Memorandum of Economic and Financial Policies for 2000-03

November 21, 2000

I. Introduction

7.  The discussions on the new three-year economic and financial program for Niger took place in Niamey in August and September 2000. This program, which the International Monetary Fund could support with an arrangement under the Poverty Reduction and Growth Facility (PRGF), will enable Niger to successfully resume the structural adjustment of its economy that was interrupted by the events of April 1999. It is set against a backdrop of reconstruction of democratic institutions and restoration of political and social stability in 2000. The aim of the program is to achieve sustainable economic growth and medium-term financial viability in a stable macroeconomic environment, so that an effective fight can be waged against poverty. This memorandum reflects the main focuses of the medium-term strategy set out in the interim poverty reduction strategy paper (PRSP), and the government of Niger affirms its resolution to implement all the policies established under this strategy, which will be completed and validated in 2001 in the context of a broadened and enhanced participatory process.

II. Recent Developments: 1999-2000

A. Structural Adjustment Interrupted in 1999

8.  The program of economic and financial structural adjustment policies supported by the IMF since 1996 under the Enhanced Structural Adjustment Facility and by the community of donors had resulted in substantial progress in restoring the major macroeconomic and budgetary balances and introducing structural reforms focusing on private sector development, privatization, and the civil service. Achievements in the 1996-98 period remained fragile, however, and suffered a number of setbacks caused by the political and social instability that followed the political events of April 1999. The economic consequences of this instability were aggravated by the almost total withdrawal of external financial assistance from Niger during the transition period.

9.  In addition to these difficulties, there was a decline in agricultural output following an exceptional harvest in 1998 and a drop in uranium production, the effects of which resulted in a slight economic downturn of about 1 percent in real GDP in 1999 after a 10½ percent increase in 1998. However, consumer prices benefited from the excellent agricultural output at end-1998, and inflation was negative, at nearly -2 percent year-on-year, compared with the 3½ percent increase in 1998. As for the external sector, a 10 percent decline in the volume of exports was offset by a drop in the volume of imports of more than 20 percent, reflecting, inter alia, a deterioration in the terms of trade, estimated at close to 5 percent, and the economic downturn. Thus, notwithstanding the increase in the prices of oil products, the external current account deficit (excluding official transfers) narrowed from about 10 percent of GDP in 1998 to about 7½ percent in 1999, but the interruption in flows of external budgetary assistance led to a new accumulation of external payments arrears and contributed to a decline in the gross external assets of the central bank of CFAF 15 billion (or close to 0.6 month of imports). The political instability and slowdown in some public projects also affected investment, which dropped from 11 percent of GDP in 1998 to 10 percent in 1999.

10.  On the budget side, cash-flow difficulties resulting from the withdrawal of external budgetary assistance were exacerbated by a lack of budgetary discipline and insufficient mobilization of domestic resources. This crisis situation highlighted the weakness of the Nigerien public administration and its budgetary system, and led to an accumulation of domestic and external payments arrears equivalent to almost 5 percent of GDP. In particular, the regular payment of civil service employees could not be maintained, and arrears amounting to 7 months of wages accumulated for 1999, bringing the total wage arrears to 13 months of wages at end-1999, or close to 3½ percent of GDP. The budget execution difficulties also affected all of the social sectors, whose real share in total expenditure declined substantially. In addition, governance problems arose, and the failure to respect budgetary procedures led to the accumulation of irregular expenditures estimated at more than 1 percent of GDP at end-1999.

11. The overall budget deficit (on a commitment basis, excluding grants) reached the equivalent of about 10 percent of GDP in 1999, increasing by almost 2 percentage points over 1998. This reflects an increase in primary expenditure (total expenditure, excluding interest on the debt) and current expenditure by more than 1 percentage point, in terms of GDP, and a decline in budgetary revenue by close to 0.5 percentage point.

12.  On account of these budgetary developments and the decline in external financing, the monetary aggregates in 1999 reflected a deterioration in the net government position of almost CFAF 8 billion, or almost 12 percent compared with the December 1998 level. However, the increase in net domestic assets was moderated by the 3 percent contraction in bank credit to the nongovernment sector as activity stagnated, and despite a relaxation of regional monetary policy in January 1999. Taking into account the drop in net foreign assets, the money supply declined by 5½ percent in 1999 and the velocity of money, already high, increased by 8 percent.

