World Bank Document

RESTRICTED Report No. P-994 Public Disclosure Authorized

This report is for official use only by the Bank Group and specificallyauthorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibilityfor the accuracy or completenessof the report.

INTERNATIONALDEVELOPMENT ASSOCIATION Public Disclosure Authorized REPORT AND RECOMMENDATION

OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORS

ON A PROPOSED CREDIT

TO THE REPUBLIC OF DAHOMEY

FOR A Public Disclosure Authorized COTTON PROJECT

February 1, 1972 Public Disclosure Authorized FILECOPY

IDTIERNATIONALDEVELOPMENT ASSOCIATION

REPORTAND REC(I'TH,ENDATIONOF THE P2ESIDENT TO THE EXECUTIVEDIREECTORS ON A PROPOSEDCREDIT TO THE REPUBLICOF DAHOMY FOR A COTTONPROJECT

1. I submit the following report and recommendation on a proposed credit to the Republic of Dahomey in an amount in various currencies equivalent to US$6,100,000 on standard IDA terms to help finance a project for developing cotton production.

PART I - INTRODUCTION

2. Dahomey has been independent since 1960 and a member of the Bank Group since 1963. In 1966, the Government requested IDA assistance for an agricultural development project in the Hinvi area of southern Dahomey. The purpose of the project was to develop 6,000 ha. of oil palms and 6,000ha. of food crops. In 1969 the Associationmade a $4.6 million credit (144-DA), and Fonds dtAide et de Cooperation (FAC) of France made a grant of the same amount, to finance a palm oil factory, maize storage silos, palm plantings, food crop development and related infrastructure. The difficulties encountered with this project and the actions proposed to deal with them were reported to the Executive Directors in my memorandum of September 13, 1971 (IDA/R70-63). Agree- ment on those actionswas reached in Washington in September of this year with a delegationled by H.E. Chabi Mama, Minister of Rural Development and Cooperation. Disbursementsare much behind schedule,but they can now be expected to accelerate. (See Annex I for a summary statement of IDA credits as of December 31, 1971).

3. In 1967, the UNDP financed a survey of Dahomey's land transport requirementsand the Bank acted as ExecutingAgency. As a result of the survey, a $3.5 million DevelopmentCredit (215-DA)for highway mainte- nance and engineering was made in 1969. Execution of this project is proceeding satisfactorily, including the engineering studies which are expected to lead to a road project in 1973.

4. A long-term program for cotton developmenthas been carried out since 1964 wfithfinancial support from FAC and the Fonds Europeen de Developpement(FED) of the European Communities. The proposed project, which would be financed concurrentlyby IDA and FAC, -wasidentified by the Bank's PermanentMission in Western Africa (PMT14A)and appraisedin January/February1971. The DevelopmentCredit Agreement and the other legal documentswere negotiated in TArashingtonin September 1971. Representativesof FAC participatedin the negotiations. - 2 -

5. Presentation to the Executive Directors was delayed because institutional arrangements regaarding the marketing of cotton seed and the management of credit had to be further discussed in December at the request of the Government. Final agreement was reached with the Government in mid-January. The credit has been increased by $400,000 over the amount originally negotiated to take account of the increase in project costs in terms of US dollars resulting from the currency re- alignments of 1971.

6. As discussed briefly in Part II below and more fully in the Economic Memorandum attached as Annex II, Dahomey faces serious economic problems at two levels. The first is the fragile financial position of the public sector. This is in part the result of ineffectualmanagement, aggravatedby frequent changes of government. The need now is to re- establish control over the volume and directionof public spending and to increase revenues. The second is that the Governmenthas not developed an economic strategy which would make the best use of a narrow resource base and has actually contributedto a growing disparity of incomes between town and countryside. The two are of course interconnected. The narrow resource base means a narrow revenue base; even with strong financialmanagement the scope for public savings will be limited for a number of years. As it is, weak financial managementhas hampered efforts to develop new resources. The Bank Group's approach must be tackled together. In close collaboration with the IlF, Bank missions have been discussingwith the Governmentmeasures to regain control of expenditures and improve revenue collection,to reorder spending prioritiesand to introduce more effective developmentplanning. By lending for projects to increase productionin the rural areas, as in the case now proposed, the Bank Group, in collaborationwith multilateraland bilateral sources of financial and technical assistance,particularly the European Econo- mic Communityand France, can help to strengthenthe resource base and improve income distribution. In the course of the next two fiscal years it is hoped to bring forward proposals for the rehabilitation and improvement of the Parakou-Malanville road, which is part of the main North-South artery and an integrated rural development project in the south. Also under preparationis an educationproject that would be a first step towards relating the education system to manpower needs.

PART II - THE ECONOMY

7. Prior to independence in 1960, Dahomey was part of the large French West Africa Federation,which provided part of the costs of public services and offered wider prospects for employmentthan could be found in Dahomey. Dahomey produced many of the educated elite of French West Africa and provided many of the civil servantsin both the federal and other local administrations. In the years followingindependence they became unemployedor unwanted and returned to Dahomey, a small country, poor in natural resources,faced with latent regional antagonismsand hard pressed to establish a viable political framework. In these circum- stances, political instabilityhas been reflected in an unsatisfactoryuse of governmentresources and the lack of an effectiveapproach to economic development. - 3 -

8. Dahomey has virtually no mineral resources or manufactures which could be a source of substantial foreign exchange earnings. The only physical resource available at present is cultivableland. Progress in the use of this resource has been slow and per capita income of village people has been stagnant. The disparity between rural and urban incomes has been growing, leading to rapid urban growth which constitutes one of the main problems facing Dahomey.

