cyclical considerations, with long-term goals, soas to guarantee a minimum of stability and to provide the productive sectors withsufficient supplies of credit to enable the growth targets of the developmentprogram to be met. Budgetary policy will be marked by rigorous control of publicexpenditures, and fiscla policy by simplification of the legislation governingcustoms duties and other taxes, bringing it more into ine with the needs ofgrowth and the development of private initiative.

3.2 How to ensure a balanced contribution from all partners at the timeof program preparation

In future, steps need to be taken to remove all ambiguity in theallocation of responsibilities between nationals and external partners.

Lastly, the Government will present the partners with an economicprogram showing the objectives to be achieved, the strategies it has adopted, theexternal financing requirements and the procedures for securing such financing.The Government should maintain a leadership role through active monitoring of thevarious components at the technical level.

- 45 -


AIRE


EART.111: STATSTICAL INFORMATION

Amounts: IDA: US$SS5.0 millionSFAz US$108.3 million

As of 09/19/90

Original Disbursed Cancelled Repaid Outstanding

1831/A-30

Credit No. A A-301ZR X

Oricinal Credit Daters ASua1

Initiating Kemorandum February 25, 1987 February 25, 1987

Letter of DevelopmentPolicy June 2, 1987 June 2, 1987

Negotiations May 21, 1987 May 21, 1987

Board Approval June 4, 1987 June 25, 1987

Credit Agreement July 29, 1987 July 29, 1987

Effectiveness September 30, 1987 September 30, 1987

Credit Closing December 31, 1988 December 31, 1989

Actual Completion June 30, 1990

CUMULATIVE CREDIT DISBURSEMENT

E=I EMA E1

(i) Planned 82.5 165.0 --

(ii) Actual 58.3 147.5 179.0

(iii) Actual as % of Planned 71% 89%

MISSION DATA

No. of No. of Staff Date of

Month/Year es ara san& enha Baat

Preparation 03/86 n.a. n.a. n.a. 12/86

Appraisal 03/87 n.a. n.a. n.a. 04/87

SupervisionTotal 1987/1991 n.a. n.a. 206.7' n.a.

Completion 09/90 n.a. n.a. n.a. n.a.

FOLLOW-ON ADJUSTMENT OPERATIONS

None.

- 47 -

ANNEX 1

ZAIRESTRUCTURAL ADJUSTMENT LOAN

(Credits 1831 ZR and A-30 ZR)

FINAL SUPERVISION REPORT

I. MACROECONOMIC FRAMEWORK

1. In the early 1980s, after a decade of economic mismanagement,

Zaire embarked on a structural adjustment program to stabilize the economy

and achieve sustained economic growth. The economy had been deteriorating

for almost a decade; the infrastructure was deteriorating; the country had

lost its external creditworthiness because of large misguided investments

and the inability to service its debt; the state copper mines were making

losses; projects in the agricultural sector were not working; the

industrialization program had failed; and, after the Zairianization and

nationalizations of 1973/74 and years of arbitrary economic management, the

private sector was disinclined to invest. The economy suffered from

chronic foreign exchange shortages. Extensive economic controls had

distorted prices and exchange rates to the point where only the paralleleconomy could survive, while the official economy was plagued by high

taxes, erratic Government regulations, and pervasive rent-seeking.

2. The adjustment program aimed at decontrolling prices, improving

the provision of infrastructure services, and withdrawing the state from

commercial activities. More specifically, the program sought: (1) the

removal of price distortions; (2) a return to moderate inflation levels;

(3) a shift of resources from the public to the private sector; (4) adevelopment-oriented public expenditure program; (5) a reduction in debtservice obligations; and (6) more foreign aid.

3. The first attempt at structural adjustment was made in 1981 with

the support of an IMF Extended Fund Facility (EFF). Unfortunately, the EFF

had to be canceled a year later because of inadequate budget performance

and falling copper prices. By 1983, the adjustment policy had obtained

sufficient domestic support, and a new attempt was made to adjust the

economy. The 1983-86 program started with a major devaluation of the

Zairian currency and a subsequent transition to a market-oriented exchange

rate; over the years, the national currency depreciated further in real

terms. A broad price liberalization program improved the market signals

for domestic production and consumption. Strong economic stabilization

measures quickly absorbed the inflationary push caused by the realdevaluation. Although the economic situation improved, the program did not

achieve a breakthrough to sustained economic growth: improvements in

production and trade indicators were mostly due to parallel market

activities reentering official channels. This was due to four reasons:

(1) despite generous debt rescheduling, net resource transfers to Zaire

remained negative; (2) the political and legal climate in Zaire remained

- 48 -

unattractive to most potential investors; (3) the Government did not manage

to contain the expansion of public expenditure and money supply, causing

the reemergence of high inflation; and (4) public expenditure was not

sufficiently oriented toward social development, and maintenance of

infrastructure thus the infrastructure continued to deteriorate.

Growth

4. The Bank emphasized private sector development when it joined

the dialogue on structural adjustment in 1986. Because the Government did

not implement the agreed structural adjustment measures; however, economicgrowth slowed and the share of private investment in GDP fell from 6.3

percent in 1986 to 5.1 percent in 1989. Only the current account deficit

remained within the parameters indicated in the program, owing to world

copper prices well above the 1987 projections (table 1). The following

sections of this report will give the reasons for the lack of supply

response.

Table 1: Comparison of Program tarqets and actual results(percentages)

1986 198 198 I

GDP growth p.a. Programmed 2.4 3.0 3.5 3.5

Actuals 4.7 2.7 0.6 -2.6

Per capita GDP growth Programmed -0.6 0.5 0.5 0.5Actuals 1.7 -0.3 -2.4 -5.6

Investment/GDP ratio Programmed 12.2 18.1 18.5 18.4Actuals 12.8 13.9 14.7 13.3

Curr. acc. deficit Programmed 470 765 773 770

(in mln. US$) Actuals 608 865 796 736

Sources: President's Report SAL; Revised National Accounts (INS, 1990);Bank data base; IMF for current account deficit.

Credit

5. The objective of the program was to channel to the private

sector the additional foreign exchange and domestic credit resulting frombalance of payment aid in order to stimulate private sector production andinvestment. The rationale of this objective was to provide the privatesector with the additional credit needed to absorb more imports and to

finance an increased level of economic activity. This objective was not

easy to achieve because structural adjustment loans are granted to

Governments and, in first instance, reduce central bank credit to the

Government while not increasing credit availability to the private sector.

In the program design for Zaire, this problem was resolved by excluding

- 49 -

from the IMF ceilings for credit to the Government the deposits resultingfrom the Bank's structural adjustment loans. 1/ In other words, thetarget for budget deficit financing discounted balance of payment support(table 2). In theory, this mechanism should have allowed an increase incredit to the private sector without creating inflation. In practice, thisapproach did not work.

Table 2: Credit use by the public sector(end period and in billions of current Zaires)

Dec. Dec. Dec. Dec. Aug.1986 1987 1988 1989 1990

Credit to the public sector 24.9 36.9 118.5 86.8 150.9Counterpart funds from

BOP aid - 17.4 33.1 80.4 104.2

Credit to Government before

deposit counterpart funds 24.9 54.3 151.6 167.2 255.1Increase in cred. to Gov. before

deposit counterpart funds(covered by IMF ceilings) - 29.4 97.3 15.6 87.9

IMF ceilings for

credit to the Government - 6.0 15.0 2/ 30.0 20.0

Source: IMF reports.

Private Sector Credit Needs

6. The propensity to invest in the private sector remained low andthe demand for credit was mainly related to trade. Monetary authoritiesenforced strict credit ceilings on commercial lending to containspeculation against the Zaire and capital flight. Although the programintended to let the private sector benefit from the credit expansion due tothe Bank's BOP aid, the inflationary pressure generated by the quick

I/ The Bank disburses SAL funds against private sector importdocumentation submitted by the Bank of Zaire to the World Bank. Itshould be noted that, at that moment, these imports have already beenpaid for in foreign exchange by the private sector. The Bank ofZaire then sells this foreign exchange to the local commercial banksto finance new private sector imports and deposits the local currencythus received on the account of the Government. As a consequence,central bank credit to the Government will go down. If theGovernment will nevertheless keep its balance with the central bankat about the same level, de facto, it will absorb the additionalcredit availability emanating from the balance of payment aid for itsown purposes.

/ Target in the 1988 Government program (no Stand-by arrangement inthis year).

- 50 -

expansion of credit to the Government made this impossible. Credit to theprivate sector (both including and excluding the counterpart funds from BOPaid) decreased as a percentage of GDP between 1986 and 1989 (table 3).

Table 3: Credit to the private sector(percentage shares of GDP)

1986 1987 1988 1989

Private sector credit 2.4 2.9 2.6 2.1

Counterpart funds frombalance of payments aid - 2.0 2.0 2.3

Source: INS for GDP and IMF for credit.

Public Sector Expenditure

7. Lax public expenditure management led to high budget deficits,higher than programmed expenditure, and substantial spending outside thenormal budget process. In 1989, the Government reduced recordedexpenditures in real terms, but expenditure in constant prices remainedhigher than the budget and well above the level of expenditure before thestart of the program in 1986 (table 4). On the surface, the composition ofrecorded expenditures improved in 1989. These numbers should be treatedwith caution, however, because the nature of expenditures within eachcategory was not reported. As one example, no explanations were given forthe vast increase in financial expenditures (under "others"). And theexpenditure on "infrastructure" could not be reconciled with the PIP. Thebreakdown did not correspond with other sources obtained and could not bediscussed in the field because of the strictly confidential nature of theexpenditure data provided to the mission. As was the case in 1988,expenditure of about Z.40 billion occurred outside the normal budgetaryprocedures.

- 51 -

Table 4. Nondebt Government expenditure(in billions of 1989 Zaires)

1986 1987 1988 1989

General administration 8 21 29 24Economic management 2 4 3 3Human resources 42 97 86 53

Infrastructure 10 11 47 32Regional administration 1 1 1 0Sovereignty & political 143 193 272 122 3/

Other 12 9 37 41

Total nondebt expenditure 219 335 476 274 4/

Source: Public Expenditure Review.

Foreign Exchange

8. As in the case of credit, the foreign exchange made available

by quick-disbursing external support did not benefit the private sector.

The Bank disbursed retroactively against invoices of private sector

importers submitted by the commercial banks to the Bank of Zaire.Subsequently, the Bank of Zaire sold the foreign exchange to the commercialbanks to finance new private sector imports (footnote 1). Thus, allforeign exchange acquired under the SAL was in principle passed on to theprivate sector. Under Zaire's foreign exchange system, however, the

Government retains 55 percent of the foreign exchange earnings from copper

and 100 percent from petroleum exports, while the commercial banks can only

retain the export revenues from exports of secondary importance (mainly

coffee and diamonds) to finance private sector imports. In 1987, when

copper prices shot up and coffee prices fell, the Government increased its

foreign exchange expenditure, largely for nondevelopmental purposes. The

shortfall of foreign exchange available for the private sector caused by

the fall in export earnings from coffee was, grosso modo, compensated for

by the foreign exchange available from the SAL. In short, despite the

intent of the program to have the private sector benefit from the

additional foreign exchange made available under the SAL, this did not

happen (table 5).