13.  In the area of structural reform, 1999 was marked by a significant delay in the implementation of the privatization program and the planned reforms of budget management, the civil service, and private sector development. No new public enterprise was privatized in 1999, and the number of privatizations remained at 3, out of 11 envisaged in the program established in 1996. Nevertheless, some progress was made in establishing a new legislative and regulatory framework for the water and telecommunications sectors. A multisectoral regulatory agency was created in September 1999 to ensure compliance with the regulatory provisions applicable to the various sectors concerned (water, electricity, telecommunications, and petroleum products) and to monitor the quality of services provided, rates applied, and performance of the contractual obligations of private investors in the various sectors.

B. The Restoration of Democracy and
the Resumption of Structural Adjustment in 2000

14.  The free and transparent legislative and presidential elections in late 1999 restored a genuine democratic framework and eased political and social tensions, conditions necessary for sustainable economic development. The new government quickly established its social, economic, and political objectives in the General Policy Statement approved by the National Assembly in April 2000. These involve (1) on the macroeconomic front, resuming and expanding the structural reforms to ensure economic recovery and diversification so as to effectively combat poverty; (2) on the social front, consolidating the rule of law and peace throughout the country by introducing a framework of ongoing dialogue among the social partners; and (3) on the financial front, consolidating and improving government finances in a context of restoration of good governance and strengthening of government management capacities.

Budget situation in the first half of 2000

15.  Pending the complete restoration of relations with the donor community as regards budgetary assistance, the government continued to face serious cash-flow difficulties, leading to severe budget constraints. The priorities thus became to ensure the regular payment of civil service wages, provide the minimum appropriations needed for the government to operate, and limit external debt service to certain multilateral international organizations. To this end, a number of measures were taken, including (1) separation of the 1999 and 2000 fiscal years to verify the regularity of expenditures committed at end-1999 before proceeding with their payment; (2) introduction of a very strict cash-flow plan and management system to ensure that priority expenditures were covered and to limit expenditure commitment to resources actually available; and (3) compliance with the existing budgetary procedures and rules. The 2000 budget introduced at end-1999 by the transitional government was revised by a supplementary budget law in June 2000 to place the government revenue and expenditure projections on a more realistic footing, taking account of Niger's actual potential for mobilizing domestic and external resources and the concern to avoid accumulating new domestic payments arrears.

16.  The Nigerien government's prudent financial management, and its determination to improve budgetary transparency and good governance, have made it possible, with the financial assistance of some bilateral donors, to achieve the priority objectives of the government and maintain social and political stability. At end-June 2000, the overall budget deficit (on a commitment basis, excluding grants) was held at CFAF 42 billion (equivalent to 6.3 percent of GDP), with budgetary revenues equivalent to 8.1 percent of GDP and total expenditure limited to 14.4 percent of GDP (including an off-budget subsidy of the prices for petroleum products equivalent to 0.7 percent of GDP). Wages were paid on a regular basis, and one month of wage bill arrears was even settled. Nevertheless, the strict respecting of budgetary financing constraints and the priority given to some expenditure made normal budget execution difficult, affecting services and the investment program. Based on actual external financing at end-June, the government was able to reduce its debt to the Nigerien banking system by about CFAF 1.8 billion. This improvement in the net government position was made possible only by the skipping of payments of part of the external debt service and a slight increase in domestic payments arrears, owing essentially to the implicit subsidy on petroleum products.