9. Efforts to accelerateagricultural development since independence have focussed mainly on export crops. Oil palm, one of Dahomey's traditional assets, has received assistancefrom various foreign sources and in particularwas the main object of the first IDA-financedproject. Modern cotton cultivation was introduced around the middle of this century. This crop is presently one of Dahomey's main assets. It gives satisfactory returns, and the farmers are interested in its development. Furthermore,modern cotton cultivationalso benefits food crops grom in rotation with it. However, the comparativeadvantage now enjoyedby cotton is likely to diminish and greater attentionwill have to be given to food crops such as rice and maize, some of which could be exported to neighboring countries,and to cattle raising. As indicated with respect to the Hinvi project, there have been difficulties in developinga program to encourage food crops productionby subsistencefarmers. Nevertheless, such efforts are important and, in the project area, a study to be financed under the proposed project is expected to lead to a crop diversification project. In the south, we hope it will soon be possible, in the light of experience derived from the Hinvi project and its continuing food crop program, to identify a project for agricultural development on an integrated basis, and we are prepared in principle to assist the Govern- ment in preparing and financing it. Finally, we also hope that livestock resources in northern Dahomey can be developed.

10. The developmentof human resourceshas been very poorly related to the developmentpotential of the country. Formal education,which absorbs the bulk of a relativelylarge educationbudget, has been provid- ing training almost exclusivelyfor clerical employmentand fosteringhopes of a differentand better life in the cities. The number of literate unemployed continuesto increase and the Governmentis always under pressure to create jobs for them. Uhat may be most needed as a basis for sustained economic development is to provide manpower training which would make possible a better use of availablephysical resources. That would mean a major reorientation of the education system. In this pers- pective, the first educationproject now under preparationwould include a manpower survey and curriculumdevelopment for primary and secondary education.

11. In infrastructure, due to the small size of the country and its location,most projects have a regional aspect. The improvementof the North-South axis would yield appreciablebenefits to both Dahomey and Niger. -4-

It should, however, be followfed by smaller projects for the improvement of feeder roads, which would be to the advantage of the rural areas. Some investments may also be justified in regional telecommunications. Power is imported from Ghana, which will remain the most economic source of energy for some time.

12. Additional sources of foreign exchange may be found some day in off-shore oil, where explorationis actively underway.

13. Great efforts will be required to improve the budgetary situation and the use of governmentresources. Government deficits have been a cause for concern and IMF fiscal experts have suggestedmeasures to increase governmentrevenues. The Governmenthas implementedsome of these suggest- ions and has invited a new vJBF missiLonto discuss the implementationof further measures. However, a balanced budget cannot be achievedwithout rigorous control over current expenditures, which requires in the first instance that the Government be able to resist pressures for the continued creation of new Jobs on the government payroll. The Government recently informed the Association of its intention to recruit only for replacement purposes at the higher levels and to defer salary increases,but considers similar measures impossiblein education at this time. Since it will be some time before Dahomey can reasonably be expected to generate substantial public savings, the immediate objectiveis to secure a better allocation of resources and in particulara better maintenanceof governmentfixed capital, such as schools and roads, and more financing for those government services which are related to productive developments,such as agricultural extension services. The Government has agreed to discuss these questions, as well as the level of government expenditures, with a forthcoming economic mission.

14. Since the Dahomean economy has a very limited capacity to generate savings, even with improved fiscal performance by the Government, foreign lenders should be prepared to finance part of the local costs of productive investments. Due to Dahomey'spoverty and difficultdevelop- ment prospects, it is clear that external assistance should be provided as far as possible on concessionalterms.

PART III - THE PROJECT

15. An appraisal report, entitled "The Zou-BorgouCotton Project - Dahomeyt"(PA-99a), dated January 21, 1972, is being distributedseparately. A credit and project summary is at Amnex III.

16. The project area, located in the center and north of the country (see attached map) enjoys favorable conditionsfor cotton cultivation,and the quality of the cotton is good. The Government has maintained producer prices at levels which at present world market prices leave room for large surpluses by the marketing organization, even after the recent realignment of currencies,but are attractiveto farmers. The vast majority of the Dahomean people (over 80 percent) draw their livelihoodfrom agriculture, although agriculturalproduction has failed to keep pace with the growth in population, and an increased effort is needed to raise productivity in the food crop sector. - 5 -

17. The project aims at developingcotton productionby extending cotton growing areas in two large districts,the Borgou and the Zou, from 29,000 ha. to 59,000 ha. over a four-yearperiod. The number of farmers growing cotton would increase from 29,000 to 41,000. Production of maize and groundnuts, grown in rotation with cotton, is also expected to double. In addition,rice productionwould be developed on some 3,300 ha. and rice milling facilitiesprovided. This project would be the culmination of a program supported up to now with financial and technical assistance from France and managed by CFDT and by SATEC (see para. 19 below). The present program, which started in 1966, represents the only practicable means at this time of substantially improving the standard of living of a large segment of the rural population and improving Dahomeyts balance of payments.

18. The project would cover the four-year period 1971-74. Its principal components would be:

a) the provision of staff and equipment to the "SocieteNationale Agricole pour le Coton" (SONACO0),which will administer extension, credit and marketing services;

b) establishmentof a revolving fund to provide cotton growers with seasonal and medium-termcredit;

c) construction of two ginneries in the project area to increase annual ginning capacity from 43,000 tons of seed cotton to 67,000 tons and provision of six small rice mills to process 3,600 tons of paddy;

d) rehabilitation of about 620 km of feeder roads;

e) execution of field trials to adapt research results for practical application;

f) provision of funds for the preparationof an agriculturaldiver- sificationproject in the Borgou and Zou districts.

