Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. P7382-MAG

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED SUPPLEMENTAL CREDIT

OF SDR 15.2 MILLION

(US$ 20 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MADAGASCAR

FOR THE

SECOND STRUCTURAL ADJUSTMENT CREDIT

July 5, 2000

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

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CURRENCY EQUIVALENT(Exchange Rate of May 2000)

Currency Unit = Malagasy Franc (FMG)US$ = FMG 7,213

SYSTEM OF WEIGHT AND MEASURES

Metric US EquivalentI meter (m) 3.28 feet (ft.)I square kilometer (kM2) 0.386 square miles (sq. mi.)I hectare 2,47 acres (a)1 metric ton (m ton) 2,204 pounds (lb.)

MALAGASY FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program LoanCAS Country Assistance StrategyCiSco School District (Circonscription Scolaire)CAS Country Assistance StrategyCNC National Coordinating Committee for Cyclone Damage

(Comnite National de Coordination des Degdts Cycloniques)CRESED II Second Education Sector Development Project

(Prcoet de Developpement du Secteur de l'Education)CRESAN II Second Health Sector Support Project

(Deuxieme Projet d'Appui au Secteur de la Sante)CNS National Relief Council (Conseil National de Secours)CSB Primary Health Centre (Centre de Sante de Base)EPZ Export Processing ZoneEU European UnionFID Social Fund (Fonds dI'ntervention pour le Developpement)GDP Gross Domestic ProductIDA Intemnational Development AssociationIMF Intemnational Monetary FundINSTAT National Statistical Institute (Institut National de Statistiques)NGO Non-Governmental OrganizationPRGF Poverty Reduction and Growth FacilitySAC-2 Second Structural Adjustment CreditSEECALINE Second Community Nutrition project

Vice President: Callisto Madavo, AFRCountry Director: Hafez Ghanem, AFC08Sector Manager: Larry Hinkle, AFTM3Task Team Leaders: Jesko Hentschel, Christos Kostopoulos,

Bienvenu Rajaonson

ii FOR OFFICIAL USE ONLYREPUBLIC OF MADAGASCAR

SUPPLEMENTAL CREDIT FOR SAC-2Credit Summary

Borrower: Republic of Madagascar

Amount and Term: SDR 15.2 million (US$20 million equivalent), on standardIDA terms, with a 40-year maturity, including a 1 0-yeargrace period.

Objectives and Description: The supplemental credit is an integral part of IDA's strategyto help Madagascar respond to the impact of the threesuccessive cyclones. The proposed supplemental creditwould provide Madagascar with fast-disbursing foreignexchange to partially compensate for lower export earningsand higher import needs in 2000 and 2001 due to threecyclones that devastated parts of the island in February,March and April 2000. These have created an unanticipatedfinancing need that would endanger the government's reformeffort that is otherwise proceeding on track. Counterpartfunds generated will assist the government in its plannedreconstruction effort.

Benefits and Risks: The main benefits will be to assist Madagascar in overcomingan unanticipated financing need, thereby maintaining macro-economic stability and meeting government's pressingreconstruction requirements. Possible risks relate to thefinancing need being larger than anticipated, capacityconstraints in the public sector, and the non-transparent use offunds. Appropriate supervision and monitoring will addressthese risks.

Poverty Category: Not applicable. The poor were the most severely affected bythe cyclones. Though not targeted at the poor, the creditwould assist the poor by helping the government containinflation, providing foreign exchange for key imports(especially rice), and contributing resources for the restorationof basic services in the cyclone-affected areas.

Disbursement: The supplemental credit is in one tranche. The governmentintends to draw on the available funds in two installments.The full credit amount (US$20 million) is expected to bedisbursed by December 31, 2001.

Maps: IBRD 20035R1

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

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS ON A PROPOSEDSUPPLEMENTAL CREDIT

TO THE REPUBLIC OF MADAGASCARFOR THE SECOND STRUCTURAL ADJUSTMENT CREDIT

1. I submit for your approval the following report and recommendation on a proposedsupplemental development credit to the Republic of Madagascar for SDR 15.2 million(US$20 million equivalent). The proposed credit would be on standard IDA terms with amaturity of 40 years. The credit supplements the on-going Second Structural AdjustmentCredit (Credit 3218-MAG). The supplemental credit aims to ensure that Madagascar hassufficient resources to cover an unanticipated financing need arising from the threecyclones that hit the country from February to April 2000. The counterpart funds willprovide budget support for the government's reconstruction effort.

I. Summary

2. Madagascar was struck by three consecutive cyclones - Eline, Gloria and Hudah - inquick succession in February, March and April 2000.1 The island is highly exposed tostorms that form over the Indian Ocean. On average, three storms hit the island per year aswas the case in 2000. However, this year's impact both in terms of human suffering aswell as physical damages has been the most severe in years with damages even higher thanthose estimated to have been caused by the 1994 cyclones Daisy and Geralda. In 2000,more than 1 million inhabitants were affected by the cyclones, resulting in over 200 peopledead and over 400,000 people in need of emergency assistance. Winds and heavy rainscaused serious damage to homes, schools and health centers. Thousands of hectares offorests were destroyed, and roads were swept away, isolating many villages. Destructionof a large share of the rice, vanilla and coffee harvests will substantially increase importneeds of rice and lower export proceeds. The human and environmental impact of thecyclones is considerable, especially since it came on top of a drought in the south of thecountry that has lasted for months and has the potential for causing food shortages in thenext few months.

3. Madagascar is a low-income country with a GNP per capita of US$250. Per capitaincome fell by almost 50 percent (in real terms) over the past three decades. Today, lifeexpectancy, health and education indicators are at or below the unsatisfactory averages forsub-Saharan Africa. Literacy stands at 46 percent and almost half (44 percent) of childrenunder the age of three are stunted. Access to basic public services is scarce. In 1997, 75percent of the Malagasy population were income-poor with rural poverty most severe. Thegovernment's central objective is to steadily reduce the incidence of poverty to 35 percentby 2015. Recently, the government drafted a preliminary version of an anti-povertystrategy which will serve as a basis for development of a Poverty Reduction Strategy Paper(PRSP).

Although Gloria is classified as a tropical storm, for purposes of presentation we do not distinguish itfrom the two cyclones, Eline and Hudah.

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4. The cyclone damages in 2000 are estimated to be US$137 million (about 4 percent ofGDP), of which US$76 million are private damages and US$61 million are public. Thecyclone caused income losses in the order of US$77 million for 2000, or approximately 2percent of GDP. Public reconstruction needs amount to US$92 million, expected to becovered over a two-year period, July 2000 - June 2002.2 These public reconstruction costs,losses in export revenues, as well as additional import needs of the private sector, areestimated to result in financing needs of US$75 million in 2000 with needs in 2001 ofUS$65 million and in :2002 of US$41 million. The financing gap in the year 2000 isexpected to be filled by additional debt relief from the Paris Club (US$19 million),multilateral and bilateral donors (US$23 million), and the IMF (US$33 million). It isanticipated that IDA resources - including the proposed SAC-2 supplemental - will helpthe government in its reconstruction effort and will allow the private sector to play animportant role in overcorming cyclone-related setbacks.

5. The government requested assistance from IDA to respond to the directreconstruction needs of the emergency as well as to mitigate the potential macro-economicimpacts. IDA's response includes (a) technical assistance to the government in assessingthe damage and its implact; (b) portfolio restructuring to meet short- and medium-termreconstruction needs; (c) supplemental financing for the Third Social Fund Project and forthe Second Structural AdLjustment Credit; and (d) assistance to the government to develop along-tern cyclone vulnerability mitigation strategy. This Report spells out IDA's overallresponse to the emergency and details the proposed supplemental financing to the SecondStructural Adjustment Credit. The supplement to the Third Social Fund Project ispresented in a separate Memorandum of the President (Report No. P7380-MAG),presented to the Board of Executive Directors at the same time as this Report.