2/ Excluding an amount estimated at Z.40 billion in financial

arrangements outside normal budgetary procedures.

&/ Excluding an amount estimated at Z.40 billion in financial

arrangements outside normal budgetary procedures.

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Table 5: Use of foreign exchange by public and private sector 5/

(in millions of USS)

1986 1987 1988 1989

Private sector 895 701 714 823

Public sector (nondebt) 98 207 550 194 6/

BOP aid (including IMF) 95 316 87 333

Commodity imports 1523 1650 2025 2107

Source: Bank data base.

9. By early 1988, the inadequate supply of foreign exchange to theprivate sector had become an important topic in the dialogue between theBank and the Government. The Bank tried to address this issue by limitingthe nondebt foreign exchange use by the Government in 1989 to US$180million. The Government's recorded foreign exchange use in 1989 was

indeed close to the ceiling, but expenditures in local currency with highimport content increased sharply. It was impossible, therefore, to tracewith precision what part of the imports was used by the private sector andwhat part was indirectly used for Government consumption. And, asdiscovered in 1990, the Government spent an estimated US$100 millionoutside budgetary procedures, above the agreed ceiling.

5/ Foreign exchange receipts of the public sector include: balance of

payment aid; central bank reserves; the Government share in copper

and petroleum exports; and central bank foreign exchange purchases

(mainly from Gecamines). Private sector receipts include the exportearnings on official export transactions that commercial banks areallowed to retain and the foreign exchange purchases by commercial

banks from the central bank. This table does not include imports of

state enterprises on retained export earnings (Gecamines and other

state mining companies); imports of petroleum exploitation companies;

imports of equipment financed from project aid; foreign food aid

programs; imports financed from private sources (foreign investment

and parallel market financed operations). For this reason, the

commodity imports are much larger than the financing shown in thistable.

g/ The ceiling was US$180 million, but the Government explained that the

recorded foreign exchange expenditures of US$194 million includedcertain expenditures related to 1988. However, it should be noted

that this amount does not include extra-budgetary expenditures

discovered in 1990, estimated at about $100 million. In 1988, the

extra-budgetary foreign exchange expenditure had amounted to about

US$250 million, which is included in the table.

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Net Resource Transfer

10. The evolution of the external financing of the adjustmentprogram appears in table 6. After the Bank initiated its structural

adjustment financing and called on the donors to increase their aidprograms for Zaire, a notable improvement was achieved despite theincreasingly negative net resource transfers with the IMF. In 1987, gross

aid (disbursements plus debt rescheduling) increased to US$1.39 billionfrom a level of US$1.01 billion in 1986. In 1988, when the program wasoff-track, BOP aid was down but project aid was up and debt service was lowbecause of accumulation of arrears (including arrears on obligations to the

IMF). In that year, the Bank had more than US$200 million in quick-

disbursing structural adjustment components in preparation (the quick-

disbursing part of the so-called hybrid operations), which it first had topostpone and finally to abandon in March 1990 when the adjustment program

collapsed.

Table 6: Net resource transfers to Zaire 7/

(in millions of US$)

1981 1982 1983 1984 1985 1986 1987 1988 1989

Bank (net) 9 29 33 36 39 63 194 104 122

IMF (net) 96 67 67 57 10 -80 -57 -161 -176

Gross disb. other 482 312 276 259 350 375 427 569 596Debt serv. paid other -222 -191 -212 -314 -402 -305 -164 -100 -136Payment nondebt arrears -41 -24 -13 -76 -59 -28 -71 -27 -27

Net transfers 323 192 151 -38 -61 25 329 384 380

Source: Bank data base.

II. PROGRAM COMPONENTS

11. The implementation record of the different SAL components varied

widely. Reforms in trade incentives and taxation were actively pursued,

although with major setbacks from time to time. The financial reforms were

sought through a sectoral adjustment operation. The civil service and

state enterprise reforms were virtually abandoned, although sector-related

second tranche conditionality was formally met in both cases. The reforms

in the transport and agricultural sectors were pursued through traditional

investment projects.

Tariff and Tax Reforms

12. The objectives of this component were: (1) to broaden the tax

base; (2) to improve the incentive structure; and, (3) to increase the

elasticity of the system to inflation.

I/ Excluding short-term borrowing.

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Broadening of the Tax Base

13. This objective was to be achieved mainly through improvement intax administration and through reduction in tax exemptions, evasion, andfraud. The sub-component had a slow start. In 1987, the on-going reformsin the Customs Office were upset by interference from the paramilitarycivil guards and by a personal attack on the head of the EC technicalassistance team who was managing the Customs Office. Work andrecommendations by French tax experts in the Department of Taxation gotlittle or no follow-up. Some specific measures foreseen under the programwere never implemented or were badly designed: drafts for a single taxcode were prepared but never adopted; the numerous low-yielding taxes andmost of the parafiscal charges were not removed as agreed under theprogram; the new inflation accounting in fiscal assessments introduced in1988 contradicted the purpose of the reform and was strongly opposed by theprivate sector; the change in the turnover tax in 1986 was misconceived andwas changed several times during 1987-89; no court of appeal was created;and tax assessments continued to be negotiated between the tax inspectorand taxpayer, while part of tax payment did not arrive in the treasury.The Interministerial Committee for Tax Reform never met.

14. The situation improved dramatically in 1989, when the Governmentappointed strong managers in the Customs Office and in the Department ofTaxation, both with clear mandate to improve tax assessment and recovery.The Government earmarked 5 percent of the gross tax receipts for these twoinstitutions to finance staff incentives and to improve equipment. A Bank-financed coordinator for fiscal reforms managed to activate the TechnicalSecretariat of the Interministerial Committee for Tax Reform and helped tocreate task forces for specific program components. It took until November1989 before the Committee had its first meeting. At the moment, a broadprogram for improvement in tax administration and identification of newtaxpayers is well underway. The tax reform program in its present form isputting emphasis on the removal of exemptions. The Bank sees reduction inthe excessively high tax rates as an instrument to reduce fraud and taxevasion; if well implemented, such structural change can be achieved along

with a substantial increase in tax revenues. Progress reports are beingreceived on a quarterly basis.

15. The economic program financed under the ISAC included a refomof the existing turnover tax (CCA). The turnover tax was planned to havean important resource-raising function to compensate for the gradualelimination of export taxes. The objective was to introduce a single20 percent tariff for the CCA, both on imported and domestically producedgoods. The resulting double taxation on inputs and end products wasproposed to be eliminated through a system of tax deductions (drawback ofpreviously paid import duties and turnover tax on exported goods were notconsidered).

16. Unfortunately, the tax administration was unable to implement

the deductions system; for this reason the reform introduced importantdistortions in the economy. Importers paid the CCA only on the cost priceof goods, whereas domestic producers paid the tax on inputs and, again, onthe sales price of the final product. The private sector rightfullyprotested that this tax was favoring imports over domestic production and

refused to comply with it. The Government, under pressure to satisfy theprivate sector and also to increase tax revenues, introduced changes almost

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every year (without consulting the Bank or, in 1988, even its own

technicians). In 1987, it reduced the CCA on industrial inputs to 3

percent. In 1988, it reduced the CCA tariffs to 12 percent. In thefollowing year, the tariff was brought back to 18 percent and a list of

"undeniable inputs" S/ was exempted from the tax. However, in thatyear, the Government also opened the possibility of exemption for allproducts and services that could be used as an input, an exemption to be

determined according to the final destination of the specific batch ofgoods or services. Considering the weak tax administration in Zaire, this

system is bound to lead to abuses. The Interministerial Committee for TaxReform is planning to introduce a value-added tax system by 1992, when thecapabilities of the tax administration are supposed to have sufficiently

improved.

17. As agreed under the program, the Government removed the CCA on

interest on credit to the agricultural sector in exchange for theelimination of the administratively fixed interest rates and creditallocations for this sector. The program included a plan to remove in two

steps the CCA on interest for all other credit in order to facilitate

financial intermediation. But, in 1988, commercial lending rates were

heavily negative in real terms and this tax helped capture for theGovernment part of the rents that otherwise would have gone to the

commercial banks. Moreover, the full elimination of CCA on interest wouldhave led to a substantial loss of budget receipts that the Government could

ill afford. The Bank recommended to postpone this measure until interestrates became positive in real terms and compensating tax measures wereintroduced. The elimination of CCA on interest over a two-year period is

on the agenda of the Interministerial Committee for Fiscal Reforms for

1991.

18. The economic program included the introduction of lump-sum

assessment of CCA obligations for smaller enterprises which was introducedin 1989 and is supposed to start yielding in 1991.

19. The program also proposed the merger of excise taxes into theCCA. This measure was --rightly so--not introduced. While moving the CCA

to a unified tariff, the excise taxes offered the possibility of making thesystem more progressive.

20. As part of the up-front measures for the SAL, four special

levies and parafiscal taxes were removed or integrated into the general

budget. The main reason for this measure was lack of accountability andmisuse of these funds. Vested interests prevailed, however; in 1989, theGovernment reintroduced similar funds in the form of the Fund forIndustrial Development, the Fund for Tourism, and the Cultural Fund. Bank

missions notified the Government that these new Funds are against the

spirit of the structural adjustment program. The Government appointed atask force to study the wide range of parafiscal and regional taxes. The

objective is to replace these taxes (more than 900) by revenue sharing on

the CCA, wage taxes, and real estate taxes. This may offer a newopportunity to liquidate the special funds.

8/ This expression was used to describe products that can be used

exclusively as an input in a production process.

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21. Under the tax reform, for practical reasons, the local funding

of Zaire's road maintenance program was to be financed from a special levyon petroleum product sales. Part of this levy was also to be used for the

general treasury and other transport-related public enterprises. One of

the achievements of the program was to put the petroleum levy on an ad

valorem basis (that is, set as a percentage of the value of the sales).

Not for long, however: in early 1990 the Government introduced an

administrative price on petroleum imports for fiscal purposes based on

multiyear averages; in consequence, increases in import prices will lead to

higher tax revenues only with several years of delay. Moreover, twoproblems were not resolved. First, the Government controlled petroleumproduct distribution prices and was often reluctant to adjust them on a

timely basis. Second, the Government was slow in paying for its own

petroleum consumption. The oil companies normally reacted on inadequate

profitability or on an increase in Government outstanding by not

transferring to the treasury the taxes they collected. The threat of

supply stoppage normally allowed the oil companies to prevail in

confrontations on this issue. As a result, the receipts from these taxes

remain far below the theoretical yields.