19. The Ministry of Rural Developmentand Cooperationwould oversee project execution with the help of the following organizations:

- Societe NationaleAgricole pour le Coton (SONACO),a government- owned, autonomouscorporation established in 1971 to develop the production of cotton and other crops in the north and center of Dahomey and to organize primary marketing;its statutes are acceptableto the Association;the posts of General Manager, Deputy General Manager and Financial Manager would at all times be held by persons whose qualifications and experience are acceptable to the Association; the Financial Manager would initially be provided by CFDT; - 6 -

- Compagnie Francaisepour le D6veloppement des Fibres Textiles (CFDT) is a French statutory corporationwith public and private participation(societe d'6conomiemixte) establishedin 1949 to provide assistancein the production,ginning and marketing of fiber crops, particularlycotton. CFDT is financed mainly by the French Governmentand has its headquartersin Paris and regional offices in several French-speakingAfrican countries includingDahomey;

- Societe d'Aide Techniqueet de Cooperation (SATEC)is a French government corporationestablished in 1956 to provide technical assistance for the developmentof production,particularly in agriculture,also with headquartersin Paris and offices in several African countries,including Dahomey;

- Direction des Travaux Publics (DTP) is a department of the M4inistryof Public WJorks.

20. The Governmentwould, by a contract which is acceptable to the Association,entrust SONACO with the developmentof production and the organizationof primary marketing, i.e., delivery by the producers to the marketing organization(CFDT), or to the ginneries. For that purpose, SONACO would provide extension services and credit. Extension services would be contractedto CFDT in the Borgou district and SATEC in the Zou under terms which are satisfactoryto the Association. Personnel employed by SONACO, includinggovernment personnel seconded to SONACO, Dahomean personnel heretofore employed by CFDT and SATEC, and foreign personnel employed by CFDT and SATEC, would work in an integrated structurewith a single chain of command. The contract will provide for in-servicetraining of Dahomean personneland lay down a timetabl- for their taiing over positions that have to be filled initially by expatriates. The Government would undertake to make available the necessary financial resources for the executionof these contracts.

21. The organizationof credit has posed a problem. The Banque Dahomeenne de Developpement (BDD),which might have been expected to handle it, has an unsatisfactoryrecord. It ceased agriculturalcredit operations in 1963 and requires a thorough reorganizationbefore it could resume them. Credit operations in the project area are presently managed by CFDT and SATEC with financial resources provided by the Fonds de Sta- bilisation et de Soutien des Prix des Produits a l'Exportation(FAS). Under the proposed project the I4inistryof Agriculturewould establish an agriculturalcredit fund for the project area, which SONACO would manage. Short-term credit would be provided for seasonal inputs and medium-term credit for agriculturalequipment. Satisfactorycredit procedures have been agreed.

22. For the purchasing and ginning of seed cotton and the marketing of cotton lint, the Governmentwould enter into a joint venture (association en participation)with CFDT, the terms of which are acceptableto the Association. Each partner would put at the disposal of the venture -7- its relevantcapital assets (gimneries and storagefacilities). Profits and losses would be shared between the Government and CFDTin the ratio 4:1, exceptfor lossesattributable to government decisions, e.g. should the producerprice be set too high, or to CFDT,e.g. shouldthere be mismanagement.CFDT's liabilitv would be limitedto profits previously receivedplus CFAF 5 million../ CFDTwould also be contractedto design and constructtwo ginneriesto be ownedby the Governmentand put at the disposalof the venture. The termsof the contractare satisfactoryto the Association.

23. Marketingcotton seed has been carriedout since 1969 by OCAD), a publicmarketing organization which has not provedefficient. In the courseof negotiationsit was accordinglyagreed that CFDT would take over the marketingof cottonseed under the joint venturearrangements. The draft CreditAgreement provides that any changein these arrangementswould be subjectto the approvalof the Association. 24. Under the proposedproject, 620 km of feederroads would be improvedby the Departmentof PublicTWorks (DTP), which would establish a specialunit, open a separateaccount and engage consultants for this purpose. The list of roads to be improvedeach year wouldbe drawn up by SONACOin consultationwith DTP and presentedto the Associationfor approval. The Governmentwould alsoundertake to maintainsatisfactorily the feederroads in the projectarea.

1/ US$ 1.00 = CFAF 255.79 -8-

25. The estimatedproject cost and respectivecontributions thereto by IDA, FAC and the Government would be as follows:

IDA FAC GOVT. TOTAL 7T$milli T A. Extensionservices .53 2.50 2.87 5.90 B. Farm inputs (on credit) 2.59 - .29 2.88 C. Processing equipment 1.42 .17 - 1.59 D. Feederroad improvement .63 .07 - .70 E. Researchand studies .51 .19 .03 .73 F. Contingencies .40 .18 .30 .88

TOTAL 6.08 3.11 3.491/ 12.682'

Foreignexchange cost 7.63

Percentage of project cost (including taxes) 48.0 24.5 27.5 Percentage of project cost (net of taxes) 54.4 27.8 17.8

26. The Government's financial contribution to SONACOto finance the salaries of Dahomean personnel and other expenditures on extension services should not give rise to budgetary problems since a large part is expected to be provided from the Goverriaent's share in the profits of the joint venture (see paragraph 28 below). Increased revenues expected to result from the project,for examplefrom export taxes, would more than cover the remainderof the governmentcontribution to projectcosts.