II. The Impact of Cyclones Eline, Gloria and Hudah

6. Cyclones Eline, Gloria and Hudah. Cyclones Eline, Gloria and Hudah madelandfall on the east coast of Madagascar on February 16, March 2 and April 2, 2000,respectively. Depending on the level of human impact and physical damage assessed,between 9 and 20 districts (of 111 total) were classified by the government as heavilyaffected, with at least 33 more classified as moderately affected having experienced amedium impact through winds, rain and flooding. Eline, the first to hit, struck the centraleast part of the country. The second cyclone, Gloria, struck the northeast coast and snakedsouthwards. The third cyclone, Hudah, made landfall in the same area as Gloria, butproceeded west across the northern tip of the country. Nearly all of the national territorywas at least lightly affected by at least one of the three cyclones.

7. In all of the most affected districts, agriculture is the main source of income withmore than 90 percent of the workforce employed there. The northernmost, heavily-affected districts of Antalaha, Andapa, Maroantsetra and Sambava comprise the backboneof Madagascar's cash crop production of vanilla, coffee and cloves. Subsistence farrning

2 Public reconstruction needs exceed public damages because reconstruction will be at cyclone-proofstandards in several sectors. This is in-accordance with the standard construction practice of thecurrent sector investment programs in the health and education sector, supported by IDA.

3

in maize, rice and manioc dominates activity in the other hardest hit areas in the East of thecountry to the south of Tamatave. Although sparsely populated, the affected areas have alow average landholding of around 0.4 hectare. Over 90 percent of the population lives insimple bamboo dwellings which were largely destroyed by the cyclones.

8. The hardest hit districts had the highest stunting rate of children, the lowest densityof doctors per person, and the lowest access rates to infrastructure such as electricity orlatrines. Table I presents several living standard indicators aggregated across differentareas according to the strength by which they were hit by the cyclones. Although the mostheavily-impacted areas do not rate the worst in all indicator categories, the stunting rateand doctor availability rates suggest severe deprivation in these areas.

Table 1: Social Indicators of Affected Areas

Stunting Rate Literacy Rate Doctors Electricity Access, Sanitary Access(percent children (percent adult per 1000 percent (private toilet),below 3) population) percentSeecaline, 1998 Census, 1993 M1. Plan, Cens-us, 1993 Census, 1993

1998

Heavy Impact (9) 51.1 62.7 0.88 1.9 31.5Moderate Impact 43.3 55.3 1.30 3.5 20.1

(44)

Light Impact (32) 46.7 68.5 1.79 10.3 39.6No Impact (16) 40.9 44.2 1.21 3.7 18.8National Average 44.5 57.1 1.39 5.4 26.1

Source: CNS database.

9. Human and Poverty Impact. The direct human impact of the consecutive cycloneswas high. More than 200 people lost their lives, more than 1 million people were affecteddirectly as their houses were damaged or destroyed, and parts or all of their agriculturalproduction lost. Of these, more than 400,000 were in need of immediate and urgent help asthey had to flee the destroyed area or were isolated from the outside.

10. The impact on the already poor rural population in the affected districts is verysevere and requires targeted reconstruction activities. Income and asset losses to theeconomy are small on the aggregate but with the poor bearing the brunt of these incomelosses, it means that many of them risk even greater poverty. The cyclone impacted thepoor in the following ways:

(i) Asset Losses: It is estimated that about 60 percent of houses in the most affectedareas were totally or partially destroyed with hundred thousands of people losing allor a large part of what they owned - houses, livestock, tools, and other belongings.Although houses were small and simple, material costs and time invested inreconstruction put an enormous strain on household resources. To buy materials likenails, many families will need to save for weeks or even months. In the cash croparea in the North-East, vanilla and coffee trees were uprooted by winds or died in thefloods. They represented the most valuable asset for small-holder farmers. In therice growing areas, destruction of irrigation systems will lower yields in the nextyears if not rehabilitated quickly.

4

(ii) Income Losses. Wit]hout support, a large percentage of families in the affected areaswill fall even deeper into poverty. Especially in the tree crop sector, incomes willonly recuperate in two to three years. In the short-run, prices for staples such as riceare likely to increase (especially if a shortfall of foreign exchange were to lead to anexchange rate devaluation), further lowering real incomes of the poor. If the washed-away rural and provincial roads remain impassable, trade of agricultural produce andintegration in the off-farm labor markets will be limited.

(iii) Higher Health Risks: With a number of health centers as well as roads destroyed,access to both preventive and clinical services is impaired and needs urgent attention.A post-cyclone survey conducted by the National Relief Council (CNS) indicates thatmalnutrition rates in several districts are on the rise. With water levels receding,water contamination is reduced. The incidence of malaria might increase, however,in the coming months.

(iv) Disruption of the Education Cycle: In the ten most affected educational districts, it isestimated that schools for 223,000 students at all levels had been destroyed.Although many villages and towns set up provisional teaching facilities in make-shifthalls or tents, the cyclones disrupted the school year at a very intense time oflearning.

11. Overall, a key priority of the government and its partners in the short run is tomitigate the urgent needs oi the poor. With many private assets of the poor destroyed andincome earning possibilities impaired, it is crucial to rehabilitate roads, water systems,education and health facilities as well as ensure seed distribution and nutritional aid. If thegovernment and donors do not respond swiftly and effectively to this emergency, the poorof affected regions may continue to suffer long after the floods recede, in turncompromising the accumulation of human capital required for Madagascar's sustainedgrowth.

12. Environmental Impact. The cyclones had an extensive physical impact on theenvironment. The area of forest heavily damaged is estimated to be 7,000 km2. InAntalaha, where cyclone :Hudah made landfall, roughly a quarter of the trees arecompletely uprooted and a half lost major branches. Many of these darnages occurred inthe largest national park of Madagascar, the Masoala environmental park. There and inother hard-hit districts, deforested areas are scarred by numerous landslides. The impact ofthe cyclones on biodiversity and the many endemic plants and animal species is unknownto date and will require careful monitoring.

13. The main threat of the cyclones to the environment is linked to poverty as manyaffected families are in search of food. Burning of the fallen wood on hillsides providesrice land for two years before the soil becomes too depleted for further cultivation. Thisdoes not allow natural regeneration of the forest and destroys the habitat of many species.Also, the deforested hillsides left behind by the slash and burn practices increase the impactof future cyclones because deforested hillsides are more prone to erosion and lose theirwater-retention capacity. Hence, in deforested areas the impacts of cyclones are larger dueto increased flooding and mnudslides. Rapid relief and reconstruction efforts of vital

5

infrastructure would therefore also- limit the pressure on the environment in the affectedareas.

14. Damages and Income Losses. In close cooperation with the Government, otherdonors and several NGOs, IDA conducted a preliminary damage assessment (see Box 1 inSection III). Total infrastructure and asset damages are estimated at US$137 million orslightly less than 4 percent of GDP (US$76 million private, US$61 million public). Table2 provides a breakdown of these damage costs by sector. Roads, bridges, ports, railroads,and two airports record the highest damage in the public sector with US$31 million. In thesocial sectors, 1727 primary schools, 173 secondary schools, 82 primary health centers(CSB1) and 86 district health facilities (CSB2) were damaged or destroyed. In theagricultural sector, irrigation systems were especially affected in the eastern part of thecountry around Tamatave. Private asset damage fell largely on households as they losthouses, belonging (including livestock) and vanilla, coffee and clove trees.