Incentives

22. Reform of the incentive structure was initiated under the

Industrial Sector Adjustment Credit and pursued under the SAL. Many

manufacturing sub-sectors enjoyed excessive protection; protection on most

agricultural products was negative. The program aimed at gradually

narrowing the band of nominal protection to a range of 20-40 percent. Much

of the private sector feared the reduction in protection and opposed thisreform. Before the release of the second tranche, the band of import

tariffs had already been reduced to a range of 10-50 percent (with textilesand luxury cars still at 60 percent). The 20-40 percent range was to be

reached in two further steps. But, many exemptions were still allowed on

the 10 percent minimum. First, a long list of special tariffs existed for

assembly-type industry. Second, many importers, such as the Government,

state enterprises, foreign aid projects, nongovernment organizations, andembassies, were exempted from import duties. Third, many exemptions had

been granted under the Investment Code, with little or no control on thefulfillment of the contractual obligations of enterprises enjoying

exemptions. As a result, only a third of the potential import duties was

actually exploited.

23. While slow, the implementation of the reform of import tariffs

made steady progress throughout 1987-90. During SAL supervision, it was

agreed that a 20 percent minimum import duty could be counterproductive andwould trigger additional exemptions for basic necessities, equipment, andimported inputs. Industry reasoned that many imports entered duty-free and

that a further increase in the minimum would put taxpaying enterprises in adifficult situation. In 1988, the Government proposed to lower the maximumtariff to 45 percent without increasing the minimum; the Bank advised

against this measure because of its negative impact on the budget.

24. In 1988, the reform program switched emphasis toward the

elimination of exemptions. The 3 percent administrative levy on imports

was increased to 5 percent in 1989 and extended to all imports not subject

to the regular import duties. However, Zaire's respective Ministers of

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Finance continued to use their authority to grant exemptions. Certainbeneficiaries of the Investment Code (the petroleum producers) refused topay the administrative fee on legal grounds. Embassies were protected byinternational conventions. Exemptions opened loopholes for third parties,reduced the tax base, and put Zairian producers of the exempted goods in anunfavorable position. In 1990, the Interministerial Committee for FiscalReform appointed a work group with the task of eliminating the remainingexemptions. The Government decreed that no further tax exemptions would begranted under the general regime of the Investment Code and that thespecial conventions would be screened and renegotiated on a one-by-onebasis. The Government also introduced in 1991 full taxation on alltransactions of the state and state enterprises and is considering taxingprocurement of NGOs and embassies.

25. In February 1990, the Government increased the minimum importtariff to 15 percent, except for a fixed list of heavy equipment goods thatwould be taxed at 5 percent. All special tariffs were removed, as well asthe use of the highly protective "administratively assessed import values"(valeur mercuriale). A temporary surcharge was put on textiles, while the

duties for luxury cars were lowered to the general maximum; the Bank

proposal to compensate this tax reduction with an increase in excise taxes

on cars was not introduced.

26. Based on a study on relative protection levels for agriculturalproducts and given the increased minimum level of import duties, it wasagreed that Zaire did not need the programmed anti-dumping measures (exceptfor sugar, introduced in October 1988).

27. As to export duties, under the ISAC most taxes on nonmineralexports were removed, except for those on wood logs and coffee. The high-

yielding tax on coffee was linked to the International Coffee Agreement;with the 1989 collapse of the cartel, the tax was substantially reduced butnot eliminated. The Government is proposing to end the last taxes onnonmineral exports in 1991, depending on budgetary feasibility. Lessprogress has been made with the parafiscal levies on exports. For example,the levies of two duplicating offices for the control of coffee exports(OZAC and OZACAF) were reduced, but the Government shied away from theBank's proposal to merge the two organizations and limit intervention toquality control for Zairian brand coffee. The Government created anational committee for simplification of export procedures (includingprivate sector participation) but ignored the recommendations of thiscommittee.

Elasticity of the Tax System

28. The objective of elasticity was fully reached. By February1990, all tariffs were redefined as a percentage of the invoiced valuecovering the transaction. The percentages were set so as to recover theground lost during the years of high inflation and tariffs set in moneyterms. The administrative exchange rate for customs purposes was replacedby the official exchange rate and is now updated on a weekly basis.

29. While inflation tended to erode the yields of indirect taxes setin money terms, it inflated the income tax. For this reason the programincluded a component of inflation adjustment. Companies could revalue

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assets, but the revaluation profits were taxed at 10 percent and had to bereinvested in the same activity. The adjustment program included aprovision to drop these restrictions. Without consultation with the Bankor the private sector, the Government made asset revaluation mandatory; it

retained both the tax obligation on reevaluation and reinvestment clausesand did not introduce devaluation losses on foreign exchange denominated

loans. This episode further eroded the confidence of the private sector in

the reform program. In 1989, new fiscal facilities for accelerateddepreciations of assets removed the need to change the revaluationobligation. The Government did adjust the progression in wage and income

taxes to inflation, but the adjustment lagged behind rapid inflation and

should have been automatic. Such a measure is now a top priority of the

reform program.

30. Conclusion. In 1989, the fiscal reform program started to show

results, thanks to the new management of tax departments, the clear

mandate, staff incentives, and the support of a Bank-financed coordinator

for fiscal reform. New measures are being passed and implemented inagreement with Bank and IMF advice, while tax reform is evolving underprinciples adapted to the Zairian reality (lower rates, simplicity,elasticity, and nondiscretionary legislation). Both direct and indirect

taxes receipts have sharply increased in real terms.

31. From this experience come the following lessons regarding thedesign and implementation of tax reform programs. The design was toocomplicated to be implemented by the Zairian administration. The programwas established without adequate consultation with the private sector and

was out of touch with the Zairian reality of "negotiating" tax payments.Emphasis should have focused on moving toward nondiscretionary legislation,

increased tax collections, more numerous taxpayers, removal of exemptions,

lowered rates, and the creation of a court of appeal. In particular, theattempted introduction of value- added type taxes was premature. The tax

package was regressive; for example, it did not include a reform of real

estate taxes, the yields of which dwindled during the 1980s. Regarding

implementation, the Government passed new measures without consultingprivate sector organizations, the academic community, the Bank, or even itsown technical services. Until 1990, the Interministerial Committee for TaxReforms never met. As a result, many new measures had to be revised lateror were not implemented as legislated, which added to the confusion. Since

the Government tended to implement first the (more popular) revenue-reducing measures, the program damaged the budget.

Public Expenditures

32. Public Investment Program. The reform program set a broadagenda of reforms in public expenditure policies. The calendar of specificmeasures focused on the Public Investment Program (PIP) and the first stepstoward an integrated three-year public expenditures program. A rollingfour-year PIP was prepared by the Government with support from the Bank; inMay 1987, it was presented to the Consultative Group for Zaire. This

approach was adopted because of Zaire's history of large uneconomical or

unfeasible public investments that destroyed creditworthiness; the Bank's

stamp of approval on the quality of the investment program was considered

essential to mobilize needed resources. A maximum of Z1.5 billion (then

about US$15 million) was reserved for projects of political importance but

- 59 -

without clear economic justification. Although in practice adherence to

this SAL condition could not be monitored, it played an important role in

the dialogue around new uneconomic investments. In addition, non-

concessional commitments would not exceed US$15 million, a ceiling

monitored through the IMF program.

33. The PIP was seen as an important instrument to direct the

available resources toward priority sectors (table 7). The PIP would

concentrate on rehabilitating infrastructure, while the adjustment program

relied on the private sector for investment in productive sectors (copper

exploitation was the most important exception). In the Consultative Group

meeting of May 1987, the donors endorsed the PIP and gave aid indications

sufficient to start implementing the program. The share of expenditure on

infrastructure grew almost as planned but a series of problems in local

cost financing and physical implementation caused further deterioration of

the national infrastructure, particularly in the road sector. Since 1988,

emphasis has shifted toward social sectors as recommended by the Bank.

Table 7: Planned and realized shares in 1987-90 public investment

(percentage shares)

Planned in 1987 Realized Planned in 1990

1987-90 1987-89 1990-93

Agriculture 10.0 9.5 12.0

Mining 26.0 30.7 21.0

Infrastructure 55.0 50.3 48.3

Human resources 5.9 6.4 8.2

Other 3.1 3.1 12_1Total 100.0 100.0 100.0

Yearly average

(US$ mln. 1986 prices) 575 435 805

Source: Public Expenditure Review.

34. The PIP had no legal status. Adherence to the program was based

on the understanding reached during the Consultative Group meeting in 1987and the successive economic programs agreed between the Government and the

Bank. While it was supposed to be publicized through a circular letterfrom the Prime Minister to ministers and managers of state enterprises,

this was not done. The PIP was treated almost as an internal planning

document to satisfy the Bank. Foreign donors and managers of state

enterprises sometimes had to get information on the PIP through Bank

services. To remedy the situation, the Bank has been insisting, since

November 1989, on a full legal status for the PIP in the framework of

annual budget procedures.

35. Despite its weaknesses, the PIP helped improve the financialimplementation of the program. The implementation rate rose from 67.5

percent in 1986 to 85.3 percent in 1989. The Government agreed to exclude

projects with a rate of return below 10 percent. But not all existing

projects were backed by up-to-date studies. A major effort is underway to

- 60 -

review the viability of the PIP portfolio. Moreover, the PIP monitoringcovered only financial execution. Until 1989, little progress was made onmonitoring of physical execution of projects.

36. Local counterpart funds posed a problem. The overall budgetallocations for investment were largely in line with requirements indicatedin the PIP, but large discrepancies existed between the PIP and the capitalbudget at sectoral and project level. To improve the availability of localcounterpart funds for externally financed PIP projects, the Bank and theGovernment agreed on the monthly provisioning of a central bank account atthe disposition of the Planning authorities. However, the use of thesefunds escaped verification by the treasury and could not be monitored bythe Bank. Except for a relatively short time in 1987-88, projectimplementation continued to suffer from lack of local counterpart funds.In 1990, the problem became critical. In the future, the proposedlegalization of the PIP and the presentation of an annual capital budgetidentical to the first year of the PIP will solve most problems; projectfinancing in the budget will have to agree with the first year of theupdated PIP and expenditures will be verified according to normal budgetprocedures.

37. Summary on the PIP. The PIP proved to be an efficientinstrument in screening inviable public investments ( "white elephants").It also provided a legal basis for the Bank to contest uneconomicinvestment outside the PIP. Given the absence of up-to-date feasibilitystudies for most projects and the lack of capacity (and political will) tohighlight politically motivated investments, it was impossible for outsidereviewers to screen all existing projects and smaller new projects. Butthe PIP supervision highlighted the most important cases requiringreconsideration on economic grounds. Many bad projects could be weededout. Some important proposals (the Mushi Pentane sugar project) werefrozen pending redesign. Others were reintroduced in the PIP afterrevision (Mobayi dam, first phase) or with improved financing schemes (Oso-Osokari road). The PIP procedures provided an opportunity for a technicalapproach to problems of choice and allowed the Bank to recommend to thedonors higher project and balance of payments support for Zaire.