27. The Government'sshare in the profitsof the joint venturewould be appliedin the first instanceto settingup a specialcotton price stabilizationaccount within the FAS and maintainingit at a level of

2! Includingtaxes of about12 percent,equivalent to about$1.5 million. CFAF 500 million, and thereafter to meeting the annual costs of SONACO for extension services in the project area. Any excess over these requirements would be applied to the improvement of cotton extension services outside the project area. The alternative would also be open for the Government to raise the producer price, which under the draft Credit Agreement-would be reviewed annually with the Association. -All-the profits would thus remain in the rural sector of the economy.

28. To illustrate the importance of the Government's 80 percent share in the profits of the joint venture, the folloinTng table gives an estimate of what it would be on the assumption of a projected decline in the world market price for cotton of about 15 percent a year through 1975, an average annual increase of 5 percent in the cost of farm inputs provided by the joint venture and an unchanged producer price.

1972 1973 1974 1975 1976 1978 1980 (CFAF mlion) 515 521 397 361 324 255 179

29. The Government would undertake to make sufficient funds available in advance on a quarterly basis to each of the project accounts: SOMACO's account (for extension services), the agricultural credit fund, the ginneries construction account, and the feeder road account of DTP.

30. Procurement of fertilizers, insecticides, sprayers, farm equipment, corrugated steel pipes, vehicles, ginnery and rice milling machinery, etc., totalling about $8.0 million equivalent, would be on the basis of international competitive bidding. Tenders for the construction of stores, houses and offices (total cost about $330,000) would be let locally since the individual contracts would be too small to justify calls for bids outside Dahomey. Furniture and office equipment (total cost about $45,000), for which there is adequate local competition, would be procured according to the Government'sprocedures, which are satisfactory.

31. Disbursement of the proposed credit would be made as follows:

a) 100 percent of the c.i.f. Cotonau costs of goods directly imported for the project such as ginnery equipment and rice hullers, corrugatedsteel, pipes and vehicles, estimatedat US$1.12 million;

b) 90 oercent of the cost of office equipment and furniture, building and road construction,applied research, and the feasibilitystudy, about Us$1.99 million;and

c) 100 percent of the c.i.f. Cotonou costs of fertilizers,insecticides, and agriculturalequipment to be purchasedbefore December 31, 1972 and 15 percent in each of the followingyears, about US$2.59 million.

32. The project would be expected to raise substantiallythe cash incomes of about 41,000 participatingfarmers (about 350,000persons including their families) of whom about 12,000 would be new. Total annual net - 10 -

cash returns on the project would almost triDle between 1970 and 1975 from CFAF 580 million to 1,570 million, or an average increase of about $95 per participating family.

33. Dahomey's cotton exports during the project period (1971-74) are expected to increase from 35,000 tons to 82,000 tons, mainly as a result of the project, and the resulting foreign exchange earnings are expected to double, from $10 million to $20 million. Dahomey's increased cotton exports will, however, have only a negligible impact on the world market.

34. Assuming a project life of 10 years, the economic rate of return on the project is estimated at 34 percent. No economic cost has been attributed to farm labor in view of the extensive under-enrployment in Dahomey and the lack of alternative employment opportunities. All labor will be provided by participating families and no hired labor will be required. The estimated rate of return would be reduced to 19 percent if the benefits were 15 percent lower on account of a steeper decline in world market prices than now forecast or of lower yields. Part of the expected benefits arise from extensionwork and investmentsalready carried out in the project area.

PART IV - LEGAL INSTRUMENTSAND AUTHORITY

35. The draft Development Credit Agreement between the Republic of Dahomey and the Association, the draft Project Agreement between the Association and the Societe Nationale Agricole pour le Coton (SONACO), the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of a resolution approving the proposed credit are being distributed to the Executive Directors separately.

36. The draft Development Credit Agreement and the draft Project Agreement conform substantiallyto the pattern of agreementused for this type of project.

37. In addition to the standard conditionsof effectiveness,we have included the followi-ng conditions in the Credit Agreement: a) the execution and delivery of the Project Agreement, the contractbetween SONACO and the Government,the contractsbetw,ueen the Government and CFDT and SATEC, and the Convention de Mandat de Gestion establishing the association en participation between the Government and CFDT; b) the appointment of the General Manager, Deputy General Manager and Financial Manager of SONACOwho shall be acceptable to the Association; c) appointment by FAS of an experienced accountant and carrying out by FAS of accounting procedures satisfactory to the Association; d) completion of the necessary action by the Governmentto allow SONACO to comply with the agricultural lending procedures set down in the Credit Agreement; e) completionof the necessary governmentalmeasures for the marketing of cotton seed through CFDT; and f) certificationthat there has been no material adverse change in SONACO's condition since the date of signing of the credit. - 11 -

38. I am satisfied that the proposed developmentcredit would comply with the Articles of Agreement of the Association.

PART V - RECOM2EDMATION

39. I recommend that the Executive Directors approve the proposed credit.

Robert S. McNamara President

by J. Burke Knapp

Annexes (3)

Washington, D.C. February 1, 1972 ANNEXI

SUE4LŽiYSTATEtiENT OF IDA CREDITS TO DAHOUMEY

AT DECEMBER 31, 1971

Amount Credit (0 million) Number Year Borrower Purpose IDA Undisbursed

144-DA 1969 Republic of Dahomey Agricultural Development 4.6 3.9

215-DA 1970 Republic of Dahomey Highwzay MIaintenance and Engineering 3.5 1.7

TOTAL 8.1 5.6 ANNEX II

ECONOMIC E`4O?A1NXDUM

1. lDahomeyis one of the poorest countries in Africa and has made little economic progress during the first decade of independence. The production of goods and services has developed only slowly. External trade and the government budget have been in deficit throughout these years. However, partly owing to high export prices, there has been some improvementin the country's economic position in 1970 and 1971. Part of the country's economic difficulties has been due to political instability and the inability of successive governments to impose austerity and improve resource allocation.