Table 2: Asset Damage Estimates, by Public and Private Sector (US$ millions)'

Sector Damage Estimate Reconstruction Need

Private 76 n.a.2- Industry 9 n.a.2- Housing & Assets 26 na2.- Vanilla, coffee, clove 41 41

trees

Public 61 92- Education 11 33- Health 1 5- Agriculture 12 15- Transport 31 31- Water & Elect. 2 3- Public Buildings 3 3- Prevention 1 2

Source: Joint Damage and Reconstruction Assessment (May 2000).1 To convert the local currency cost component of damages and reconstruction needs into US dollars, a uniform

exchange rate of I US$ equal to FMG 7,213 was used (month average for May 2000, Intemational FinancialStatistics from the IMF). Since then the Malagasy Franc has appreciated by around 12 percent (till June 30, 2000).This would lower the dollar estimate of the local cost component of the damage and reconstruction estimate which isnot above one third of total damages/reconstruction costs in any sector.

2 Reconstruction needs for industry and housing (private sector) were not assessed since these assets have to a verylarge extent already been restored by firms and households.

15. Total income losses (60 percent of which fall on the farming sector) are estimated atUS$77 million in 2000, representing approximately 2 percent of GDP. Table 3 presentssector estimates of income losses before taking into account the reconstruction effort. Asprivate reconstruction is underway and a large part of public reconstruction is expected tobe completed next year, income losses in 2001 should be limited to US$31 million. Theseincome losses do not directly translate into a lower GDP growth rate as private and publicreconstruction (partly foreign financed) will give a boost to specific sectors, especiallyconstruction and transport. Overall, growth of GDP in 2000 is expected to only fall 0.5percent short of expectations, from the pre-cyclone prediction of 5.3 percent to a post-cyclone forecast of 4.8 percent.

6

Table 3: Income Losses due to Cyclones, by Sector,2000-2002 (before reconstruction) (VS$ million)

Sector 2000 2001 2002

Industry 6 2 0

Agriculture 47 19 12Of which-rice 21 8 0

-manioc 8 0 0-maize 2 0 0-vanilla 9 8 8-coffee 4 3 3

- cloves 2 1 1-pepper 0 0 0- livestock I 0 0

Services (incl Transport) 24 10 1

Total 77 31 14

Source: staff calculations.

16. Reconstruction Needs. The same multi-organizational working groups thatappraised damages also estimated reconstruction needs and developed sectorreconstruction strategies. E3stimated reconstruction needs in the public sector total US$92million (refer to Table 2). Reconstruction cost estimates in the education (US$33 million)and health (US$5 million) sectors include costs associated with rehabilitation to cyclone-proof standards which also confirms to current standard practice of construction in thesesectors. In the transport sector, reconstruction plans cover immediate repair works. Amulti-donor funded transport rehabilitation effort is planned over the next years that willupgrade a large part of the national and provincial road network. In the agricultural sector,the Government plans to distribute about US$3 million in seeds, in addition to repairingthe damaged irrigation systems. Reconstruction needs of the private sector have in largepart been already met as most private households and firms have rebuilt their assets.

17. The government's priority is to solve major transport bottlenecks at the beginning ofthe reconstruction effort. S;uch priority is important to reach now-isolated areas. It couldalso have an important positive effect on containing price rises of food (especially rice) andconstruction. Trucking prices have risen as high as 30 to 50 percent in the affected areassince the cyclones because of the damage to roads and bridges.

18. Economic Impact. Ihe primary macroeconomic impact of the cyclone has been dueto losses in earnings to the private sector (producers, intermediaries, and exporters) andforeign exchange pressure for additional cyclone-related imports in 2000 and beyond. Asmentioned above, reduced income earnings are around 2 percent of GDP. In the absenceof a concerted reconstruction effort, GDP per capita (which grew at a rate of 2.0 percent in1999) would level off after four years of positive growth. The Government is committedto the reconstruction effort and has programmed additional capital goods expenditures of

7

US$23 million in 2000. As stated above, this and additional private sector reconstructionactivity is expected to contain the reduction in GDP growth due to the cyclones to 0.5percent.

19. On the external side, the shortfall in exports and additional import needs are expectedto translate into a current account worsening of US$75 million for 2000 (equivalent to 45percent of foreign exchange reserves of the Central Bank). The export shortfall will beprimarily due to reduced vanilla exports (US$12.9 millions), although the cyclone has alsoaffected exports of coffee (US$5.4 million), and cloves (US$2.8 million). Additionalimports reflect public and private sector needs, especially additional needs for the importof rice (US$8 million). The actual commercial imports of rice will have to be closelymonitored in the next months since production losses capture only damages due to thecyclones. If the drought in the south of the country continues, it is possible that foreignexchange needs for food imports might be substantially higher.3

20. Extra import needs also stem from Government's reconstruction effort and privatesector needs. The current account balance (excluding grants) is expected to deterioratefrom -7.3 percent to -9.1 percent of GDP in 2000. The impact of the cyclones on exportsand imports is expected to last until 2002. Given the country's low level of reserves,US$226 million or 9.6 weeks of imports, it would be impossible for Madagascar to meetthese additional demands without external support.

21. On the fiscal side, the US$92 million net public reconstruction investments areprogrammed over the period July 2000 - June 2002. To meet these reconstruction targets,the government plans to use 25 percent of that amount in the latter half of 2000. Thiswould increase programmed public investment by about 10 percent. To meet such higherinvestment expenditures, government revenues can unlikely be increased as they arealready set at ambitious levels. Part of the needs can be obtained through reprogrammingplanned expenditures and government will raise 20 percent of the public reconstructionneeds through such expenditure switching measures in the years 2001 and 2002. Apartfrom foreign financing, the other options to cover the unanticipated financing needed carryrisks. Increased domestic borrowing could raise interest rates even further, stifling privateinvestment at a time when it is badly needed. Resorting to overall credit expansion - apartfrom being limited by the existing IMF program -- could increase inflationary pressures.

22. National and International Response. After the first two cyclones, the governmentlaunched an international call for help on March 7, 2000, to solicit emergency assistancefor the most affected populations and support for the rehabilitation of damaged anddestroyed infrastructure. The National Relief Council (CNS) coordinated the relief effortwhile the National Coordinating Committee for Cyclone Damage (CNC) organized thedamage assessment and reconstruction effort. The emergency relief program comprisedfood assistance, distribution of basic essential goods and spot repairs of basicinfrastructure. About US$12.8 million of external assistance has been provisionallycommitted for this relief effort. The French army made deliveries of rice, equipment and

3 A joint report by the Food and Agricultural Organization and the World Food Program released onJune 1, 2000, warns of a serious potential food shortage due to the drought in the south of the island.

8

relief material (blankets, imedical supplies, cholera kits, soap, plastic rolls) as well as afour-wheel drive vehicle. The World Food Program (WFP) distributed food and basicemergency necessities in the hardest hit and isolated areas (US$2.9 million). Medecinssans Frontieres also went immediately to the most affected areas to provide medicalservices and monitor health conditions. NGOs such as CARE and Agro Action aredistributing seeds. Other donors and NGOs are active in rescue and relief efforts,providing humanitarian aid and undertaking damage assessments in affected sites.Additional food aid and community nutrition activities will be needed over the next fewmonths in the hardest hit areas to offset income losses. A working group led by thegovernment estimates these needs at US$9 million.

III. IDA's Response to the Cyclones

23. After the cyclones hit Madagascar, the Bank received a request from the governmentfor emergency assistance. In close coordination with its international and nationalpartners, IDA developed the following multi-pronged response to the emergency situation.Based on IDA's experience with emergency assistance to date, the response addressesMadagascar's short, medium, and long-term needs.

.) Joint Damage and Reconstruction Assessment

24. In response to the government's request, IDA sent a technical mission to Madagascarthat established the need for further IDA involvement and initiated a joint damage andreconstruction assessment. In May, a large IDA mission evaluated and completed the jointassessment of damages and reconstruction needs together with the government and severalinternational and national partners (Box 1).

Box 1: Partnership Coordination

IDA coordinated its response to the cylones very closely with its partner organizations.(i) During the first IDA mission in April 2000, a donors' meeting agreed that working groups in seven

sectors be established comprising health, nutrition, education, transport, agriculture, private sector andmacroeconomic issues, and vulnerability mitigation.