38. The Government, however, did not accept the PIP as the exclusiveinstrument for public investment. Throughout 1987-89, problems surfacedabout Proiects launched outside the PIP framework, invariably with lowrates of return and high costs. No systematic procedures existed to tracethese projects. Whenever the Bank became aware, such projects were stopped-- sometimes after difficult discussions. In March 1990, the Governmentnotified the Bank that the choice of investment projects was an act ofsovereignty and that it had decided to move ahead with several projectswhich did not comply with the economic criteria agreed upon with the Bank.Government's reneging on the agreements regarding the PIP was one of thekey elements in the Bank's decision to discontinue quick-disbursinglending.

39. Recurrent Expenditures. The adjustment program aimed atexpanding the PIP approach to a full three-year rolling public expendituresprogram. In this context, the Government developed (with Bank-financedtechnical assistance) integrated public expenditure programs foragriculture, health, and education. The purpose was to protect theseexpenditure programs from arbitrary budget cuts. In March 1990, however,

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the first reform proposal in this direction failed to obtain Government

support.

40. The Bank financed technical assistance for the introduction of

new budget procedures and a new budget nomenclature to improve budgetary

choices and control. The mere recording of public expenditures under the

correct budget code was thought an important step forward. But in August

1989 the necessary flow of expenditure information to the Ministry of

Budget stopped; the Government declared that it needed at least two years

before a system could be introduced.

41. According to the program, the Cour des Comptes (state audit

bureau) was to be strengthened. While the Government took some action in

1990, the detail and efficiency of this reform has yet to be assessed.

42. It is important to stress that, while problems in controlling

public expenditures had some technical aspects, the root difficulty was

that the Presidency kept spending authority outside the agreed budget. The

Government's unwillingness to move toward better financial planning, strict

adherence to the budget, and more accountability for actual expenditures

was the principal reason why the structural adjustment program fell

through.

Civil Service Reform

43. Reform of the civil service aimed at rationalizing and reducing

Government staff, improving the salary structure, and enhancing personnel

management. The first objective was partly achieved. As part of tranche

conditionality, 25,300 ghost workers were removed from the Government's

payroll in 1987 and 1988. In 1989, budget provisions were made for the

retirement of 19,000 eligible government employees. The total staff on the

Government's payroll fell from 500,000 in 1986 to 475,000d in 1990 (well

below the targeted 15 percent reduction); this came in part through a

simultaneous increase in security forces. Progress on salary and

management objectives was negligible. With some delays, manpower planning

began in a few key ministries, but the Bank never received the results of

the studies.

44. Over the years, inflation eroded civil servant salaries so

greatly that at least a doubling of real salaries would have been required,

if salaries were to be an incentive for better performance. At the

existing low level of remuneration, Government personnel had to seek

additional employment or take advantage of their official positions. The

program proposed a salary reform "not substantially adding to the public

wage bill," but this was difficult to conceive. The 5 percent reduction

in staff did not contribute significantly to the financing of the intended

reforms. The programmed salary reform also aimed at reducing the 1:13

ratio between highest-and-lowest paid civil servants. However, the

analysis by the appraisal team put the ratio between 1:50 and 1:90

including secondary income. These ratios made it clear that uneven

remuneration of civil servants could not be resolved by changes in the

official salary structure. The adjustment program included

"rationalization" of these largely illicit advantages. But discussions on

the topic were blocked from the beginning. Reform would have required

strong political will and financial resources to cushion the initial

- 62 -

impact. Both elements were absent at the time of Board approval. Aperformance evaluation system existed but was not applied; no improvements

were introduced, not even for the smaller group of civil servants working

in key sectors on which the program focused; the high degree of

politicization in higher civil service ranks certainly played a role. The

programmed indexation to inflation of Government salaries was not

introduced on Bank advice, because such rigidities would be dangerous wherethe state budget is so highly dependent on volatile world copper prices.

45. With hindsight, it is evident that the civil service adjustment

program could not be implemented under the existing circumstances in Zaire.

To make a start, tranche conditionality was linked to more limited

objectives of removing ghost workers and provisioning the budget for

retirement of eligible staff. The Government's non-performance in the

field of salary structure and personnel management never became an issue

because, by February 1988, the program became inactive on macroeconomic

grounds. In 1989, the program was refocused on economic stabilization and

removal of macroeconomic distortions, while all formal second tranche

conditions had been met. The Bank took the position that this component

must be reappraised (together with the UNDP that had provided technical

assistance) and that a workable comprehensive civil service reform must be

designed.

46. Policy action developed instead in restructuring the salaries of

limited groups of civil servants within the ministries of Finance, Budget,

and Planning -- staff essential for the implementation of the structural

adjustment program. Under the Bank's technical assistance project,

agreement was reached that salary premiums for this core group would be

financed by the Government budget. A study was completed on how to

structure these premiums, the Bank commented, but the Government did not

follow up arguing that premiums would create destructive jealousy within

the civil service. In 1989, however, after the departments responsible for

tax collection had gotten a special civil service status, the Government

introduced large incentive payments for tax collection staff. So far, the

response to these incentives has been good.

47. A new civil service reform program should be embedded in an

overall scheme of public expenditures and tax reform; it should be

carefully designed, with broad participation of all concerned groups. In

1990, under the threat of strikes, the Government substantially increased

real salaries. If the real salaries are to remain at the levels achieved

in fall 1990, it would be advisable to start reducing some of the most

economically harmful advantages civil servants receive 9/.

2/ For example, allocation of free gasoline is one of the more harmfuladvantages higher civil servants enjoy. This system has increased

government gas consumption to three times what it should be. But the

Government is slow in paying its fuel bills. For this reason, the

petroleum companies are withholding taxes they collect on behalf of the

Government. Almost half these taxes are earmarked for road maintenance.

The inadequacy of local counterpart funds for road maintenance paralyzed

this activity during 1987-89, and this reduced agricultural production in

some regions to subsistence levels.

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State Enterprise Reforms

48. As the structural adjustment program was appraised, the

Government had already made substantial progress in: (1) returning

nationalized enterprises to the private sector; (2) liquidating loss-makingstate enterprises; (3) removing the monopoly of the state oil company; (4)

restructuring the state-owned copper mines; and (5) reducing interference

in the management of mixed enterprises. The agricultural marketing boards

had been eliminated and preparation of program contracts with some of the

larger public utility companies had begun.

49. Under the structural adjustment program, the Government intended

to: (1) privatize a substantial part of commercial activities carried out

by state-owned enterprises (except those considered of strategic

importance, such as public utilities and copper exploitation); (2) diminish

its share in mixed enterprises; (3) liquidate nonviable state enterprises;

(4) increase efficiency, managerial freedom, and accountability through

objective setting and performance audits for public enterprises; and (5)

change the legal and supervisory framework for the state-managed sector.

The latter aim included a reform of procedures for management selection and

remuneration that had been the exclusive domain of Zaire's President. A

study program was launched to give detailed guidance and accelerate the

reforms.

50. With good past performance and a dynamic Minister of Portfolio

pushing the program, expectations were high. Three of the five second

tranche release conditions were related to public enterprise reform,

namely: the liquidation of the Ministry of Portfolio and the creation of a

light oversight structure; a decision on which enterprises would be

privatized or liquidated, and a plan for restructuring the remaining state

enterprises. Since, at the time of SAL preparation, the UNDP-

financed/Bank-managed studies had just been launched, this conditionality

was not very specific.

51. Despite a sound conceptual basis, the preparation of this

component suffered a major draw-back: it was done in secrecy, almost

exclusively with the Minister of Portfolio (and one trusted assistant), and

backed by the Deputy Prime Minister responsible for structural adjustment.

The study on changes in the institutional framework was finished and

approved by the President in a restricted session in November 1987.

52. In February 1988, the minister in charge of the reform programwas replaced by the President's advisor in this domain; for a full year

there was no further progress. The expensive UNDP-financed studies

remained without follow-up. The audit report on cross-debts prepared to

clean the slate between the Government and the enterprises led to no action

and became obsolete. No law was passed to make external audit mandatory

for all public enterprises. Programmed work for debt-equity swaps was

never finalized. The new minister had a centralistic approach to public

enterprise management. Distorting the Bank's recommendation on the need toconsolidate the supervision of state enterprises, he aimed at concentrating

authority in the Ministry of Portfolio. He also took measures that

conflicted with reform principles. As one example, he ordered public

enterprises to use state banks exclusively in financial transactions. For

an enterprise with large foreign exchange dealings like Gecamines, the loss

- 64 -

of control over transactions would have been a major setback. This

discriminatory measure was later directed exclusively against Belgian-owned

banks as part of a wider set of measures to show the Government's

displeasure with certain Belgian positions on Zaire, and subsequently

dropped altogether, but most public enterprises had already shifted theirfunds. The programmed financing of technical assistance in this field wasnever requested.

53. In early 1989, lack of progress in state enterprise reform

became a block to second tranche release. The Cabinet then decided to

downgrade the Ministry of Portfolio to a light oversight structure (ConseilSuperieur du Portefeuille) according to the conditions spelled out in thecredit agreement but without much change in personnel or policies. The

Bank did not push for the programmed overhaul of the legislation dealingwith public enterprises; given the thinking in the Ministry of Portfolio,results could have been counterproductive. The new unit produced the

required lists for privatization of enterprises (without mentioningliquidations) and a plan for rehabilitating remaining public enterprises.

The formal conditions of second tranche release had thus been met. But thesubstance of the program was not supported by the institution created tomanage the change. Progress was made through other instruments: as partof traditional Bank projects, program contracts were agreed upon for water,power, and public transport companies, and an important forestry company

was put up for privatization as part of a Canadian aid program. Inaddition, the Bank had hoped to achieve substantial privatization and

rehabilitation of financial sector enterprises through the later suspended

financial sector adjustment operation. Since the Government has recentlyappointed a new chairman for the oversight unit, progress may again becomepossible.

54. The main lesson learned from this experience is that structuraladjustment measures prepared in isolation run a great risk of not beingimplemented because they do not enjoy enough political backing. In

particular, it is dangerous to lean heavily upon one strong personality wholacks political support and who may be removed from office. A secondlesson is that Zaire's reform program did not focus on the enterprises

where most was to be gained from privatization (the Kilo Moto gold mines

and the MIBA diamond mines); these enterprises remained under less-than-transparent public management, operating at low levels ofefficiency. 10/ Finally, it was imprudent to launch consultants'studies ($US773,000 UNDP financed) before evidence existed that Governmentwould follow through.