Political and social aspects

2. Since independence, in 1960, Dahomey has had a series of political crises and eight changes of government which have reduced the effectiveness of development planning in the public sector. The main cause of that instability was regional affiliations and antagonisms reflecting traditional rivalries between ancient kingdoms. The present Presidential Council is an attempt to reconcile these differences,as it is composed of Messrs. Hubert JIaga from the north, Ahomadegbe from the center and Apithy from the south. Bach member will in turn hold the office of Head of State for two years. Mr. Hubert Maga is serving the first term and is due to be succeededby Lr.Ahomadegbe in 1972.

3. From the economic vietpoint,it is important to note that the political system is increasinglydominated by the urban class, made up largely of public employees and private wage earners, two small but priv- ileged groups which until now have successfullydefeated all attempted austeritymeasures. The gap between their standard of living and that of rural people has been increasing,which largely explains the growing rural exodus, despite the fact that employmentpossibilities in the modern sector are seriously lagging. This problem is further aggravatedby Dahomey's educationsystem which is almost totally unrelated to the rural environmentand largely irrelevant to economic realities. By contributing to the growing rural exodus of school leavers, the system is hampering the development of the agriculturalsector and is at the same time contributing to increasing urban unemployment. This widening gap between rural and urban areas is likely to loom ever larger in Dahomey's political life, and to become one of the central problems of economic policy.

Recent economic and financial developments

4. Between 1965 and 1970, the GDP at current prices grew by about 5.5 percent per annum. As prices appear to have risen at an annual rate of about 2-1/2 percent, and population to have grown by around 2.8 per cent per annum, per capita income has remained virtuallyunchanged over the past five years. There are only provisional data for the years subsequent to 1966; but indications are that there has been some ANNEXII Page 2 acceleration in the growth of GDPat current prices in 1969 (5.1 percent) and 1970 (5.6 percent) compared to 1968 (3.6 percent). This modest acceleration in growth is partly due to increased agricultural production. Cotton production has risen from 9,000 tons in 1966/67 to 29,000 tons in 1969/70 and a further increase to 40,000 tons is expected in the 1970/71 crop year. There are plans to expand production to 80,000 tons by 197V/75. Oil palm is the other crop which is growing at a favorable rate. The value of palm product exports rose from CFAF3.7 billion in 1967 to about CFAF6.9 billion in 1969. The area under cultivation for oil palm has increased substantially over recent years (from about 9,000 hectares in 1965 to about 20,000 hectares in 1970) largely through the planting program of SONADE/ which is progressively replacing wild palm groves with higher yielding trees. During the next four years this program is expected to give rise to a 50 percent increase in production. Export receipts will however increase less rapidly since the price for palm oil is expected to decline from its present high level. Other export crops such as coffee and tobacco have also increased over recent years but remain of minor significance.

5. The industrial sector in Dahomey is still small and does not yet contribute much to economic growth. Manufacturing, mining and construction account for some 12 percent of GDP. Despite government measures to promote industrialization, progress has been slow due to the small size of the market and the lack of regional cooperation. On the other hand, trade and transport have expanded more rapidly than the rest of the economy. This is mainly attributable to the sharp increase in transit trade with Nigeria (mainly consumer goods) after the outbreak of the civil war. Similarly, unrecorded exports from Nigeria, especially cocoa and groundnuts, have shown a sharp rise. This trade has considerably boosted Dahomey's export and fiscal receipts. Now that the political and economic situation in Nigeria is back to normal, these windfall profits for the Dahomean economy are decreasing.

6. Economic growth during 1970 and 1971 has also benefitted from high prices for palm oil and cotton, the country's most important export products. These high prices are probably the principal factor in the marked increase in the country's foreign assets (from $12 million in August 1970 to $23 million in August 1971, equivalent to about 5 months of imports) and in the improvements in the budgetary situation, which will be discussed below. Unfortunately, palm oil and cotton prices are expected to decline again in the next several years. Unless the country's structural problems are solved, this will lead to renewed financial difficulties.

&/ Societe Nationale pour le Developpement Rural. ANNEX II Page 3

7. These financial difficulties stem from large over-spending on national account. Over the last five years, expenditures have totalled 113 percent of GDP - consumption 97 percent and investment 14 percent. Domestic savings were only 3 percent and financed only a small proportion of investment. This degree of dependencegoes beyond the assistance which Dahomey could expect to receive from abroad and serious difficulties,particularly in governmentfinancing, have been the result. When export prices return in the next few years to a lower level,!/ the Government t s financial weakness will again be in evidence,unless the structure of governmentfinance is improved in the meantime. The improvementof resource mobilizationwill undoubtedly remain the most pressing problem of the Dahomean economy.