(ii) After the preliminary danmage assessment was completed, a steering committee was formed comprisingthe UN organizations, the World Bank and the Government of Madagascar. This steering committeeorganized a two-day conference at which all established working groups appraised the preliminarydamage assessment. This conference was held on May 22-23 in Antananarivo. Besides theGovernment, the UN system and IDA, participants included the African Development Bank, theEuropean Community, several bilateral donors and several NGOs like CARE and Medecins sansFrontieres. In addition to assessing damages and reconstruction needs, the working groups alsodiscussed programming and phasing of sectoral investments as well as the potential contributions ofdifferent international donors.

(iii) The steering committee included the outputs from the working groups and produced a final document"Evaluation des degats et Programme de Reconstruction durable post cyclonique pour Madagascar" onMay 26. This document is to be published by the steering committee in July.

(iv) In addition to bilateral d[iscussions with many of its partners, IDA based the restructuring of theexisting portfolio and the design of its supplemental credits on the joint damage and reconstructionassessment.

9

ii) Portfolio Restructuring to Meet Short and Medium-Term Reconstruction Needs

25. Given the need for timely financial support, restructuring the existing portfolio, asopposed to designing a new multi-sector cyclone relief investment project, is the fastestand most flexible way to meet Madagascar's reconstruction needs. Four on-going IDAoperations in Madagascar will be restructured (Table 4) within the existing legalframeworks in order to provide financing for rehabilitation needs. The main objectives ofthese projects will not change.

Table 4: IDA Financing of Reconstruction EffortThrough Existing Portfolio, by Sector/Project

(US$ millions)

SECTORIPROJECT TOTAL FINANCING BY FYIDA 2001 2002

FINANCINGEducation/CRESED II (Cr. 3046-MAG) 11.0 4.0 7.0HealthICRESANHI (Cr. 3302-MAG) 2.3 1.0 1.3Nutrition/SEECALINE (Cr. 3060-MAG) 2.5 1.3 1.2Transport APL-1 (Cr. 33640-MAG) 5.5 2.3 3.2

TOTAL 21.3 8.6 12.7

(a) Second Education Sector Development Project (CRESED II): IDA funds in theamount of US$11 million (out of a total credit amount of US$65 million) will bemade available for reconstruction of primary and secondary schools in the six most-affected districts located in the provinces of Antsiranana and Toamasina. CRESED IIwill finance the reconstruction of around 414 classrooms in FY2001 and 700classrooms in FY2002. To facilitate a rapid response, the following actions will beundertaken: (i) simplification of the project's manual of procedures, (ii) strengtheningof management capacity at the central and district levels, (iii) certification andadoption of a uniform anti-cyclone classroom design depending on the region andcharacteristics of the school, and (iv) strengthening of financial management.

(b) Second Health Sector Support Project (CRESAN II): An amount of US$2.3 millionwill be made available by CRESAN II (total credit amount of US$40 million) mostlyfor the eleven health districts located in Toamasina and Antsiranana. Of this, US$1.5million will be used for large reconstruction or rehabilitation works, such as healthcenters and hospitals, and US$800,000, for small repairs works. Actions will beundertaken to accelerate credit effectiveness (scheduled for the first quarter of FY01)so that the emergency program can start as soon as possible.

(c) Second Community Nutrition Project (SEECALINE): With the possibility ofincreasing malnutrition due to the cyclones, community nutrition activities underSEECALINE (total credit amount US$27.6 million) will be extended to the ten most-affected districts. IDA will make US$2.5 million available to this end. It isanticipated that cyclone-related activities will start on August 1, 2000.

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(d) Transport Sector Reform and Rehabilitation Project APL: At the time ofeffectiveness (scheduled for first quarter FY01), US$3.1 million will be allocatedunder APL-1 (total credit amount US$48.4 million), the first of a series of loansunder the APL package, for the purchase of emergency metallic structures, includingbridges. A further US$2.0 million will be used for cyclone-related repairs of keyroads (originally included in the project). The project will also support thedevelopment of a strategy for the prevention and the mitigationl of the effects ofnatural catastrophes, including cyclones (US$0.4 million). In addition, theprocurement process for road maintenance has been accelerated and the capacity ofthe line ministry strengthened to manage the emergency works.

iii) Supplemental Financing for the Third Social Fund and for the Second StructuralAdjustment Credit

26. Supplemental IDA financing in the amount of US$18 million for the Third SocialFund (FID) project for rnulti-sectoral investments is being proposed (see separateMemorandum of the President Report No. P7380-MAG). FID could productively applysuch additional funding to the cyclone reconstruction effort while continuing its normalactivities at the current pace and not jeopardizing the quality of its work, given its provenimplementation capacity. Activities to be financed would span the spectrum of FIDactivities, including construction of schools and prim'ary health centers but also micro-irrigation schemes at the community level. All implementation modalities defined underthe on-going FID III will continue to apply for the supplemental credit. Beneficiaries areexpected to contribute a minimum of 20 percent of the cost of each sub-project in cash orin kind. During the May mission, a rapid beneficiary survey was conducted in priorityareas for intervention after the cyclones. Even though not statistically representative, thesurvey concluded that beneficiaries' priorities lie with the rapid rehabilitation of primaryschools, health posts and water systems. CNC will ensure that the activities carried outunder the FID supplemental credit will be well coordinated with other reconstructionactivities.

27. Public sector reconstruction coupled with export losses and additional private importneeds are expected to create a need for residual balance of payments support.Supplemental financing in the amount of US$20 million is being proposed under SAC-2 inorder to fill the unanticipated financing gap in 2000 and 2001. The government hasindicated that it intends to draw on the funds in two installments, matching its foreignexchange and domestic resource needs arising from reconstruction. To that end, thegovernment and IDA have agreed on a transparent mechanism that will monitor progress ofthe complete reconstruction effort. The details of this supplemental credit are covered inSection IV.

iv) Long-term Cyclone Vulnerability Mitigation Strategy

28. IDA worked with gove,rnment and other partners to evaluate the existing cyclonevulnerability mitigation strategy. While Madagascar's early warning systems were used toalert the population to the approaching three cyclones, the system does requireimprovements. The present system is a patchwork, comprising both national and

I1

international actors, and has emerged over years of successive disasters. Responsibilitiesfor various aspects of disaster reduction, from prevention and preparedness to relief andreconstruction, and for dealing with specific hazards, have grown organically over theyears during successive administrations through a series of sometimes overlapping decrees.As a result, responsibilities and resources are allocated through dispersed and ad hocarrangements that, even so, manage to function surprisingly well. Nevertheless, thegrowing emphasis on prevention and the need to manage disasters more effectively ingeneral is creating a positive pressure to clarify the institutional structure and roles andresponsibilities so that capacity building efforts can be focused to achieve disasterreduction results.

29. With the assistance of IDA and other donors, the government has formulated avulnerability mitigation plan. The plan includes four areas: (a) development of a NationalStrategy for Risk Management that also includes the rationalization of the legal andinstitutional framework for the response to disasters and would assign clear mandates forvarious institutions in disaster management; (b) mobilization of permanent resources forrisk mitigation which can include the establishment of a permanent 'disaster fund'; (c)capacity building in the key agencies (CNS and CNC); and (d) improvement ofinformation systems such as the early warning system and a vulnerability monitoringsystem. The govermnent assigns high priority to carrying out this strategy. Various donororganizations, including IDA, have pledged financial support for the implementation of thestrategy. IDA's contribution will come through the recently approved Transport SectorReform and Rehabilitation Project APL (effectiveness expected August 2000) whichincludes US$0.4 million to support the development of a strategy for the prevention andmitigation of effects of natural catastrophes, including cyclones.