Monetary and banking developments in the first half of 2000

17.  Niger's net foreign assets continued to decline in the first half of 2000, reflecting the continued lack of sufficient external aid and the deterioration in the external current account balance. The latter resulted from a significant increase in the value of imports, mainly owing to the depreciation of the CFA franc vis-à-vis the dollar. The drop in net external assets put downward pressure on the money supply, which declined by almost 9 percent in the first half of 2000 despite an increase in net domestic assets of the banking system. Indeed, while the net government position improved slightly, in spite of an increase in the statutory advance from the central bank of more than CFAF 1 billion, credit to the economy increased by 35 percent in the first six months of 2000 in response to the need to finance the rise in the nominal value of imports and the cash-flow difficulties faced by many companies, including some public enterprises. These difficulties resulted from the budgetary measures taken (the freeze on payments relating to fiscal-year 1999 and the restrictive beginning-of-the-year policy) and, in the case of the public enterprise responsible for petroleum imports (SONIDEP), the failure to increase pump prices despite the rapidly rising import prices for petroleum products. These trends were observed even though regional monetary policy was tightened on two occasions, first via the expansion of the base for required reserves and an increase in the reserve ratio from 1.5 percent to 3 percent in March, and second by the raising of the central bank reference rate by 75 basis points in June 2000. The latter measure was also aimed at stemming the outflow of capital following the rise in European interest rates.

Implementation of structural reforms

18.  The new government has affirmed its determination to resume the process of structural reform and to make it a cornerstone of Niger's poverty reduction strategy. The authorities have endeavored to restart the government's privatization program, specifically the divestment of four key public enterprises: NIGELEC (electricity), SNE (water), SONITEL (telephone), and SONIDEP (petroleum products import and storage). After some delays, the terms and conditions for the privatization of NIGELEC were finalized, consisting in a concession arrangement for the production, import, and distribution of electricity. Potential buyers for SONITEL were invited to come forward in May, and a data room was held in July. At the same time, the call for bids for the two cellular telephone licenses was launched in May. Finally, the strategy for the privatization of SONIDEP was adopted in July. The strategy calls for the sale of a majority of the shares in this company to professional private investors in the sector and the signing of a concession contract between the government and the new SONIDEP for the management of fuel depots. In this new context, oil imports will remain under the privatized SONIDEP's control and subject to public bidding procedures approved by the World Bank.

19.  As part of the civil service reform, a new law on the retirement rules for government workers and civil servants was implemented in March 2000, and will result in the early retirement of 2,384 government auxiliary workers and civil servants. The savings are approximately CFAF 0.6 billion in 2000, and the full-year effect is estimated at the equivalent of 0.2 percent of GDP. Under this legislation, the age limit for auxiliary workers was reduced from 60 to 58, and the maximum years of service for civil servants was reduced to 30 years, while their age limit for public employment was maintained at 55. Likewise, the consolidation of the various payroll and personnel records in a single database was completed in July 2000 and led to the identification of almost 300 irregular cases. The resolution of these cases has begun and should be completed by the end of the year.

20.  Beyond the strict control of expenditure described above, the government has resumed implementation of the budget management reform program introduced in 1997 and 1998. This program includes a number of modules covering budget preparation, execution, and tracking. The program also aims to improve the entry and processing of budgetary data across the board. The measures adopted in the early part of 2000 focus mainly on better control of certain government expenditure items. In particular, government consumption of water, electricity, and telephone services was reduced through the implementation of provisions that had been generally ignored. Coverage under the budget of the private consumption of several categories of senior civil servants was eliminated, in compliance with the prevailing laws and regulations, while access to the long-distance (domestic and international) telephone network was severely restricted. Finally, the government encouraged the companies to cut off service to departments that did not pay their bills, with the exception of some key sectors, such as health centers. Payroll management was also made easier and more transparent with the use of the new single database for the civil service to prepare the pay slips as of July 2000.

21.  In the area of management and use of budgetary data, regular reconciliations have been done among the central revenue collection offices since the beginning of 2000. Likewise, the Treasury has introduced an information system for the weekly collection of not yet recorded or classified revenue data through the internal network. The improvement in the quality of budgetary data made it possible to prepare more realistic cash-flow plans than in the past. The recording of government operations was also improved, as the restoration of the bookkeeping day and more rigorous allocation of transactions to the appropriate accounts led to a reduction in suspense accounts balances and a more readily understandable general balance sheet for the Treasury. Finally, it was possible to close the annual accounts for fiscal-year 1997. The 1997 budget review law was submitted to the Office of the National Assembly, and the corresponding revenue and expenditure accounts were reviewed and audited by the Accounting Office of the Supreme Court.