Budgetary situation

8. Since independence, Dahomey has sufferedfrom budget deficits which could be financed only with continuedFrench budget support. The main reasons for the deficits were on the expenditureside: the continuing growth of personnel expendituresand the mounting outlays on education. Partly because of its political instability,the Governmenthas never been strong enough to resist the pressure to absorb Dahomeans previously employed in other TWesternAfrican countries as well as new graduates. Each new governmentcreated jobs to satisfy its political clientele. During the last few years an average of about two thousand new positions were created annually and the number of public sector employees amounted to about 20,000. Salary payments account for two-thirds of government expenditure. At the same time, the growth of education expenditures reflected an apparent belief in Dahomey that there can be no misspending on education. One may hope, howfever, that in the future the Government will be able to resist the pressures for government job creation, and that educationpolicy will be adapted to the economic realities of the country.

9. In recent years, governmentrevenues increased rapidly, due mainly to import taxes, and current expenditures increased more slowly. In 1970, the current deficit was substantially lower than in previous years (see table, p. 7 of this Annex). However, this improvementwas partly due to a change in budgetary presentationwhich included transfers from the funds of government agencies and enterprises of CFAF 730 million as a current budget item rather than as a financing item as in earlier years. A consistent presentation shows an estimated current account deficit in 1970 of about CFAF 440 million or 4 percent of revenue. Furthermore, the increase in tax revenues from imports in 1970 was to some extent due to higher import prices following the 1969 devaluation and also to the rapidly expanded transit trade with Nigeria during the civil war and its aftermath.

1/ During the recent currency realignment the relation of the CFA franc to the French franc remained unchanged. The CFA franc has thus been revalued upward vis-a-vis the US dollar. AMTEXII Page 4

10. The improvement of the budgetazr situation has continued in 1971. Budget accounts from January to September showTeda small surplus (CFAF0.5 billion- 5 percent of government revenue) and, although expendituresin the last part of the year are usuallyrather heavy, budget equilibriumfor the full year 1971 is likely. This satisfactory result is due to certainnew tax measures(i.e. increase in import taxes and transit taxes, and improved tax collection) but probably the most important cause of the improvement is the increase in the volume of cottonand palm oil exportsand the high pricesfor theseproducts throughout1971.

11. The budgetdeficits prior to 1971 have been financedby French budgetsubsidies, Central Bank advances,and, especiallybefore 1966, by deferment of payments to the private sector. During recent years, the DahomeanGovernment has moreoverincreasingly used reservefunds of public entities. These transfers have by now virtually exhausted the reserves of these entities and impaired their borrowing and self-financing capacity.

12. One reason for the increasirg use of the reserve funds of public entities was that ordinary fiscal receipts have been increasingly ear- markedfor a numberof special funds. The most importantof these specialaccounts is the "Caisse Autonomed'Amortissement" t , whichwas set up to liquidateunpaid bills to the privatesector accumulated before December 1966. The "Caisse"has operatedvery successfully.Because a special tax has been made availab'le to it, an aggregate of CFAF2 billion in debts outstanding at the end of 1966 is now likely to be repaid by the end of 1971. There has also been some reduction in the amount of unpaid bills accumulated since 1966; the amount outstanding in 1970 was CFAF0.7 billion. The Government is now considering a proposal to extend the functions of the 1Caaisse" to debts incurred after 1966, and to entrust it with the administration and service of long and medium-term external publicdebt.

13. At the end of 1969,Dahomey t s external-public debt (including amountscontracted for but undisbursed) amounted to CFAF12.1 billion, of which CFAF 2.8 billionwas owed to privatesources, mainly on account of suppliers'credits. The remainingCFAF 9.3 billIonwzas held by official creditors, mainly the governments of France, Canada, Germany, the Ivory Coast and Zaire. Debt servicepayments will rise considerably duringthe next twroyears and reachbetw--een CFAF 1.0 billionand CFAF 1.2 billionwhich is equivalentto 8 to 10 percentof 1970 exports. Furthermore, one has to take into accountDahomey's unconsolidated debt, wrhichamounts to about CFAF 3.7 billion,of which CFAF 2.7 billionis owed to France. Prospectsand Bank involvement

14. The main factorsof growthin the next severalyears will be the expansionof oil palm and cottonproduction and the increasein domesticprocessing of theseproducts. Groundnutproduction is also likelyto increase. Takinginto accountalso the prospectsfor a few ANNEXII Page 5 minor crops, this expansion sho'ild lead to an overall growth rate of export volume of six percent a year until 1975. However, in view of the expected decline in palm oil,, cotton and groundnut prices from their present high level, it is likely that the value of exports in 1975 will hardly be higher than the value of 1971 exports. In view of the importanceof exports for the Dahomean economy, prospects are that overall economic growth during the first half of the 1970's is also likely to remain at a low level.

15. These overall economic prospects provide the setting for the Government'sbudgetary prospects. In the short term, the situation is unlikely to improve and the Government's financial position may even deteriorateduring the coming two years, because of the probable reduction of transit trade with Nigeria, the increasingforeign debt service, the less favorablewvorld market prospects for palm oil, cotton and groundnuts, the lack of important and immediatelyproductive development projects (besides cotton) and finally the continuedpressure on the Government'srecruitment policy. This prospect,however, only enhances the need for early action if the Government is to become able to parti- cipate significantly in the financing of economic development. The Government seems to be aware of these problems and the lines along which action is required.