30. Lessons Learned. In designing IDA's response to the emergency, the team drewfrom OED experience, from advice from the Bank's Disaster Management Facility andfrom Bank teams involved in responding to recent similar emergencies in different parts ofthe world, such as Honduras and Mozambique. From these, three key lessons wereincorporated in the formulation of IDA's strategy. First, any response to such anemergency situation should be rapid, efficient and fast-disbursing. Thus the Bank's effortto assist Madagascar in rapid assessment of the damages and the choice to respond byusing existing operations, with either supplemental credits (and quick disbursing as in thecase of the SAC-2) or restructuring. Second, procurement and implementationarrangements should be flexible. Hence, in the restructuring effort of ongoing operations,the team reviewed and simplified procurement and implementation arrangements. Thethird lesson pertains to the importance of monitoring and evaluation. Thus, severalmonitoring tools will be used to keep track of macro-economic performance, disseminateinformation about cyclone rehabilitation efforts, and determine the impact of cyclonerehabilitation on people in the affected areas (Annex 1).

31. Lessons were also drawn from the experience of two previous rehabilitation projectsin Madagascar in 1984 and 1994 supported by IDA.4 Three evaluation results were

4 Implementation Completion Report of the Cyclone Emergency Rehabilitation Project (Report No.:17378).

12

incorporated in the design of the IDA response. First, successful program implementation,and prompt reconstruction, hinges on having a strong coordination unit. The governmentand IDA have agreed that CNC will be reinforced with sufficient qualified staffing,equipment, and an operating budget to coordinate effectively the reconstruction effort.Second, stringent moniloring is instrumental in focusing assistance on key activities for thesuccess of the program and in enhancing flexibility in project implementation. To this end,the government and IDA have agreed that CNC will furnish detailed monthly informationupdates to regional and national consultative groups to be established as part of thiscyclone reconstruction effort. The groups will be composed of the government, donors andnon-governmental organizations. The consultative groups will receive detailed monthlyreports on the entire reconstruction effort as part of government's effort to ensuretransparency. Meetings conducted every two months will discuss the progress made andfuture plans. Annex 1 spells out the specifics of this monitoring arrangements. Third, thecomplexity inherent in multisectoral reconstruction programs can be mitigated by earlyagreement on the reconstruction strategy and donor coordination for the channeling ofassistance into priority sectors. The joint damage assessment conducted by thegovernment, IDA, other donors and non-governmental organizations, outlines specificsector rehabilitation strategies that will form the basis for phasing of the reconstructioneffort.

32. Rationale for IDA Involvement. The CAS (discussed by the Board on February18, 1997, Report IDA/R97-7) advocates faster and broad-based economic growth partlythrough higher foreign investment as a necessary means to achieve sustainable povertyreduction. With its response to the emergency, IDA aims to:(i) contribute to the effective and rapid reconstruction of productive and social

infrastructure in the most affected and poorest areas of the country, thereby helpingpoor families to regain their income earning potential and providing crucial access tofunctioning schools and health centers.

(ii) help maintain macro-economic stability by contributing to covering unanticipatedfinancing needs that threaten to jeopardize the implementation of the reformprogram Madagascar is currently undertaking. Accordingly, IDA's response wouldcontribute to sustaining growth, reducing pressure of the reconstruction effort on thedomestic credit market, thereby creating more room for the private sector as a vitalactor in the reconstruction effort. This will contribute to upholding the confidenceof foreign investors in the country.

IV. The Proposed Supplemental Credit for theSecond Structural Adjustment Credit

33. Macroeconomic S3ituation and Resource Needs. Madagascar's economicperformance has substantially improved in recent years. Per capita income growth hasbeen positive, averaging 1.5 percent since 1997, which is a first for Madagascar in adecade. Inflation has declined from about 50 percent in 1995 to single digits in recentyears. Fiscal management has improved, and the budget deficit (including grants) declinedfrom an average of 6 percent of GDP in the mid-1990s to about 1.2 percent of GDP in1999. New export earnings from export processing zones (EPZ) and tourism have loweredthe dependence on traditional agricultural exports. The current account deficit (including

13

grants) declined from about 6 percent of GDP in mid-1990s to about 2.7 percent of GDP in1999.

34. Madagascar faces the challenge of reconstruction at a critical time in its adjustmentprogram. It is important that the government overcomes the reconstruction challenge in atransparent and judicious fashion to maintain international and domestic credibility. Thejoint damage assessment conducted by government and donors estimated publicreconstruction costs at US$92 million for the 24 month period July 2000 - June 2002.Together with compensation for crop losses, US$62 million, and additional private imports,US$27 million, the total additional financing needed for 2000 to 2002 amounts to US$181million (Table 6). For the remainder of 2000, the financing needed due to the cyclonesamounts to US$75 million to compensate for cyclone-related export shortfalls and higherimport needs, including private sector reconstruction. These figures are based on IMF andinitial government projections; they were updated using the work of the joint workinggroups for reconstruction assessment in May/June 2000. The figures will be revisited inSeptember 2000 at the mid-term review under the current Poverty Reduction and GrowthFacility (PRGF).

Table 5: AMadagascar: Selected Economic Indicators, 1997-2001

Actual ProjectionBefore cyclones After cyclones

1997 1998 1999 2000 2001 2000 2001

Real GDP growth (in percent) 3.7 3.9 4.7 5.3 5.6 4.8 5.7Agriculture 1.9 2.1 3.4 3.8 5.2 0.8 3.5Industry 4.7 5.3 4.3 5.5 5.8 5.5 6.0Services 4.6 5.1 5.5 5.8 5.8 6.7 7.5

Inflation (CPI, in percent) 4.5 6.2 9.7 7.6 5.0 9.9 8.0

Exports, FOB (in US$ millions) 505 519 594 657 721 627 704Imports, CIF (in US$ millions) 802 791 885 1009 1066 1054 1114

Current account deficit (percent 7.8 7.9 6.5 7.3 7.0 9.1 8.4of GDP, before grants)

Current account deficit (percent 2.4 4.8 2.7 2.4 2.3 4.2 3.8of GDP, after grants)

Fiscal deficit % GDP (before 7.7 8.1 4.8 5.5 4.3 6.3 4.9grants)

Fiscal deficit % GDP (after 2.4 4.6 1.2 0.7 1.1 1.5 1.6grants)

Source: Government of Madagascar, IMF and staff estimates.

35. Assisting Madagascar to meet the unforeseen financing needed arising from thecyclones (US$181 million over the period 2000 to 2002) is of paramount importance tokeeping the adjustment program on track. The additional financing need for 2000-2002,

14

representing both private and public iequirements, amounts to approximately 80 percent ofthe stock of foreign reserves at end 1999. As stated above, over the period 2000-2002,central govemment reconstruction needs have been estimated at US$92 million, eightypercent of which would be extemally financed. The advent of the three cyclones imposesadditional financing needed which should be overcome while maintaining macro-stabilityand adjustment on track. This means that it is important for Madagascar to avoid (a)resorting to domestic credit, which would be inflationary, (b) increasing public sectorborrowing, which would put pressure on the private sector, or (c) depleting already lowreserve levels. Either of these options would weaken Madagascar's stabilization gains.

Table 6: Financing needed due to Cyclones' (US$ million)

Total2000-02 2000 2001 2002

Resources needed 181 75 65 41Public reconstruction2 92 23 45 24Offset of crop losses 62 30 17 15Additional private imports 27 22 3 2

Financing of additional needs 181 75 65 41Paris Club3 19 19 0 0IMF 33 33 0 0IDA 59 18 34 7

SAC-2 20 10 10 0FID-3 18 4 12 2Other 21 4 12 5

Other Donors Reconstruction (incl. ADB, EU) 52 5 26 21Government of Madagascar reprioritization of 18 0 5 13

public expenditures

1/ Both the government expenditure and balance of payments needs are additional, over andabove, amounts planned prior to cyclone; figures are rounded.