III. The Program for October 2000–September 2003

22.  During the coming three years, the government will implement a series of policies that are in line with the objectives described in its General Policy Statement of April 2000, described above. The program will give priority to poverty reduction and revival of the Nigerien economy in a context of financial stability, while emphasizing good governance and regional integration within the West African Economic and Monetary Union (WAEMU) and the Economic Community of West African States (ECOWAS). Specifically, the economic and financial program forms part of the Solidarity, Growth, Stability and Convergence Pact among the WAEMU member countries that came into effect in 1999, and aims to comply with its key objectives.

23.  The development of a new and comprehensive poverty reduction strategy is based on the work that led to the preparation of a national poverty reduction program in 1997. A revision of this program involved taking a critical look at past experience and the lack of real progress in reducing poverty. Progress to date is reflected in the interim PRSP prepared by the government. This interim paper provides current data on the profile of poverty in Niger, reviews the policies implemented in recent years, presents the medium-term macroeconomic framework, and indicates possible features and objectives of the new poverty reduction strategy. It also presents the institutional framework for preparing this strategy and the timetable for finalizing the paper, along with a matrix of strategies and measures that the government intends to implement in the coming three years.

24.  To finalize and validate this strategy, the government has created a high-level interministerial committee under the auspices of the Office of the Prime Minister. This committee will also be responsible for ensuring that sectoral policies are consistent with the poverty reduction strategy and will monitor the strategy's implementation. In addition, the government intends to take the necessary measures to improve knowledge of the causes and dynamics of poverty in Niger, and actively involve not only government and public agencies working in this area, but also civil society and representatives of bilateral and multilateral partners in development. Moreover, the government hopes to receive technical and financial support from the international community in preparing the programs and setting the objectives underlying this strategy. This process will result in the preparation of a full PRSP by Niger within the coming 12 months. Once the paper has been prepared, and with the expected benefits of the Initiative for Heavily Indebted Poor Countries (HIPC Initiative), the government would amend some of the assumptions and objectives of the program supported by the PRGF.

25.  The objective of reducing poverty can be met only in a context of financial stability and high, sustainable growth. Consequently, the government intends to continue to implement policies and reforms that will make it possible to achieve a growth rate of at least 4½ percent by 2003, while gradually increasing the investment rate to about 14 percent of GDP. As a result, GDP per capita growth rate will be close to 1½ percent in 2003. Keeping inflation under 3 percent is another program objective, while the external current account deficit (including official transfers), estimated at 5 percent of GDP in 2000, should decline progressively, reflecting improvements in the economic situation.

26.  In support of the macroeconomic objectives described above, the government will implement a fiscal policy aimed at improving the current and basic budgetary balances (the basic balance is the overall balance, excluding foreign-financed investment spending), and upgrading the quality of public spending. The program (which does not yet incorporate the benefits of the HIPC Initiative debt reduction) aims to balance the current budget by 2003, rebounding from a deficit of approximately 4 percent of GDP in 1999. This improvement will make it possible to achieve long-term budgetary viability by covering current expenditure out of revenues and releasing domestic resources to finance the public investment program. Budgetary savings will be restored by increasing budgetary revenues from 8.2 percent of GDP in 2000 to more than 10 percent in 2003, and by implementing a prudent current expenditure policy. The planned increased in revenue reflects a strengthening of tax and customs agencies (especially at the local level) and the adoption of legislative provisions to reform the tax system, with the main objective of widening the tax base and eliminating exemptions. As to current expenditure (excluding interest on the debt), it should decline from 8½ percent of GDP in 2000 to approximately 8 percent in 2003, based on a moderate wage policy, control of transfers, and savings on the consumption of goods and services, particularly telephone, water, and electricity. In contrast, capital expenditure should increase from 5 percent of GDP to 7 percent during the program period, taking into account the important growth in the domestic contribution to the public investment program (from 1 percent of GDP to 1½ percent of GDP) and the capacity to implement the program. The basic primary budget (excluding interest on the debt and foreign-financed spending on a commitment basis, and excluding grants) would thus be balanced in 2003, compared with a deficit of about 1½ percent of GDP in 2000. The overall budget deficit (on a commitment basis and excluding grants) would increase from 7½ percent of GDP in 2000 to 8 percent in 2001, reflecting mainly the higher capital expenditure, before declining to 7 percent in 2003.