Financial Sector Reforms

55. The financial sector reform program aimed at: (1) establishinga market-determined financial system, (2) improving financial

intermediation, and (3) improving the supervision of the banking system.

The reform program in this field also included a special action program for

small-scale enterprises, the creation of a consultative commission on

agricultural credit, the strengthening of savings cooperatives, and studies

10/ More recently, IFC has been invited to study rehabilitation and

extension of these mines in mixed ownership formulas.

- 65 -

on credit for the fishing and livestock sectors. In a later phase therehabilitation or privatization of state-owned financial institutions indisarray was added to the program.

56. Financial sector reforms started during the 1983-86 economicprogram with liberalization of the lending rates of commercial banks. In1987, as part of the up-front measures for the SAL, preferential interestrates for agriculture loans were removed, prior authorization for medium-term and agricultural lending abolished, turnover tax on credit to theagricultural sector removed, and the system of allocated credits withinoverall credit ceilings replaced with a single target for long-termlending. However, the last item was never enforced by the Bank of Zaire.The introduction of high interest treasury bills helped increase interestrates on savings deposits.

57. During SAL preparation, the general direction of the reform inthis sector was identified; related studies were not finished or digestedat the time the program was adopted. The consultant report produced withBank financing was highly critical of existing financial institutions buthad been prepared without adequate consultation with those institutions.The report's quality did not meet full professional standards, and the Bankof Zaire refused to engage in discussion on the basis of it. Lack of depthand of consensus with the monetary authorities was one of the reasons whythe Bank, in early 1988, decided to deepen the reform program in thissector and to strengthen the calendar of concrete actions through afinancial sector operation. In 1988 and 1989, several missions went out toprepare the credit. This work was discontinued in 1990, when theadjustment program went off-track.

58. Measures aiming at the creation of a market- determinedfinancial system were highly vulnerable to disturbance of the financial andmacroeconomic equilibrium. Already in 1987, inflation had reached 90percent because of monetary financing of the large budget deficits; thecredit ceilings introduced under the IMF Stand-by arrangement had createdwaiting lines for credit. This scarcity allowed the commercial banks tomaintain high margins on their lending operations. The large spreadbetween deposit and lending rates was partly justified by the high level ofunremunerated obligatory reserves that the commercial banks had to support(these reserves financed low-interest central bank lending to theGovernment). On the other hand, the spread represented commercial bankprofits from the scarcity of credit. The SAL program included the removalof the turnover tax on interest for nonagricultural loans in 1988. Butbecause, under the prevailing inflationary conditions, this tax wascapturing part of this scarcity premium for the Government, the Bankadvised Zaire to maintain this tax as long as real interest rates werenegative.

59. A serious problem arose in 1988, when the Government gavespecial status to one of the state-owned banks, exempting it from centralbank supervision and allowing it to hold foreign exchange in accountsabroad. Since this bank was also handling revenues from copper exports,the special status created a hole in institutional controls on the use offoreign exchange that the program hoped to establish. For practicalpurposes, this problem was resolved when the Bank of Zaire was assigned asthe controlling agency of this commercial bank.

- 66 -

60. As part of the misguided 1988 anti-inflation program, the Bankof Zaire used its market power to keep interest rates low. The heavily

negative real interest rates stimulated capital flight and commodity

speculation and put pressure on the exchange rate (also set at rates far

below the market value). In 1989, when the program was relaunched, high

priority was given to economic stabilization, removal of price distortions,and a return to positive real interest rates. While interest rates were

increased according to the agreed schedule, inflation was declining faster

than expected. In the last quarter of 1989, inflation was down to an

annual 20 percent, and real interest rates were positive by about 30

percent. In that period, the Bank was proposing removal of the tax oninterest; it also relaunched the financial sector operation. Soon afterthe Government discontinued the adjustment program, however, the old

problems of excessive budget deficits and inflation returned. The prudence

of the monetary authorities in maintaining high interest rates through 1989

proved to be justified.

61. The Bank provided TA on the supervision of the commercial

banks by the Bank of Zaire through the preparation of the later-aborted

financial sector operation. Tnis TA was well received, and therecommendations will probably be introduced without the support of asectoral adjustment operation. The Bank of Zaire stopped further advancesto the bankrupt BCK (a state-owned commercial bank) and continued therestructuring of the Zairian Development Bank, SOFIDE (para. 63).

62. As to the financial institutions targeted for

rehabilitation/privatization, preliminary studies already existed. These

institutions had also been screened in the framework of the state

enterprise reform program. After the failure of that program, the Bank had

decided to act through the financial sector adjustment program. With thewithdrawal of the financial sector adjustment credit, no further progresswas made.

63. The Zairian development Bank (SOFIDE), supported by the Bank andIFC, had inadequate project screening and credit recovery. The

Agricultural Development Bank (BNA) had weak management and could not

attract the foreign capital needed for "privatization" (the Government was

aiming at participation by foreign donor organizations). For this reason,the Bank supported channeling new credit lines through the commercial banksusing refinancing facilities in the central bank.

64. The SOFIDE credit lines financed by the Bank passed the foreign

exchange risk to the borrower; this brought several enterprises into

difficulty after the major devaluation in 1983 when the exchange rate

continued to depreciate. The Government then created a fund to carry the

foreign exchange risk, but this concealed large interest subsidies and thus

did not receive the necessary backing of the Bank and donor community. The

fund is inoperative due to lack of money.

65. Among the special action programs, only the increase of credit

to small enterprises worked. This success was achieved through a

traditional Bank investment project that created the refinancing facility

in the Bank of Zaire. The study programs for credit to the agricultural,

fishing, and livestock sectors were never pursued. However, the studies on

the cooperative saving institutions have recently been launched.

- 67 -

Transport Sector Reforms

66. The structural adjustment program proved right in makingtransport infrastructure a key element. While the macroeconomic frameworkwas expected to create a better economic environment, success of theprogram would critically depend on a strong private-sector response toimproved incentives. In almost every survey with entrepreneurs, the poorcondition of roads and telecommunication services emerged as the mostconstraining factor.

67. In 1987, following an IBRD loan to rehabilitate the statecopper mines (Loan No. 2682), the Bank focused on the rehabilitation of the2000-km rail and river connections between the mines and the coast. Therelated sector policies were to be embodied in program contracts for thetwo companies responsible for rail and river transport throughout thecountry (ONATRA and SNCZ); these policies would have to includerationalization of tariffs, improvement in financial management, andprivatization of certain activities. This reform program was to be carriedout by a traditional investment project, but the strategy was also includedin the SAL to make use of its monitoring. Because the SAL approach tostate enterprise reform failed, these issues, however, were exclusivelyaddressed through an investment project passed in May 1989 (Credit No.2027). Part of this agenda was successfully implemented. But littleprogress has been made on privatization of selected activities and onclosing uneconomic rail connections in the north of Zaire. The Governmentwas unsupportive of these reforms. Preparation of the privatizationmeasures is lagging behind on the agreed calendar, and the financial healthof the enterprises involved is deteriorating.

68. Diversifying Zaire's economy out of its dependence on coppermining, was one of the principal adjustment objectives. Under the program,production incentives were changed in favor of agriculture. But

plantations and small-holders were handicapped by poor road conditions,

silted river channels, collapsed bridges, nonfunctioning ferries, lack offuel and spare parts, lack of wage goods and other problems. Improvedmaintenance of the road network was considered the highest priority. TheSAL included a policy framework for a general road maintenance program, tobe financed under the Sixth Highway Project, and a decentralized feeder-

road maintenance program. The principal policy element included in the SAL

program was an arrangement to secure the local counterpart funds for these

works from an earmarked levy on petroleum products. This agreed policy

measure failed. In 1987 and 1988, the Government was slow in paying for

its own petroleum consumption. It also kept petroleum product prices below

cost and promised the petroleum companies compensation from the pricestabilization fund; since the fund had no liquidity, the oil companiescompensated themselves by the receipts of petroleum taxes that were

supposed to provide the local financing for road maintenance.

69. In 1988, the Bank had to suspend disbursements under the Sixth

Highway credit because of lack of local counterpart funds; for lack offunding the road maintenance program halted, cutting entire regions from

their potential markets and increasing food imports and prices in the

towns. Conditionality attached to the proposed Energy Sector Adjustment

operation was supposed to bring improvement. Briefly in 1989, the

earmarking system seemed to work and funds started to flow to the highwayauthority. This allowed the Bank to lift suspension of the Sixth Highway

- 68 -

Project. But in 1990 the same problems reoccurred. Now that thestructural adjustment is interrupted, the Bank has tried to secure local

financing for road maintenance through conditionality on a traditional

investment operation; in the new feeder-road pilot project, approved by the

Board on September 11, 1990, the local funding would be provided and

managed by the local authorities.

70. Given the importance of road maintenance for the long-term

development of Zaire, the Bank is continuing to work in this sector despite

problems in public resource management. On several occasions theGovernment expressed unhappiness with the structure of the HighwaysAuthority (Office des Routes --OR), presenting it as an agency that hadfailed to perform. However, no alternative for restructuring this agency

was envisaged until the end of 1989. Moreover, most of OR's badperformance was due to the Government's persistent inability to provide the

agreed local counterpart funds to the available foreign financing. In

1990, OR was redesigned into an agency managing and supervising the quality

of works, while the actual jobs are to be executed increasingly by private

contractors.

Agricultural Sector Reforms

71. The structural adjustment objective in the agricultural sector

was to improve conditions for spontaneous private investment. Agricultural

production, particularly for exports, suffered most from the economicmismanagement of the 1970s. The real devaluation and price liberalization

passed in 1983/84, followed by the removal of negative protection and most

export taxes in 1987, provided better price incentives for agriculture, but

other constraints hampered adequate supply response. As major constraints

on agricultural growth, the SAL appraisal team identified deteriorating

transport infrastructure, lack of counterpart funds for foreign financed

projects, an unfavorable investment climate, absence of private sector

input delivery, unsuited credit policies, high regional and parastatal

taxes, "unfair" foreign competition, and complicated export procedures.

The previous sections of this report described how the structural

adjustment program was designed to remedy these ills -- and how weaknessesin implementation doomed the program.

72. Despite the improved incentives, the private sector remained

reluctant to invest. The Bank tried to design a project to stimulatesupply response in the agricultural sector, particularly for the tree crop

sector, but could not identify a full project that would be effective. The

main reason was that the private sector was not willing to make long-term

investments in Zaire at market interest rates. Moreover, the debt/equity

swap program, mainly intended to privatize the plantation sector, never got

off the ground. Instead, the Bank proceeded to prepare small-scaleprojects to remedy sector specific weaknesses: a TA project to develop

sector strategy in November 1988 (Credit No.1958-0); a thus-far successful

Pilot Extension Project in February 1990 (Credit No.2096-0); and a National

Research Project in preparation. In the same vein, the pilot feeder-road

project was approved in September 1990.