16. The Bank has been discussing the situationwith the Government and has been seeking agreementon measures to improve budgetary performance. The Governmenthas declared its intention to take steps toward a reduction of the current budget deficit and, in consultationwith the Bank, has taken or is considering the following measures:

a) At the end of 1970, the Governmentreceived technical assistancefrom the Fund in the fiscal field. The Fundts experts made a comprehensivestudy of Dahomey's present tax system and concluded that improvementsin assessment and collection are the most promisingmeans to raise revenue in the immediate future. Specific measures have been recommendedwhich would increase revenues by about CFAF 1265 million (16 percent of 1970 revenue). In 1971, the Government consolidatedthe income taxes on wages and salaries into a single progressive tax to be withheld at source. It has also taken measures to improve the staffing of the tax department,whose lack of qualified personnel has been a major bottleneck. The Govern- ment also should take new fiscal measures to compensate for the loss of the solidarity tax. This tax, a special austerity levy on salary incomes introduced in 1966, had an annual yield of CFAF 1 billion (15 percent of 1970 revenue). This tax, which was very unpopular, was abolished in 1970. So far, no new taxes have been introduced which could yield comparable revenues. ANNEX II' Page 6

b) The Government has informed the Bank that it is strictly limiting the hiring of government personnel to the numbers that are required to replace those who retire from service. However, the Governmentintends to continue hiring additional personnel for education and tax administration. vlhile we could agree with the need to strengthen tax administration, we have serious doubts regarding further increases in education ex3penditures which already appear too high. The forthcoming economic mission will discuss the level of education expenditureswith the Government.

c) The Government has also stated that it intends to manage government salary payments in such a way that the increase in the cost of salaries will be slowed down considerably. Since the abolition of the solidarity tax had led to an increase in the disposable income of public servants, the Governmentshould be able to freeze salaries at the present level.

17. The Governmenthas agreed to discuss these problems with the forthcomingeconomic mission. The main purpose of this mission will be to assess the country'slong-term developmentprospects and investment requirements and to give advice on ways in which the Governmentcan improve resource mobilization. The mission will try to formulate guide- lines for a comprehensive budgetary program aimed at a better balance between revenues and expenditures in the medium term and a re-ordering of spending priorities. The results and recommendationsof the mission will be reviewed and discussedwith the Governmentwith a view to achieving agreementon a program of budgetary improvement and reform.

18. The mission will also examine the situation of public entities. As already nouted,`.he reserve funds of these entities have beexi used until 1971 to finance expenditures under the current budget. Although such transfers might be temporarily justified, there is a danger that this mi,ght become a standing practice. To the extent that the savings of public entities will be available to the central government without detrir'K*nt to the financial position of these entities, they should be used only for the financing of productive investment projects.

19. Indispensable though the above measures are to improve Dahomey's budget situation, it must be stressed, however, that in the lorng run only a broader tax base is likely to bring about a more permanent improvement in public finance. Tn this respect, the proposed project would contributeto improving the Government'sfinancial position.

20. Even if the Governmenttakes the necessary steps to improve resource molbiJ.izat.Lon, Dahomey has, at the present stage of its development, only limited capacity to generate savings for investmentpurposes. External lenders slould therefore be prepared to finance a high proportion of project costs and to contributeto the financing of local costs in high priority projects with a low foreign exchange coitiionent. DAHOMEY - ORDINARY BUDGET REVENUES AND EXPENDITURES ANNEX II Page 7 1968 - 1971

(in billions of CFAF francs)

19 6 8 1 9 6 9 1 9 7 0 1 9 7 1 Estimates Actuals Estimates Actuals Estimates Actuals Actuals Estimates Actuals (Sept.) (e.(Spt.) REVENUES

Direct taxes 1.91 1.64 2.03 1.89 1.67 1.92 1.80

Indirect taxes 4.13 3.59 3.96 4.43 4.51 6.10 5.94

Other revenues!/ o.98 1.22 1.33 1.01 1.30 1.20 1.27

TOTAL 7.02 6.45 7.32 7.33 7.48 7.20 9.22 9.01 7.80

EXPENDITURES

Wages and salaries 5.51 5.o4 5.78 5.41 6.25 4.20 5.98 6.82 3.96 Materialsand supplies 1.36 1.43 1.07 1.43 1.42 0.89 1.45 1.52 0.78

Debt service 0.14 0.12 0.15 0.22 0.16 1.45 0.20 0.15 o.o8

Other 1.23 o.96 1.33 1.65 2.01 0.05 2.03 2.12 2.44 TOTAL 8.24 7.55 8.33 8.71 9.84 6.58 9.66 10.61 7.26

Budget deficit (-) or suirplus(+) (excluding transfers from public agencies) -1.22 -1.10 -1.01 -1.38 -2.36 (+0.62) -0.44 -1.60 (+0.54)

1/ Excluding contributions from pu-blicagencies and enterprises. ANNEX II Page 8

DAHOMEY

CountrZ Data

Area 112,600 square kilometers

Population (1970) 2.8 million; estimated annual growth rate: 2.8 percent

Gross domestic product per capita us$ 85 at US$ 1 = CFAF255.79

(In billions of CFA francs)

National accounts 1966 1967 19681/ 196941 19702/

GDP at market prices 48.2 52.7 54.6 57.4 60.7 Gross fixed investment 6.2 7.9 6.8 8.0 8.5 Consumption 47.0 50.6 53.0 55.7 58.8 Domestic savings 1.2 2.1 1.6 1.7 1.9 July Monetary survey 1966 1967 1968 1969 1970 1970 1971