2/ The public reconstruction effort is scheduled to last from July 2000 to June 2002.3/ Total Paris Club debt (including previously planned and additional) relief 2000 is expected

to be US$33.3 million.

36. Madagascar's additional financing needed (US$181 million) for the period 2000 to2002 is expected to be met by extemal and domestic efforts. On the extemal side, ParisClub additional debt relief (US$19 million), the IMF (US$33 million), IDA (US$59million), and other donors (US$52 million) are providing the majority of the resources,while govermment is providing an amount (US$18 million) equivalent to twenty percent ofthe public sector reconstruction needs (US$92 million). The financing needed for 2000amounts to US$75 million; it is expected to be met by the aforementioned debt relief fromthe Paris Club, US$33 million from the IMF, US$18 million in additional IDA support, andUS$5 million in other multilateral and bilateral support. IDA's response and thegovernment's proposed phasing of its withdrawal under the supplemental credit wasclosely coordinated with the IMF to provide emergency financing under its PovertyReduction and Growth Facility. Both the African Development Bank and the European

15

Union have indicated that they will actively support the reconstruction effort. The proposedfinancing scenario responds to the government's reconstruction need. The budget supportprovided by the proposed SAC-2 supplemental operation would complement IDAassistance from project restructuring and the FID supplemental. It also enables thegovernment to undertake quick and decisive reconstruction activities in high priority areasthat suffer from cyclone damage and chronic poverty.

37. Progress and Experience of the On-going Structural Adjustment Operation. OnApril 29, 1999, the Board of Directors of the World Bank approved SAC-2 in the amountof US$100 million. This credit builds on the first adjustment operation and assists thegovernment to continue implementing its reform program. The program rests on fourpillars for high growth: (a) macroeconomic stabilization; (b) privatization; (c) an improvedbusiness environment; and (d) strengthened public finances.

38. The credit was signed on June 10, 1999 (Cr. 7294-MAG), and became effective onJune 30, 2000. The effectiveness date was postponed twice. The principal cause of thisdelay was difficulty in the privatization of the petroleum distribution company "SOLIMA".The privatization of "SOLIMA" faced complicated technical problems coupled with aweak institutional structure in implementing the privatization. These problems partlystemmed from this being the first large-scale non-financial privatization for the governmentand were compounded by a tough political constraint as prices of oil products had to beraised following the rise of crude oil prices in the international market.

39. After successful completion of the effectiveness conditions, disbursement of firsttranche of the credit, amounting to US$25 million, is now being processed. The secondtranche, amounting to US$30 million, depends in part on the privatization of AirMadagascar, the national airline, which is to take place at the end of 2000 or in the firstquarter of 2001. Since the government has now gained knowledge and experience inprivatizing large companies, disbursement of the third and last tranche (approximatelyUS$45 million linked to the privatization of TELMA, the state telephone company) is lesslikely to be delayed and is expected in 2001.

40. Objectives of the Supplemental Credit. The objectives of this supplemental creditto SAC-2 are twofold:

(i) to provide fast-disbursing foreign exchange to partially compensate for unanticipatedand pressing financing needs in the balance of payments; and

(ii) to provide counterpart funds to government for the planned reconstruction effort,thereby alleviating borrowing needs from the private sector which could crowd-outmuch-needed private sector investment activity.

41. Credit Description and Phasing. The supplemental credit to SAC-2 would consistof one tranche in the amount of US$20 million. The tranche would be availableimmediately after effectiveness of the supplementary credit. However, the government hasindicated that it would withdraw the funds in two installments of US$10 million, with thefirst withdrawal immediately after effectiveness and the other in 2001. Governmentproposes to phase the withdrawal so as to help meet financing needed for next year; andmeet needs of domestic reconstruction in a timely manner. Thus, timing of the second

16

installment would in part be deternined by the rehabilitation work in health and education,both high priority sectors fDr the government. The government plans to withdraw thesecond installment when (i) 350 destroyed primary schools in the 10 most heavilydamaged school districts (CiScos) are rehabilitated in a cyclone-prone manner andappropriately staffed and equiipped; and (ii) 33 of the 82 destroyed primary health centers(CSB1) are rehabilitated in a cyclone-prone manner, appropriately equipped and staffedwith medical personnel. A stringent monitoring system for the entire public reconstructioneffort has been agreed between the government and IDA (Annex 1).

42. Monitoring. Since the supplemental credit to SAC-2 contributes to closing anunanticipated financing need in the balance of payments and the budget that couldotherwise undernine the reform effort, the government, IDA and the IMF will jointlymonitor macro-economic performance including the evolving adverse impact of thecyclones on exports and import needs. For 2000, the program would be deemed a successif (a) growth does not fall below 4.8 percent; (b) inflation does not rise above 10 percent;and (c) the reform agenda, including private sector development and public sector reform,remains on track.

43. The government has put in place a transparent monitoring mechanism. This effortwould not be linked to the actual use of counterpart funds under the SAC-2 operation butrather provide the basis for a global monitoring of the reconstruction effort, includingfunds from IDA, other donors and domestic resources. The principles of this monitoringsystem are:

(i) Formation of Consultative Groups. Consultative groups will be forned both at thenational level as well as in the two most affected regions.5 These groups willconsist equally of public officials, and donor and civil society representatives (non-governmental organizations, community groups). The consultative groups willmeet every two months at the national and regional level with CNC. Theseconsultative groups will (a) be informed by government about the progress of thereconstruction effort; (b) discuss with government bottlenecks in the cyclonerehabilitation efforts and help CNC exert pressure on the relevant rehabilitationinstitution to eliminate these bottlenecks; and (c) act as independent parties todisseminate information about the cyclone rehabilitation efforts, increasingtransparency. The groups will remain active until the cyclone rehabilitation effortshave been completed, which is expected to happen around mid 2002.

(ii) Reconstruction Information Dissemination. CNC will furnish monthly reports tothe national and regional consultative groups specifying (i) type of infrastructurerehabilitated to date; (ii) its geographic location; (iii) costs of rehabilitation; (iv)source of funds used for the reconstruction; and (v) future reconstruction plans.The regional consultative groups will also be furnished with detailed inforrnationabout contractors chosen by type of reconstruction plus the contract arnountawarded. CNC will facilitate the meetings of the consultative groups at theregional and national level.

S The two areas comprise (i) the districts severely affected by cyclones Gloria and Hudah; and (ii) thedistricts severely affected by Eline.

17

(iii) Participatory Beneficiary Assessment. To monitor the impact of the cyclonerehabilitation effort on people in the affected areas, the government willcommission participatory beneficiary surveys to be conducted every six months,starting in February 2001. The beneficiary assessment will be conducted by anindependent party, subject to non-objection from IDA. Each assessment willrandomly select four communities per district in four out of the ten most affecteddistricts. In each community, 30 randomly selected households will be interviewedabout local reconstruction efforts in the education, health, irrigation, transport,water and electricity sectors. The results of this participatory beneficiaryassessment will be made publicly available to the consultative groups.Additionally, the government is planning to request the National Statistical Institute(INSTAT) to include an additional module in the household survey alreadyplanned, which would provide data on the reconstruction effort in the most affectedzones.

44. Credit Implementation, Procurement and Disbursement. Implementation,procurement and disbursement arrangements remain as in the original credit agreement.Coordination of overall program activities remains the responsibility of the TechnicalSecretariat for Adjustment, but the Government has designated CNC to report on theformation and working of consultative groups and to oversee the preparation of thebeneficiary assessments. Disbursement will follow the Bank's simplified proceduresapplicable to all adjustment operations.

45. Poverty Category. The poor were the most severely affected by the cyclones..Though not targeted at the poor, the credit would assist the poor by helping the governmentcontain inflation, providing foreign exchange for key imports (especially rice), andcontributing resources for the restoration of basic services in the cyclone-affected areas.