27.  A key element of the program for 2000-03 is the projected settlement of all external and most domestic payments arrears (CFAF 219 billion in net terms, including wage arrears). These payments arrears have impaired the proper functioning of the budget and effectiveness of the civil service, affected relations with Niger's development partners, and penalized economic activity. The clearance of payments arrears would thus contribute substantially to restoring a sound economic environment for growth and poverty reduction. Taking into account this clearance of payments arrears, the external financing of the investment program (CFAF 284 billion), projected debt amortization payments (CFAF 158 billion), a stabilization in domestic bank financing (which takes into account projected Fund disbursements), the budgetary financing gaps stand at close to CFAF 497 billion for 2000-03, or about 8½ percent of GDP for the period. Niger's external needs are expected to be covered through debt relief for CFAF 229 billion (including traditional rescheduling of debt servicing for bilateral creditors and rescheduling of external payments arrears for all creditors), and through budgetary assistance from the donors' community, especially the World Bank, the European Union, and some bilateral donors.

28.  The debt relief that will result from the implementation of the HIPC Initiative in Niger will bring additional resources to Niger to support the poverty reduction strategy and will benefit mainly the social sectors and basic infrastructure. The current program will be amended to take account of this debt relief, once it is in place, and the revised program incorporated into upcoming budget laws, starting with a supplementary budget law for 2001. Nevertheless, this important contribution to the poverty reduction and development program in Niger will not cause the government to deviate from its commitment to fiscal adjustment.

29.  Another government priority in the implementation of the poverty reduction strategy and enhancement of good governance in Niger is to improve the quality of public spending. Expenditure preparation, programming, budgeting, and execution will be improved by the introduction of an expenditure tracking system that will make it possible to ensure more efficient and more effective public spending, including public investment. Public expenditure reviews will also ensure a better geographic and functional distribution of expenditure, including reallocations to reduce nonproductive spending and to support greater devolution and decentralization of the government.

30.  The government's budgetary policy, particularly the reduction in the direct advances of the central bank to the government, will support the prudent monetary policy that the regional monetary authorities are conducting to control inflation and strengthen the pegging of the CFA franc. The restructuring of the Nigerien banking system will be completed during the program period, and the monetary authorities will continue to monitor compliance with the prudential regulations to ensure the viability and liquidity of the banking and financial system, including the mutual credit and microfinance institutions, which should develop considerably in the coming years.

31.  To improve the macroeconomic outlook, the government will implement a program of structural reforms that will focus on reviving the economy and reducing poverty. The budgetary measures already described will be accompanied by actions to develop the rural sector and financial system, and reforms of social sectors. The liberalization of the economy will be continued by further lifting controls on prices, privatizing public enterprises, continuing to endeavor to open all sectors of the economy to competition, and strengthening the regulatory and legal framework governing economic activity.

IV. The Program for October 2000–September 2001

32.  In the context of the three-year program described above and the preliminary poverty reduction strategy, the aim of the program for the first year is to stabilize the economic situation and restore the foundations for sound and harmonious growth. In confirmation of its commitment to change, the government has taken the following prior actions: adoption of a supplementary budget law for 2000 by the National Assembly; elimination of the implicit subsidy on petroleum products through increases in the prices of petroleum products, revisions of the pricing formula, and liberalization of the transport of petroleum products (see paragraph 38); transmission of the draft budget review law for 1997 to the National Assembly, and of the corresponding treasury accounts to the Supreme Court's Chamber of Accounts for auditing purposes; verification of the conformity of expenditure effected at end-1999; and closing of the accounts for fiscal years 1998 and 1999. At the same time, the government has resumed its contacts with the international donor community to secure for 2000/01 the budgetary assistance needed to cover a residual financing gap estimated at CFAF 291.5 billion, or 10.6 percent of GDP. To avoid any budgetary slippage, the government intends to maintain its policy of respecting budgetary procedures and the cash-flow management system, which makes it possible to adjust expenditure commitment to available resources.