Foreign assets (net) 1.6 1.1 1.8 1.1 3.6-/ 3 . 4 g/ 6.6Z/ Domestic credit 5.1 5.2 5.6 7.7 7.3 7.2 6.5

Claims on Governments(net) (0.5) (0.4) (0.5) (1.1) (-) (0.5)(-0.5) Claims on private sector (4.6) (4-8) (5-1) (6.6) (7.4) (6.7) (7.0)

Money and quasi money 6.5 6.3 7.3 8.5 10.0 9.6 11.7 Other liabilities (net) 0.2 - 0.1 0.3 0.9 1.0 1.4

Balanceof payments 1966 1967 1968 l1696/ 1970 /

Goods and services -6.4 -8.8 -6.7 -6.6 -6.6 Exports (4-7) (5.4) (8.2) (11.0)(12.7) Imports (-10.9)(-15.2) (-14.4) -16.9)(-18.9) Services (net) (-0.2) (1-0) (-0$5) (-0.7) (-0.4)

Transfer payments (net) 4.8 5.0 5.7 4.8 6.2 Capital movements (net) 0.1 1.6 0.9 1.0 1.2 Errorsand omissions 1.7 1.4 0.5 0.2 - Over-all surplus or deficit (-) -0.2 -0.8 -0.4 -0.6 0.8

1/ Provisionalfigures. g/ Includes special drawing rights of OFAF 0.5 billion in July and December 1970 and 0.9 in July 1971. AINNEXIT Page 9 DAH0MY

Social Indicators

1. Education

- in 1961, 2 percent of the population over 15 years of age knew how to read and write;

- school enrollment ratio - 1967:

Age Group Total P lation Female Population

6- 8 20 12 6-11 35 21 12-18 4 2

2. Culture

- libraries - 1966: Total = 1

National Library: number of volumes: 8,000 number of visits: 1,000 number of registered borrowers: 100

- newspapers- 1968:

Number Circulation Circulation per 1000 inhabitant

Daily 1 1,000 04 NIon-daily 6 13,000 6.4

- movie theaters - 1969: total: 6 annual attendanceper inhabitant:0,4

- radio - 1969: number of receivers per 1000 inhabitants:23

3. Health

- Birth rate: 5.4 percent (1969)

- Death rate: 2.6 percent (1969)

ANNEXIII

DAIHIMEY

ZOU-BORGOUCOTTON PROJECT

CREDIT AND PROJECT SUYMMARY

Borrower: Republic of Dahomey

Amount; US$6.1 million equivalent. The proposed credit would cover about 48 percent of total project costs (including taxes) and about 80 percent of the foreign exchange cost. The French GovernmentFonds d'Aide et de Cooperationwill contribute as a grant $3.1million equivalentto the financing of the project.

Terms and Conditions: The principal amount of the credit will be repaid in semi-annualinstallments payable commencingApril 1, 1982 and ending October 1, 2021, each installmentto and including the installmentpayable on Octoher 1, 1991 to be one-half of one percent (1/2 of 1%) of such principal amount, and each installment thereafter to be one and one-half percent (1-1/2%)of such principal amount.

Intermediar: Societe Nationale Agricole pour le Coton (SONACO), an autonomous government corporation, acting as executing agent and channel of project funds. Cotton producers will pay a commission equivalent to a rate of interest of 8 percent on both short-term and medium-term loans made out of project funds.

Project: Expansion of the cotton production developmentprogram managed by CompagnieFran9aise pour le Developpementdes Fibres Textiles (CFDT) and Societe d'Aide Techniqueet de Cooperation (SATEC)and hitherto financed by the French Fonds d'Aide et de Cooperation (FAC); improvementof extension, credit and primary marketing services;estab- lishment of a revolving agriculturalcredit fund; construction of two ginneriesand provision of six rice hullers; rehabilitationof 620 km of feeder roads; applied research;and a diversificationfeasibility study.

Special Project Features: Developmentof the recently establishednational cotton corporation (SONACO);and development of unused low-lying land for rice cultivation. ANNEXIII Page 2 Cost of Project: Local Foreign Total (U&X million)

Extensionservices 3.64 2.26 5.90 Revolving credit fund 0.14 2.74 2.88 Processing plants 0.55 1.04 1.59 Feeder road improvement 0.14 o.56 0.70 Research and studies 0.15 o.58 0.73 Contingencies 0.43 o.45 0.88 Totalproject costs (includingabout 5.o5 7.63 12.68 1.5 millionof taxes) Financing: IDA Credit 0.7 5.4 6.1 FAC 1.4 1.7 3.1 Government 3.0 0.5 3.5

5.1 7.6 12.7

Procurement - - Arrangements: Internationalcompetitive bidding for farm inputs(ferti- lizersand insecticides)and equipment(sprayers, ox-drawn implements,processing equipment, vehicles and steel, culverts).Local tenders for buildingconstruction and localprocurement of officeequipment for amountsnot exceeding US$ 18,000 equivalent. Estimated (US} million) Disbursement: FY1973 FY1974 FY1975 3.9 1.5 0.7 Consultants: (1) For feeder road improvement program: the same consultants as for the highwyaymaaintenance program (IDA Credit No. 215-DA).

(2) CFDTto assist in setting up SONACO. (3) Suitably qualified and experienced consultants to carry out the diversification feasibility study. Rate of Return: Economic rate of return estimated at 34 percent.

Appraisal Report: Report No. PA-99a, January 21, 1972. Agriculture Projects Department. DAHOMEY AGRICULTUREAND RAINFALL MAP I

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