73. The reforms in the financial sector (para. 56) represented aloss for the agricultural sector. They eliminated the special allocation

of credit for agriculture and called instead for an obligation for

- 69 -

commercial banks to invest 20 percent of their portfolio in the sector.The new system was to be supervised by a Consultative Committee onAgricultural Credit, but the committee never met. The structural credittarget was reformulated as 30 percent of the portfolio for term-credit --but the commercial banks could not comply with this target and the centralbank did not enforce its implementation. The integration of earmarked

taxes for an agricultural investment fund (FCD) into the general treasurywas, to some extent, also a loss for the sector, since the FCD had been a

source of risk-bearing investment capital in agriculture. It is well toremember, however, that: (1) the low interest rates and specific

allocation of loans to the agricultural sector were so abused that theyhampered overall economic growth, and that; (2) two-thirds of the resources

of the FCD were allocated on political grounds and were irrecoverable.

74. The picture that emerges is that, particularly in agriculture,better performance can be obtained only through a combination of investmentprojects and changes in overall policies. Before 1983, agriculturalprojects did not work because of incorrect price incentives, yet correctionof the price structure was not enough to trigger supply response. In a

next stage of adjustment, traditional investment projects will have to

remove physical constraints, while structural adjustment must improveZaire's negative investment climate, mainly through better governance.

III. DISBURSEMENTS

75. In 1984, one of the Bank's concerns about structural adjustmentlending to Zaire centered on the perceived difficulty of channeling Bankforeign exchange resources through the Government to the private sector,

one purpose of the aid. During program implementation, Zairian techniciansoften argued for the SAL to limit disbursement to the import needs of the

productive sectors, as had happened in the preceding Industrial Sector

Adjustment Credit (ISAC). In dialogue on this point, Bank missions

insisted that the SAL was supporting economic liberalization and, for thatreason, should not add to controls and economic discrimination against one

or another form of foreign exchange use. According to this approach,foreign exchange from the Bank was integrally allocated to private sector

imports according to a negative list of goods, while sectoral priorities

were supposed to be realized through market signals and macroeconomic

incentives incorporated in the structural adjustment program.

76. However, Government decisions on other sources of foreign

exchange available to Zaire led to a situation in which despite the balance

of payments aid, the private sector did not receive additional foreign

exchange (para. 8). Indirectly, the SAL funds permitted the Government toincrease its own use of foreign exchange. The introduction of target

levels on the use of foreign exchange by the Government proved insufficient

as a safeguard against such shifts in foreign exchange use. The Government

increased its expenditures in local currency with high import content,

thereby draining foreign exchange that otherwise would have served private

sector production. It also continued to spend foreign exchange through

financial arrangements outside treasury and central bank procedures.

77. Since foreign exchange is fungible, no disbursement procedurescan be designed to exclude the risk of the Government shifting the use of

its own resources. In a liberalized economy, the use of foreign exchange

- 70 -

is determined by macroeconomic policies. With budget expendituresmisdirected and uncontrolled, negative real interest rates, andartificially overvalued official exchange rates, additional foreign

exchange availabilities will ultimately finance uneconomic expenditures,

whatever the disbursement procedures. Under such circumstances, balance of

payments aid should be discontinued, as was decided for Zaire.

78. The IDA and SFA were fully disbursed on August 29, 1989, the

Japanese Grant and Loan on June 5, 1990. The supplement was fully

disbursed on March 5, 1990. Audit reports for the first and second tranche

of the SAL certified that all funds disbursed by the Bank have beenreceived by the Government. The Government respected the lists of eligiblecommodities and countries of origin; administrative irregularities found by

the auditors did not lead to any misappropriation of funds and could be

administratively remedied. The World Bank has requested an audit on the

uses of the SAL supplement, an audit on the use of interest received on the

funds deposited in the different special accounts, and on an audit on pre-

shipment certification for a sample of imports.

79. The Bank of Zaire sold the foreign exchange from the SAL to thecommercial banks in accordance to import documentation received from thesebanks and in line with the credit envelopes of the different banks, except

for the allocation to the Agricultural Development Bank (a state owned

institution) that received a relatively large share compared to its size.

However, no rules were stipulated regarding the allocation of the SAL

foreign exchange to the different commercial banks.

Jdl/jp

3/12/91

December 18. 1990

ZAIREs STRUCTURAL ADJUSTMNT IAMN - MATRIX O ACHIEVENNTS

Program under SAL Implementation

Policy area and reform objectives Actions taken before June 1967 Actions Schedule Actions taken since June 1987

A. INCENTIVE FRAMEWORK AND PRODUCTIVE EFFICIENCY

A. 1 Tariff Reform

Strengthen economic integrationipromote efficient substitution ofimports and export diversifica-tiorl correct bias against agri-culture and export activities ingeneral.

A. 1.1 Import Duties Introduction of a minimum rate of Adopt a program of uniformization April 1967 Spread In nominal protection10% and a maximum of 60% with to be implemented in 4 years. in reduced In two steps to 15-50%.exceptions at 5% and 80% (July order to achieve a nominal (April 1967 and January 1969)1986) protection rate of 20-40%.

Extend 10% tariff to all comod- July 1987 See above. (Ordonnance-L0i No.ities previously taxed at 5% and $7/046 and ArratA No. 046. datedreduce maximum rate to 50%. with 09/19/67).the exception of luxury cars andtextiles for which 60% is applic-able.

Reduce number of exceptions July 1987 Done according to schedule.rented under DPT from 272 to (ordonnance-Lol no. 87/046),

3 remaining eliminated In January1989.

Update and publish list of Ind- July 1987 Done (Letterustrial inputs/equipment produced DENi/cB/03/1856/87)t (used tOlocally. excluxe these goods from tax

exemptions only under the generalsystem of the Investment cdj

Restructure and strengthen the December 1987. Draft decres under considerationInvestment Commission in order to plan of action and terms of since April 1988, new exemptionsbe able limit tariff exemptions reference for Technical under the general systemgranted under the Investment Assistance. temporarily suspended In 1989.Code.

Study on the competitive position Define dumping correction mach- June 1987. Study showed that new Importof selected agricultural products anis" as wall as the list of end of study, tariff provides sufficientexposed to competition from goods and the time frama for Its September 19871 protection for all productssubsidized Imports and recommend- application, plan of action. (Ordonnanco-l NO.88-006 ofations of tariff measures to ftrch 10. 1988), except sugar foroffset dDfping. which an anti-cor oing regulation

was put in place in Oct. 1988.

A. 2 Exort Promotion

Correct bias against exports.piinly of agroinaustrial and

S inufacturinp products.

A. 2.1 Export Proceduref Initial simplification of proced- Continua simplification of S 3. 1.i Arrtd intedspt. No. 007 neverures concerning exports (July procedures concerning export applied, national comittee for1986). crops (intervention of export promtion presented

OZACP/OAC). reil97ndations In 19893 no action taken except reduction InOZAC/OZACAF charges. r

A. 2.2 Export Taes and Duties Elimination of export duties. Eliminate taxes on agricultural June 1987, Dune (Letter No. 068 from theaxcept for copper.* cotton. unpro- exports currently being raised elimination of teas, kinioter of Budget).ceased won'd and czude oil (July for the Ponds Agricol(. January 198881986). elimination of Fund.

ZAIREs STRUCTURAL ADJUSTME21T LOAN - MATRIX OP ACHIEVEMENTS (continued)


Policy areas and reform objectives Actions taken before June 1987 Actions Schedule Actions taken since June 1987

R. I Tax Reform

Integrate domestic and trade tax-ation and harmonize it with theTariff Code reforms (see A.1)

Improve and expand resource mob-ilization and its administrationby. inter alia, reducing distor-tion-Ta- iWioving the distrib-ution of fiscal and parafiscalcharges.

Eliminate a nmber of parafiscaltaxes and replace them by usercharges or budgetary allocations.

a. 1.1 Parafiocal Charge. Consolidate into the central June 1967, Done (January 1988)budget and eliminate earmarking decreesoft January 1988,- Ponds Spdclal du Trdsor n.1s application.- Ponds de Promotion du Tourisme- Ponds de Sdcuritd & lEnergie.

Formalize by law the consolida- May 1987 Don (June 1987), AiretA Dept.tion of the Ponds de Convention no. 024), Portfolio taken over byde D6velopement in the central DCA according to decision Coaltdbudget and non-earmarking of the Centrols. October 1M8 new fundstwo percentage Points of the CCA. created In 1989 (Industrial

Development Pund and CulturalPromotion Pund).

Eliminate taxes on agricultural June 1987s Done (June 1987, Letter No. 068exports currently being earmarked elimination of taxes, of Minister Of Budget).for the Fonds Agricole. January 1988,

elimination of Fund.

Unity the interventions of OZAC June 1987, Arr6td Intardept. No. 007 not yetand OZACAP in coffee exports, and decree on unification, implemented.reduce the level of their charges September 1987,on agricultural exports. application.

Eliminate all administrative and may s9871 List hes been presented In Aprilproperty taxes where the yield is presentation of lists 1987 but Implementationmarginal and potentially January 1988. postponed.questionable. elimination.

R. 1.2 Indirect Taxation Harmonization of domestic end Introduce a crediting system for February 1988, Not dones suspension CA forImport CCA (July 1986). domestic and import CcA tax on plan of action. Indisputable Inputs Industry InInputs. January 1989 (Rrw No. 24 ofMarch 1988).

Change excise taxes on mIn prod- may 1987, Done (Ordonnance No. 022 ofucts to ad v!2oreM taxes, under proposals, March 20. 1988 - applied Junethe adilst.ition of OFIDA. January 1988, 1988).Including the road tax, Implementation.

Eliminate In two years the CCA on Reduction by half In 1988. total Bank/Governmant, agreement tofinancial services (interest), elimination by 1989. postpone.

Eliminate CCA on Interest for June 19t7 Doe (Arr6 Dept. o. 025/7).agricultural loans.

Introduce the forfeit system for May 1987, Doethe CC A taxation of Scs. document i

January 1988,application.

ZAIREt STRUCTURAL ADJUSTMENfT LOAN - MATRIX OF ACHIEVEMTs (continued)



B. 1.3 Company Taxation Introduce a permanent framework January 1988 Ordonnance-Lol No 8-12 passedfor inflation accounting regula- regarding reevaluation oftions for periodic revaluation of companyto assets and enforced Inassets and liabilities. 1990, rates on wes lowered to

comp,ensate for arfect patInflation.