V. Benefits and Risks

46. Benefits. IDA's overall response will contribute to the effective and rapidreconstruction of productive and social infrastructure in a stable macro-economic setting.Specifically, the supplemental credit to SAC-2 will

(i) help maintain macro-economic stability by contributing to meeting unanticipatedfinancing needed which would otherwise endanger government's reform plans;

(ii) provide resources to government's reconstruction effort thereby reducing pressure ofthe reconstruction effort on the domestic credit market and creating more room forthe private sector as a vital actor in the reconstruction effort; and

(iii) engage Government and all its domestic and foreign partners in a transparentmonitoring effort of the entire reconstruction program.

47. Risks. The program has three main risks:

(i) Evolving information on the drought in the south of the country might reveal yetgreater foreign exchange needs than presently estimated. Therefore, close monitoringof food and cash crop production in the cyclone and drought areas is essential to

18

anticipate and, if necessary, respond to such a situation. Regular reviews will takeplace under the existing PRGF program of the IMF.

(ii) Government might not be able to meet its admittedly ambitious targets in thereconstruction effort if capacity constraints continue which have held upimplementation of the Madagascar portfolio in the past. Simplification andstreamlining of procedures and capacity reinforcement designed to expediteimplementation address this risk. Further, close supervision using the establishedmonitoring system shoudd identify bottlenecks early-on. Counterpart funds generatedby the credit will likely finance the reconstruction effort in a timely manner. Further,a Portfolio Review mission by IDA is planned for the first quarter of FY2001 to takestock of implementation progress and to tackle any bottlenecks in projectscontributing to the reconstruction effort.

(iii) A non-transparent use of funds could reduce the efficiency of the governmentreconstruction effort and also undermine trust of financing organizations as well ascivil society. Therefore, the established monitoring system aims to track the use offunds in the whole reconstruction effort on a monthly basis.

48. Recommendation. I am satisfied that the proposed Supplemental Credit willcomply with the Articles of Agreement of the International Development Association andrecommend that the Executive: Directors approve it.

James D. WolfensohnPresident

by Shengman Zhang

Washington, D.C.July 5, 2000

Annexes

ANNEX 1Page 1 of 3

SUPPLEMENTAL FOR THE SECOND STRUCTURAL ADJUSTMENT CREDIT

MONITORING ARRANGEMENTS

I. FORMATION OF CONSULTATIVE GROUPS AND INFORMATION STRATEGY

National Level

1. A consultative group in support of the post-cyclone rehabilitation will be formed at thenational level. This consultative group's principal mission is to advise the NationalCoordinating Committee for Cyclone Damage (CNC) ensuring better coordination of post-cyclone rehabilitation in Madagascar.

2. The group will be led by the CNC.

3. It will be comprised of public officials responsible for social, economic and infrastructureissues, the National Relief Council (CNS), and donors and civil society representatives(non-governmental organizations and community groups). Representatives from the publicsector, civil society and donors will be equally represented in the group.

4. The group will meet every two months with the CNC during the rehabilitation periodbetween August 2000 and June 2001 and as necessary. These meetings will be presidedover by the Prime Minister or his representative.

5. During the meetings of the consultative group, the CNC will present updates on thereconstruction effort, including (i) a detailed description of the type of infrastructurerehabilitated, (ii) geographical location, and (iii) exact cost. Additionally, the report willinclude (i) total disbursements of funds received for reconstruction to date; (ii)geographical distribution of disbursed funds; and (iii) committed and planned rehabilitationwork to be conducted in the future.

6. Arrangements for the establishment, functioning and organization of the consultative groupwill be made official and Article 14 of Decree no 84/443 on January 5, 1985 related to thecreation and attribution of CNC will be revised to this effect.

Regional Level

1. Two consultative groups will also be formed at the regional level before August 1, 2000 inthe most affected regions by the cyclones Hudah, Eline and Gloria. The first group will beestablished in Antalaha for the SAVA region and Maroantsetra; the second group will be inthe Mahanoro, Vatomandry, Anosibe an' Ala and Marolambo regions.

2. The regional consultative groups will be presided over by the CNC and will meet everymonth.

ANNEX 1Page 2 of 3

MONITORING ARRANGEMENTS

3. The regional consultative groups will be composed of the regional and local branches ofCNC, mayors of the affected regions, local public sector officials from Ministries ofAgriculture, Transport, Education and Health, several community groups, local andnational non-governmental organizations as well as donor organizations working at theregional level. Representatives from the public sector, civil society and donors will beequally represented in the groups.

4. The regional CNC will report on (i) ongoing and planned rehabilitation investments perlocality, (ii) type of investment, (iii) disbursements to date, (iv) geographical location, (v)contractors chosen to undertake the work, (vi) and amount of the contract awarded.

5. Costs arising from the regional CNC meetings, including printing of material, travel costsof local representative, etc. will be borne by the CNC.

6. The CNC permanent secretariat will be assisted during the rehabilitation phase by anaccounting consultant and a civil engineer. The costs associated with these two positionswill be borne by the CNC.

II. PARTICIPATORY BENEFICIARY MONITORING

1. The CNC will conduct a participatory beneficiary assessment every six months of theplanned reconstruction effort, the first one to be conducted in February 2001.

2. CNC will hire a consultancy firm of high reputation to conduct the beneficiary assessment,subject to non-objection by the International Development Association.

3. CNC will bear the costs of the participatory beneficiary assessments.

4. In consultation with the regional consultative groups (see above), the consultant will selectfour of the ten most affected districts, and within the districts, four communities each(random selection). Within each of these four districts, 30 households will be selected on arandom basis for the beneficiary assessments.

5. The beneficiary assessment will contain the following information:

A. Inventory of infrastructure destroyed by the cyclonesB. Progress report of worksC. Interviews with community members about the (i) speed of reconstruction; (ii)

costs of reconstruction for the community; and (iii) quality of reconstruction.The interviews will also include an open-ended question about general viewsof the reconstruction effort of the government.

ANNEX IPage 3 of 3

MONrTORING ARRANGEMENTS

6. CNC will publish the results of the participatory beneficiary assessments and distributethem to the national and regional consultative groups no later than one month after thefinal consultant report.

III. HOUSEHOLD SURVEY MONITORING.

1. CNC will discuss with INSTAT whether an additional module for monitoring of thereconstruction effort can be included in the household survey.

2. The International Development Association will provide opinions and technical advice toCNC and INSTAT on the design of the questionnaire.

3. CNC will assume all costs of this activity.

7

ANNEX 2Page I of I

SUPPLEMENTAL FOR THE SECOND STRUCTURAL ADJUSTMENT CREDIT

TIMETABLE OF KEY CREDIT PROCESSING EVENTS

(a) Time taken to prepare: One month

(b) Prepared by: Government with assistance of IDA staff

(c) Appraisal: May/June 2000

(d) Planned date of Effectiveness: July 31, 2000

(e) Project Closing: December 31, 2001

ANNEX 3Page 1 of 2

Madagascar at a glance 6/21100Sub-

POVERTY and SOCIAL Saharan Low-Madagascar Africa Income Development dlamond

1999Populabon, mid-year (millions) 15.0 627 3,536 Life expectancyGNP per capita (Atlas method, US$) 250 510 520 LGNP (Atlas method, USS billions) 3.7 323 1,842

Average annual growth, 1993-99

Population (%) 2.9 2.6 1.7 G GLaborforce(%) 2.8 2.6 1.9 GNP Gross

per I primaryMost recent estimate (latest year available, 1993-99) capita enrollment

Poverty (% of population below national poverty line) 75Urban populaton (% of total population) 28 33 30Life expectanry at birth (years) 58 50 63Infant mortality (per 1,000 live births) 92 92 68Child malnutrition (% of children under 5) 32 33 36 Access to safe waterAccess to safe water (% of populaion) 29 43 73Illiteracy (36 of population age 15+) 54 40 31Gross primary enrollment (% oschool-age population) 72 78 107 Madagascar

Male 73 85 112 - Low-income groupFemale 70 71 102 |

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1979 1989 1998 1999Economic ratloa*

GDP (US$ billions) 2.5 3.7 3.8Gross domestic investmentVGDP ., 13.4 12.5 12.3 TradeExports of goods and services/GOP .. 18.4 21.4 24.8Gross domestic savingslGDP .. 9.8 4.6 4.6Gross national savingslGDP .. 10.4 5.0 6.9

Current account balance/GDP .. -3.0 7.5 -5.8 Domestic InvestmentInterestpayments/GDP .. 4.1 1.2 . SavingsTotal debVGDP .. 138.2 118.3 123Total debt servicetexports .. 44.4 18.7 16.3Present value of debVIGDP ..Present value of debtlexports ..