A. Macroeconomic Framework

33.  For 2000, despite the climatic uncertainties affecting this year's agricultural harvest, the government estimates that the outlook remains good, with economic growth in the range of 2½ percent to 3½ percent. In 2001, growth should accelerate to nearly 4 percent, resulting in an increase in GDP per capita of about 1 percent. These growth rates take account of increased output by all sectors of the economy, after the pause in 1999, and restoration of normal government finance functions. The investment rate should remain stable in 2000, with the increase in private investment offsetting a slight contraction in capital spending by the public sector, and then should increase by 1½ percentage points (of which 1 point for the public sector) to close to 12 percent of GDP in 2001. National savings, which have deteriorated in 2000, should turn around in 2001. The consumer price index is projected to increase by an average of 3 percent in 2000 and then by 3½ percent in 2001, compared with a decline of 2½ percent in 1999, owing to the rise in oil prices and the impact on prices of the appreciation of the U.S. dollar against the CFA franc.

34.  The external current account deficit (excluding official transfers) is projected to increase by close to 3 percentage points to stabilize at close to 10½ percent of GDP in 2000-01, mainly owing to the oil situation and the slow growth of exports due to the decline in the uranium sector. Oil price trends are expected to lead to a deterioration in the terms of trade of approximately 15 percent in 2000 and an increase in the value of oil products imports of approximately CFAF 11 billion ( 0.8 percent of GDP, or US$16 million) from 1999. In 2001, with the acceleration of activity, the real growth rate of imports will pick up, but the impact will be offset by a reduction in the oil bill. Niger could thus record overall balance of payments deficits equivalent to 5 percent in 2000 and 8 percent in 2001, as compared with 3.5 percent of GDP in 1999.

B. Fiscal Policy

35.  The objective of the 2000 and 2001 fiscal policy is to consolidate the financial position of the government, allow for the normal functioning and regular execution of the budget, initiate a program for the clearance of domestic payments arrears, and, in the context of renewed financial relations with the donor community, settle all external payments arrears with bilateral and multilateral creditors. The introduction of a strict cash-flow management system, the measures adopted since the beginning of 2000 (particularly the 2000 supplementary budget law, the increase in oil prices and revision of the pricing formula, and the program of early retirements from the civil service), and understandings on the settlement of external arrears with development partners will make it possible to achieve these objectives in 2000. These results will be consolidated in 2001 as the government continues to pursue a fiscal policy aimed at increasing the mobilization of domestic resources, limiting the growth of expenditure while improving its quality, and implementing a program to settle domestic payments arrears.

Fiscal policy for the end of 2000

36.  In 2000, the overall budget deficit (on a commitment basis, excluding grants) should be reduced to the equivalent of 7.3 percent of GDP, a reduction of more than 2 percentage points as compared with 1999. The basic balance (which excludes externally financed capital expenditure) should improve comparably, and the deficit should be narrowed to the equivalent of about 3 percent of GDP. This budgetary adjustment reflects the measures taken by the government to reduce noninterest basic spending and avoid the accumulation of new domestic payments arrears, notwithstanding the decline in the revenue-to-GDP ratio resulting from the introduction of the common external tariff by the WAEMU.

37.  Despite new revenue measures introduced in the 2000 supplementary budget law, budget revenue is projected to decline from 8½ percent of GDP in 1999 to about 8 percent in 2000 as a result of the anticipated weak economic growth, the impact of smaller corporate profits in 1999 on corporate income tax paid in 2000, and the introduction of the new WAEMU common external tariff (CET) effective January 1, 2000. The maximum customs duty rate under the new CET has been lowered from 25 percent to 20 percent, and the number of rates set at four (0, 5, 10, and 20 percent). Niger also had to reduce the statistical tax on foreign trade from 5 percent to 1 percent. The revenue losses resulting from the new foreign trade tax regime have been estimated at approximately CFAF 10½ billion (or about 1 percent of GDP). They will be offset in part by transfers from the WAEMU for the losses on intraregional trade and by a number of revenue-enhancing tax measures included in the supplementary budget law, estimated at 0.6 percent of GDP: (1) an increase in the value-added tax (VAT) rate from 17 percent to 19 percent; (2) an increase in the excise rates on cigarettes and tobacco from 20 percent to 30 percent; (3) an increase in the advance payment on the tax on commercial and industrial profits from 4 percent to 5 percent for the informal sector; (4) increases in stamp duties and administrative charges; (5) introduction of a special 10 percent short-term tax (TCI) on rice imports; and (6) introduction of excise taxes on some products.