B. 1.4 Tax Organization and Cooperation agreement with EEC to Revise. harmonize and unify the September 1987, Draft law for foreign trade tax

Administration provide technical asaiatence to various bodies of tax legislation creation of working group and under consideration sinceOFIDA. and regulations into a single implementation schedule. October 1987, for new Income tax

coherent tax and tariff code. law In preparation.

create an inter-ministerial Com- May 1987 commission created but did not

aiasion responsible for implemen- creation of commission. function, proposals for mallertation of fiscal and paraiacal Six-month progress and action commission with three tak forcesreform within a 30-sonth horizon. reports. Instituted by Arx&tA NO. 055/69#

first Meeting in 1990.

Strengthen Piacal Research September 1987 In 1990. fiacal analysis unitDivision of Ministry of Finance, founded (UAP).which will be responsible forTechnical Secretariat for above-mentioned Inter-ministerialCommisaion and will prepareperiodic progress reports onfiscal reform.

Strengthen Tax Revenue Div. of September 1987, On-going, Independent status ofMin. of Finance by improving itsa plan of action, OVIDA and D.G. Contributionsi 5%human and material resources January 1986-90. of tax receipts allocated toinvolved in tax base identif ice- implementation. Improvement of organization andtion and verification, claims salary premiums of direct andoffice and procedures for con- Indirect taxation servicestentious cases$ regional (Ordonnanco 89-101 of may 12.divisions, and capacity for 1989).economic and legal analysis.

Continuation of EEC program for Through March 1989. Donet Th program Prolonged,the rehabilitation of OFIDA to management now done by tKINETAINtimprove its tax and tariff col- regional staffing In place,lection. especially excise taxes. comuter ization completed,

Introdqction of IncentivepremiuDa Introduced.

launching of a study on regional September 1987, Study completed. Workgroupm andand local finance to review torso of reference. local experts stablished Incurrent practicesaend to correct 1990.diDtortions affecting productionand exports.

Esablishment of a unit In the May 1987 Division created, strengthening

Min. of Finance (Dept. of in framework of overallRevenues) in charge of the adm- reorganization of DO desIstration of CCA and CR forfeit contribution..tale for ese.

8. 2 Public ExpenditureManagement

Improve efficiency and control ofLnlic expenditurens increaste co-

ordination between capital andrecurrent expenditurrn pnrd r

Implementation of high PriorityInvestment projects.

. 2.1 Investment Progrmming. preparation of a 3-year PIP and Evaluate execution of 1987 PIP. February 1 Update 1989/91 finalized# 1990/92

identification of a three-year in consultation with World Blank update under diacuaion.

core PIP I987r90 preented to the and update 198-90 aIP.ca Meeting (May 1987).

ZAIREs STRUCTURAL ADJUS1IENT LOA - MATRIX OF ACHIEVEMEITS (continued)



Institutionalize preparation May 1987s Doneg in 1990 lay-out of PIPmechanism of 3-year rolling PIP, circular from Prime Minister, improvedl renmed sceaning of allunder the coordination of Mia. of stressing execution and old projects in PIP; start withPlan, particularly assuring the coordination of core PIP. monitoring of physical execution.link between the core PIP andinvestment budget.

Strengthen organisational struc- May 1987s First round of chavns completedture of Miu. of Plan in order to definition of structure new study with further recmend-increase its programing and September 1987s ations under consideration inmonitoring capacity. application of structure. 1990.

Open a special account in Bank of June 1987. Done (note of May 31, 1987);Zaire, in which appropriations definition of mechanism. certain problems in expenditureinscribed in the invstmat verification to be resolved.budget would be deposited on aquarterly basie.

Prepare public expenditures pro- June 19871 Done for agriculture andgramo (P P) for selected sectors program of action; education in 1989; underagriculture, education, health). June 19688 execution for health; new

completion of PEPal objectives of protected coreOctober 1988 exp*editure program not yetinclusion in 1969 budget. achieved.

Strengthen planning units (PPBS) March 19878 For agriculture being implementedin key sector ministries (agri- program of action. (Bank TA project).culture, education, health).

Define operating procedures and a January 1988. Studies do.e but not implemented.progran of action for a studyfund to be used for the prepara-tion of projects and economic andsectoral studies.

Streamline the budgeting process March 19871 Simplification of nmenclatureimplemented by the Ma. of Budget program of action, introduced in 1989 budget but notand finance In the area of. for budget execution monitoring;expenditure authorization and monthly treasury plans andprocurement. statements of budget execution

not fully implemented.

D. 3 Civil Service Reform

Strengthening of the managementof the civil service, includingmanpaer control and rationaliza-tion of remuneration structure.

3. 3.1 Manpower Planning, Ongoing civil service census by Complete civil service census and June 1987 Done (October 1987).Budgeting and Control regions and computerization of computerisation of results.

results (since 1985).

Ongoing census of primar and Introduce system to maintain up- June 1987 Instructions for unifyingsecondary teachers (1985). to-date employment records and employment records implemented in

ensure that they be transmitted 1989.to Payroll Division in Min. ofFinance.

Reduction of fictitious employees Eliminate remaining fictitious September 1987 25,300 fictitious workers(since 1981). employees after completion of eliminated since January 1987.

census.

Systematic retirement of 31,000 Begin retirement of eligible February 1988 In 1988, 1500 staff retiredi inagents between 1981-83. staff. 1989 budget provisions for the

retirement of 19000 identifiedeligible civil servants.

Freeze on recruitment and Create a manpower planning unit Janusary 1988 Unit has been created but is notpromotion since 1983. in Min. of Public Administration. yet operational in November 1988.

ZAIREt STRUCTURAL ADJUSTHENT LAN - MATRIX OF ACIEVEMTS (continued)



Establishment of target of Introduce manpower planning, June 1980. In November 1988, new organigrma100,000 for civil service (strict budgeting and control systems. Irogrem of action; established for 20 ministries.definition). abruary 199timplementation.

M.32 amaten **vcerfol(scndsdyhr

Improve existing salary structure April 1988, not don.in conjunction with reduction of revised salary structure.employees.

Introduce salary differentials April los8 Not dons.andeay steps within grade

Design a mechanism for cost-of- June 1988, Not done. (Bank against it).living adjustmnt. agreement on mechenism,September 1988,aplication to 1989 budget.

Rationalization and definition of February 1988 Not dons.specific criteria with regard tofringe benefits, particularly carand gasoline allowances forprivate use.

3. 3.3 public Administration Declaration to undertake civil Introduce system for settin February 196 Dons for Min, of PublicManagement service reform (second ad third priority objectives/tasks in four Administration ptemberparty congress of 1981 and 1982). pilot ministries. 19891 in pr*p&ratnsfor Plan.Budget and finance.

Statute on career personnel In Strengthen Inspoctorsto Unit and September 1987; Being implementod with UWDP.the public administration (1981). Organization and Nothods Unit of December 19871the Min, of Public program of action.Administration.a

Draft pror Review and define the personnel June 1988 and beyond. ing implemented by an Inter-

frevise olar structure.io

of Win. of Public Administration management function in the ministerial comittee.(May 1985 with amAp). regionp.

Directive and decision of Central DesIgn a training program in February 1988 and beyond. Status 1989, not yet implemented.Committee of party on administrs- basic management.tive reform.

Strengthen existing staff evalue- June 198 Status 1989, not yet Implemented.taion systems and elaborate on thecriteria u1ed.

3. 4 Public Enterprises Reform

the economy through selectiveliquidation, disengagement, andby increasing the role of theprivate sector.

Restructuring of GECAtNioS into Reassess capital of public June 1987 Study done In 1987 decision tofour entities, holding. produc- enterprises, review capital structure attionh marktting and development establishent of pro(non-mining activities) during contracto done for WDESO in193-8. March 19o6

rnd efyATRA in

April 1988.Liuidation of 17 public enter- Prepare draft legislation ove June 1987 Draft legislation finished butprises in the agricultural. Lng the activities of pubi not introduced.transport and Services sectors. enterpries, including mandatory

t rrnal auditing of accounts.

Take decision and prepafr ached- April/ay 1987 Decision taken for 19A8. CCIZ andule to liquidate selected enter- OHL.prioes which are clearly noteconomically or finaneciallyviable.

XIUE& STRUCTURAL ADJUSMTM LOAN - HATLIX OF ACHIEVEENTS (continued)

Program under SAL Inploaentotion


Liquidate identified enterprises. September 1967 CCIZ and HAM liquidatedi CILliquidation in process.

Decide on type of oversight September 1987 Done (Ordonance go. 69033 ofstructure for supervision of January 30, 1969).public enterprises and scheduleor implementation.

Classify mixed enterprises that November 1987 List publishedl debtlequity swapswill be increasingly privatized no longer considered.and initiate the mechanism toenable debt/equity swaps.

Complete studies on crossed debts October 1987 Studies finished in Decemberand agree on calendar for their 19871 liquidation of cross debtselimination, started by Min. of Finance;

situation reassessed in August1990.

Issue relevant legal texts on new December 1987 Done (April 1989).oversight structure.

Classify remaining enterprises October 1987 List of enterrises to beinto those to bes (i) maintained privatised published onwithin State Portfolio; (ii) gay 6, 1989.liquidateds (iii) wholly orpartially privatited.

Establish new oversight structure January 1986 Done (April 1989); June 29. 1969and appoint manager. transfer of responsablities from

Ministry of Portfolio to newunit.

01Elaborate a plan for the restruc- February 1966 Overall plan establishadl onturing and reorganisation of August 23, 1969, program contractthose public enterprises main- signed for Regideso, ONATRA andtained in the State portfolio SNCZ. Twenty other contracts inwith the aim of Improving their preparation in September 1989;management and efficiency. annual performance contracts with

41 enterprises.

Establish a new system and February 1986 The Committee of Experts (on SALcriteria for appointment and implementation) notified the Bankremuneration of PE managers. that this is a sovereignty matter

and that all criteria that seemto reduce the free jud rmnt ofthe Presidency cannot bintroduced.

Liquidate or initiate process to February 1986 Status September 1989o FOLESTCHprfvatize selected enterprises so (invitation for public bids)lclassified in October 1987. liquidation process started for

OTZ; SCMIDOI SOIKAI CODAIKICOTON-ZAIIEs SOSIDE1; ZAIRETAINjMINIRE DE KINSENGE; BCAI IAI;LOTORILA; KIIN.

Eliminate proportion of crossed February 1988 Done for EGIDESO.debts agreed upon with externalpartners.

C. SECTORAL POLICIES

C. 1 Agricultural Sector Policy

Eliminate constraints to produc-tion and exports and improve theIncentive framework for theexpansion of production andinvestment.

ZAIREs STRUCTURAL ADJUSTHENT LOAN - MATRIX OF ACHIEVEMENTS (continued)


Policy area and reform objectives Actions taken before June 1987 Actions Schedule Actions taken since June 1987

Improve trade and marketing ofagricultural inputs, strengthenthe sector's physical andinatit%ttional infratructure,improve public and privatefinancing of the sector, andimprove agricultural research.