Indebtedness1979-89 1989-99 1998 1999 1999-03

(average annual growth)GDP 2.3 1.4 3.9 4.7 5.7 - MadagascarGNP per capita -1.5 -0.9 1.5 2.4 2.7 -- Low-income groupExports of goods and services 4.2 3.9 2.1 20.9 8.7 .....

STRUCTURE of the ECONOMY1979 1989 1998 1999 Growth of Investment and GOP (%)

(% of GDP)Agriculture 29.8 32.9 30.6 30,0 !Industry 17.2 14.8 13.6 13.8 1i

Manufacturing .. 12.9 .. ..Services 53.1 52.3 55.8 56.2 7 95 99

Private consumption .. 81.4 87.9 87.6 -.20General govemment consumption .. 8.8 7.5 7.9 _ GDI : GDPImports of goods and services .. 22.0 29.3 32.7 _ 11

1979-49 1989-99 1998 1999 G h of eprts nd imports(average annual growth) GAgriculture 2.2 1.5 2.1 3.4 zIndustry -0.6 1.6 5.3 4.3 20

Manufactunng 2.5 0.2 .. 15Services -0.5 1.7 5.1 5.5 10

Private consumption -1.2 1.9 3.4 38 1 4-General govemment consumption 0.5 0.2 2.1 42 s9Gross domestc investment 13.5 -0.1 9.0 3.5 .-10 LImports of goods and services -8.5 4.2 1.6 16.5 -Exports lmportsGross national product 1.6 1.9 4.6 5.5 _

Note: 1999 data are preliminary estimates.

'The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

ANNEX 3Page 2 of 2

Madagascar

PRICES and GOVERNMENT FINANCE1979 1989 1998 1999 Infation (%)

Domestic pricesi(% change) 60

501Consumer prces 9.0 6.2 9.7 2940Implicnt GDP deflator .. 12.0 8.4 9.8 30.

20Government finance(% of GDP, includes current grants) ; o -Current revenue 12.7 10.9 12.1 94 95 96 97 98 99Current budget balance . 2.7 0.4 3.1 _ P deflator cPIOverall surplus/deficit -6. 8 -7.8 4.1 -GDP deflator -- __CP _

TRADE , 1979 1989 1998 1999197S9 mill98ns) 1998Export and import levels (US$ mill.)(US$ millions)

Total exports (fob) 358 519 594 Coffee 77 40 30Other food 42 16 27 |00Manufactures 109 405 450

Total imports (cif) 372 791 885 4 00

Food 38 54 45 #i iFuel and energy 35 102 124 Capital goods 120 149 154 9 9 9 .,

Export price index (1995=100) 81 86 83Import price index (1995=100) 81 84 88 a Exports w ImponsTerms of trade (1995=100) 100 102 95 ___ __-

BALANCE of PAYMENTS

(US$millions)1979 1989 1998 1999 m Current account balance to GDP (%)Exports of goods and services 488 461 801 921 |Imports of goods and services 928 550 1,097 1,216Resource balance -440 -89 -296 -294 -

Net income NIA -189 -85 -54Net current transfers .. 203 100 142 I K "Current account balance N/A -75 -281 -206

Financing items (net) .. 108 165 260 '10Changes in net reserves N/A -33 116 -54 .12

Memo: _ _- -Reserves including gold (US$ millions) N/A 20 170 226Conversion rate (DEC, local/lUS$) 213 1603 5341 6199

EXTERNAL DEBT and RESOURCE FLOWS ._, _ __. _ - -1979 1989 1998 1999 1

(USS mnillions)Total debt outstanding and disbursed 779 3,452 4.421 4,371

IBRD 29 27 Composition of 1998 debt (USS mill.)IDA 97 670 1,329 1,384

Total debtservice N/A 244 167 169 G 1.525 1,329IBRD 3 5 2 1IDA 1 7 22 25

Composition of net resource flowsOfficial grants 33 116 141 C:58Official creditors 138 164 122 93 C.58Private creditors 166 -17 -2 -2Foreign direct investment -7 .. 16 58 }Portfolio equity 0 57 D:930

Worid Bank programCommitments 49 25 115 132Disbursements 15 73 69 71 A -IBRD E- BilateralPrincipal repayments 1 5 13 16 8 - IDA D - Other rnultilateral F - PrivateNet flows 15 68 56 55 it___________________Interest payments 3 7 9 10Net transfers 12 61 47 45

Development Economics 6/21/00

ANNEX 4Page 1 of 1

CAS Annex B3 (IFC & MIGA) for MadagascarMadagascar - IFC and MIGA Program, FY 1997-2000

1997 1998 1999 2000

IFC approvals (US$m) 2.10 0.70 6.10 2.88

Sector (%)FINANCIAL SERVICES 100 76FOOD & AGRO-BUSINESS 24Total 0 100 0 100

Investment instrument(%/6)Loans 0 24Equity 100 56Quasi-Equity 20OtherTotal 0 100 0 76

MIGA guarantees (US$m) 1.722 1.669 1.590 1.621

ANNEX 5Page I of I

CAS Annex B8 - Madagascar

Status of Bank Group Operatons (Operations Portfolio) as of June 21, 2000

ClosedProjects

Difference BetweenLast PSR Expected and Actual

BoardDate Supervision Rating b/ Original Amount In USS Millions Disbursements 'Fiscal DvlpetIpeettoYear Active Projects Obeecives Progress IBRD IDA Cancel. Undisb. Orig. Fffn Rev'd

1990 P001540 FIN SECTOR/APEX S S 0 48 2.68 2.1 1.27 -1.541995 P001563 AG.EXTENSION PROJECT S S 0 25.2 0 1.33 4.01 01995 P001522 IRRIGATION II S S 0 21.2 0 2.2 2.32 01996 P001533 ENERGY SECTOR DEVELOPM S S 0 46 0 20.92 16.66 01996 P035669 SOCIAL FUND 2 S S 0 40 0 0 1.7 01997 P040019 CAPACITY BUILDING S S 0 13.83 0 2.72 2.01 01997 P001537 ENVIRON. II S S 0 30 0 10.18 -2.49 01997 P001555 PRIV SECT DEV & C.B. S S 0 23.8 0 9.59 10.24 -2.341997 P048697 URBAN INFRASTRUCTURE U U 0 35 0 24.28 13.39 01998 P001559 EDUCATION SECTOR DEV S U 0 65 0 58.68 22.41 01998 P056487 MINING PROJECT S S 0 5 0 3.72 2.26 -0.221998 P001568 NUTRITION II S S 0 27.6 0 23.88 4.87 01998 P001564 RURAL WATER SEC.PILO S S 0 17.3 0 14.78 11.35 01999 P052186 MICRO FINANCE S S 0 16.4 0 13.88 1.76 01999 P057378 SAC II S S 0 100 0 98.87 55.8 01999 P064305 SOCIAL FUND III S S 0 15 0 6.03 -5.26 02000 P062628 Regional Development S S 0 4.6 0 4.46 1.27 02000 P051741 Second Health Sector Support P S S 0 40 0 39 0 02000 P052208 Transport Sector Reform and Re # 0 65 0 64.74 0 0

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.

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