C. 1.1 Rural Road Program In the context of institutional Elaborate an accelerated rural Before June 1907s Plan prepared in Kay 1907; worksframework mentioned in the roads program to ensure the adoption of action plan. on-going; Bank pecttransport component, definition maintenance and rehabilitation of approved in Sepember 1990of a rural road program for 1987. 17.000 Xm of rural roads.

Encourage labor-intensive tech-niques and establish an institu-tional framework based on exist-in regional institutions andrying on the participation of

al economic operators.

C. 1.2 Tariff Reform of Apply minims tariff of 101 to July 1987 Done (Ordounance-Lol No. 87/0461Agricultural Products all agricultural products (see A. and Arrttd No. 046 of

1.1).September 19 197 increased to15 percent in 1989).

Study to recommend ways to pro- Design an adjustment mechanism June 1967. Implemented through higher importtect selected agricultura pro- for selected agricultural pro- and of study dutiesi for sugar spec if ic anti-ducts against "=uingr nd sub- ducts ea d to dumping September 17. dumping regulations (Octobersidil.d international markets. (see A.-1m) action plan. 1980).

C. 1.3 Improving Availability of Undertaking of study in January Bsed on recoendations of September 19871 Implementation through the Bank'sAgricultural Inputs 1907. study, prepare actions that would proposals to IDA. TA project for the agricultural

eliminate obstacles to input sector.distribution.

C. 1.4 Simplification of Export Propose a plan of action for June 1987. Study completed; recommandationeProcedures of measures to be taken to simplify end of stud by national export promotion

Agricultural Products export procedures for agricul- September 1967: cission not implemented.tural exports. Propose reform action plan.measures Ito be ado pted inconsultation with IDA(soe A. 2.1).

C. 1.5 Agricultural Credit Eliminate preferential interest June 1907 Done (applied as from October 1rates and the CCA tax on 1907).agricultural credit.

ducts an Agricultural Credit Before August 1907. Cission establishdby letteretative Commissioni rnaponsi DoI/nOUa 00472 dated Septeber

in agricultural 22. 1987; but never met.credit needs (Including seasonalcrop credit ) and asking recom-mindationo to banking sector foreffective coordination ofactivities.

Modify statutes of BCA to extend ofrore Septmbr 19071 Statutes modified on October 1900its capital participation. revision of atutes, but no interest from outsiders.

C. 1.6 Agricultural Research Recommendation. on agricultural Implement recomendations of Before May 19a7r Done; executd through lankresearch by Presidential amed committee on agricultural Implementation schedule; project in 1989.Commission, research. By Septemiber 1907v

implementation and financing ofsupport.

C. 1.7 RationaliBation of Staff Ongoing study on extension work. Implement recommendations of September 1907: Done; executed through Bankin Ministries of study on extension work, action plan, following UKDP/FAO project in 1989.Agriculture and Rural study on extensionj

Development Be fore February 1968;implementation of program ofaction.

ZAIREs STRUCTURAL ADJUSTHENT LOAN - MATRIX OF ACHIEVEMENTS (contizaed)



C. 2 Transport Sector Policy

Improve financial and operationalsituation of CNATRA, SWC andImprove the financing of Officedes Loutem.

Recover costs by implementingapropriate tariff structuresIth timly Inflationadjustments.

Reorient strategy of OUTRA andSCA by decentralizing respons-Ibilitie. selectively stream-lining the organisations andprogressively divesting someactivities.

Improve transport planning.strengthen coordination andelaborate sectoral policies.

Promote rural development throughimplementation of a rural roadsprogram.

C. 2.1 Financial and Operational SNCZ and Onstras Before May 31, 1967. Done Program contracts signedSituation of SNCZ and Prepare financial recovery plans Luding fro&d of price-GATRA. with short and mdium-term cost setting according to

reduction measures and opera- indexation systeml cost reductiontional improvement* and initial measures in 1966.implementation.

C. 2.2 Funding of 0.R. Adjustment in road tax from 5.4 Office d*o Rout**& May 1967 Potrolem price adjustment becaes/1 to 7.6 ail in the context of Introduce a double mechanism for In 1990 again an so hoc politicalApril 1967 increase in petroleum timely collection and periodic decision; tax ratee wereprice. adjus f petroleum prices at incre and put on an ad-

tC . a of the road tax, valor bsIs, but nvriprovidd

t king i account change in adequate financing b as r roadthe h rate and in the maintenance program.international price of oil, asteil as the level of localresources required to implementits program.

Eliminate progressively all June/eember 197 Never satisfactorily implemented.arrears accumulated by petroleumcompanies, and ensure timely pay-ments of the tax, in order toallow 0... to repsy its debts andcarry out its agreed maintenanceand rehabilittion program.

C. 2.3 Cost recovery, tariff SKCI and ORATRAo End of studies and Resolved in program contractsstructure and periodic Review tariff structure of ONATRA recommendations signed in June 1969.Inflation adjustments. and SCZ, based on analytical OATRAs September 1967.

accounting and comercial pract- SWCZs December 1967.icome and define s mechanism forperiod adjustment of tariffs to February 1966; Being implemented.ta ke inflation into account. Implementation of new tariff

structure.

C. 2.4 Statgi P 1nn and ORATRAs June 19871 Results study provided to ORATRA.ltiv R nati.on Improve man resources us"& Action program and timetable. Staff reduced by 1000 in 1969-90.of ORATRA and CZ. :et, ialying a reduction ofstoff, also by retirement.

ZAIREs STRUCTURAL ADJUSTHENT LOAN - MATRIX OF ACHIEVDEMTS (contined)



Improve efficiency by reorgan- Dec. 1987t Decentralixation of mainizing. decentralizin and plan of action and schedule production units implemented

r litie., an. 1989: through Bank project.including spinning off andlor implementation of first measures. CFMF Jan. 1990privatization of certain Voie@ Plurales Jan. 1991activities.

Redefine role of OKATRA and its December 1987. Signed in June 1989.relations with the State and the Preparation of a "Contract Pian.private sector.

SNCZs December 19871 and of study Study finalized; decision not yetUndertake study on non-economic March 1988 action plan; taken.activities. June 19882 implementation and

first measures.

Improve human resource manage- July 1988s Implemented under existingment, implying reduction of action program and timetable. program contract.staff, also by retirement.

Undertake study to improve July 1988: Study ad technical assistanceaccounting and financial and of study and recomendations. on-going, last scope oforganization, decentralizing improvement reduced.services.

Undertake study on divesting Sept. 1987s start of studyl Study not started.certain activities and their June 1988s and of study andsubsidiarization. recommendations.

C. 2.5 Transport Planning, Redefine mechanisms for the December 1987s action plan Investment plans for SNCZ andBudgeting, Coordination preparation, elaboration and June 1988: implementation of ONATRA established and presented

and Elaboration of Sector control of investment plane, first recomendations. to the donors.Policies particularly the updating of a

sectoral PIP.

C. 2.6 Rural Roads Program Launch first phase of a rural May 1987: preparation of programl I lamentation in 1987-19891 Bankroads program. Sept. 1987-end 1988 ilt project approved in

implementation of first tranche. eptember 1990.

Define an appropriate institu-tional structure, withoutcreating new administrativestructures, except for thecentral and regional coordina-tion provided by the NationalRural Roads Service, for therehabilitation and maintenance ofrural roade, operating asfollowes- definition of priorities at End June 1987 Done in 1990.

regional .sub-regional levels*ad *lection of roads.

- definition of technical works End August 19671 Technical works by privateby OR. preparation of contracts. sector.

- control of program delegated June 1987: Arrangements agreed upon in 1987.to 09 in coordination with preparation of agreement betweenregional authorities of Min. in stries of Rural Dev. andof Territorial Public Works.Administration.

- contracting of work to Sept. 1987-Dec. 1988: From 1986 to 1990 on-going.eonomic operators and sub- execution of contracts. Being continued through Bank-contractors. financed pilot project.

- audit and evaluation a Sept. 19881 audit. No audit.t rori and first -

ZAIREg STROCTURAL ADJUSTHENT IOAN - MATRIX OF ACHIEVEMENTS (continued)



Prepare a second phase rural July 1966$ end of UNDP Study completed in 1989. Designroads program. preparation study. of 1990-95 completed road

aitenance program beingimplemnted through Bank pilotproject.

C. 3 Financial Sector Policy

Increase stability of financialsector and its efficiency incredit allocation.

Develop internal financialmarkets with view to expandingfinancial savings.

C. 3.1 Credit Allocation Eliminate a distinction between June 1987 Done (modification No. 11 to theCcredits repartis and "non instruction No. 2 of creditr rtin. and liberalize credit department MO.allocation by banka withoutauthorization of aank of Zaire.

Oblige banks to indicate exact June 1967e Letter No. 070/98MMV/9)09 ofcomposition of the coat of credit circular by nank of Zaire. credit department DOe; measure Ieand to public monthly average applied.rate, including all chargee.

Conduct tudy on credit needs of Sept. 1967 Droped in agreement with thefishing ad livestock sector. terms of reference, lan.e

Establish an Agricultural Credit August 1987 Cmision established by letterConaultative Cofmiasion to review 01/GOUV. 00472 dated Septemberperiodically the volume of credit 22. 1967 but does not function. 0faihingby the sector (seC .1.6).

C. 3.2 Interest Rates and Liberalization of all interest Eliminate preferential interest June 1987 Don (modification Wo.12 to theFinancial Markets rates, except for agricultural rates on agricultural credit. instruction No.12 of credit

credit (September 1962). department BOZ).

Eliminate CCA tax on interest. June 19871 total elimination for Done for agriculturel for otheru posoned in agreement

January 1986 application for withalf reduction;January 1969 total elimination.

C. 3.3 Savings Mobilization Prepare a special lw overn December 1967 Draft lw reedy but notthe cooperatives (COOPEC). Implemented.

Carry out a management audit to March 1968 Not done.define a program of action whichwould strengthen financialstructure of COOPEC.

Exchange views and reach an June 1966 Not done.agreement with IDA on program ofaction for COOPEC.

Establish a plan of action to January 1968 Droppod from program in agreementincrease the of checks in the wit the lank.Government's payments.

C. 3.4 Supervision of Banks Implementation of the new asset Define financial ratios to be September 1967 Ratio's defined In framwork ofand liability situation in banks followed by banks and a program financial sector operation, now(January 1967), of action to strengthen the removed from landing program.

supervisory function of the Bankof Zaire over financialinstitutions.

Documents

World Bank Documentdocuments.worldbank.org › curated › en › ...(SAL) to Zaire (Credit 1831-ZR) amounting to US$55.0 million equivalent and (Credit A-30-ZR) of the Special Facility