38.  Budgetary expenditure for 2000 was revised downward in the supplementary budget law and will be limited to 15½ percent of GDP (11½ percent after exclusion of externally financed investment expenditure). The savings are chiefly on the wage bill, with the early retirement of close to 2,400 civil servants and the departure, owing to the privatization of road maintenance activities, of almost 500 employees in the Equipment and Infrastructure Ministry. Expenditure on goods and services has also benefited from savings measures applied to water, electricity, and telephone consumption and has been revised downward, while a minimum level of service has been guaranteed. The domestic contribution to the public investment budget was limited to coverage in the budget of the duties and taxes on externally financed projects and very small amounts needed to avoid the interruption of projects. However, the increase in oil prices and appreciation of the dollar were not reflected until late in the year in retail prices, and an implicit subsidy had appeared through the oil price stabilization mechanism. As prices of petroleum products were increased on May 8, 2000 by 40 CFAF per liter, equivalent to a price increase in a range of 9-20 percent according to the product, the price subsidy was reduced to about 0.5 percent of GDP on an annual basis. The authorities have eliminated the price subsidy on new sales of petroleum products by increasing all petroleum products prices (except kerosene for social reasons) by 11 percent on September 15 and achieving substantial savings in the supply cost structure of these products. These savings amount to about 10 percent of the old price and result from lower operating margins and the liberalization of petroleum products transport. Transportation quotas and authorizations have been eliminated, and competitive bidding procedures will be used for the transportation of petroleum products.

39.  Taking into account a slight reduction in domestic payments arrears and the settlement of external debt-service payments arrears (CFAF 163 billion in gross terms), the budget deficit (on a cash basis, excluding grants) should stand at about CFAF 227 billion, or 17 percent of GDP in 2000. With the projected amortization of the external debt (CFAF 40 billion) and reduction of net domestic financing (CFAF 4 billion, including expected Fund disbursements), as well as the project-related external financing (CFAF 54 billion) and assistance already disbursed (CFAF 40 billion, including a World Bank public finance recovery credit in the amount of CFAF 26 billion), the financing gap is projected at CFAF 177 billion. Of this amount, CFAF 12 billion would be covered by already secured grants from the European Union and assistance from various bilateral donors, and the remainder provided through debt relief understandings and agreements with multilateral and bilateral creditors. The total amount of budgetary assistance (excluding debt relief) should reach the equivalent of 5 percent of GDP and will be disbursed mainly during the last quarter of 2000, significantly easing the government's cash-flow difficulties and enabling it to begin 2001 on a sounder financial basis. In this context, to protect against the risk of delays in the disbursement of expected budgetary assistance, the authorities have decided to build a cash reserve by end-2000 to cover any eventuality during the first part of 2001.

40.  The government has taken the necessary steps to settle its payments arrears with regard to its development partners. Payments arrears in the process of being settled amount to CFAF 163 billion, of which CFAF 101 billion vis-à-vis bilateral creditors, and CFAF 61 billion vis-à-vis multilateral creditors. At end-1999, arrears of US$83 million were owed to multilateral creditors, of which US$36 million have since been cleared through rescheduling agreements in 1999 with the WAEMU (which has bought back the stock of debt of Niger to the West African Development Bank - BOAD) and the Arab Bank for Economic Development in Africa (BADEA) in the context of the HIPC Initiative. Of the remaining US$47 million, 48 percent is owed to the Islamic Development Bank (IsDB), 19 percent to the OPEC Fund, and 17 percent to the European Union (EU) and European Investment Bank (EIB).  Niger agreed on an interim payments arrangement with the IsDB in 2000 and has reached understandings to clear payments arrears vis-à-vis the African Development Bank/Fund (AfDB/F) and the International Fund for Agricultural Development (IFAD) by year-end. On October 31, 2000, the Nigerien authorities also held a meeting with their multilateral creditors in Paris and agreed to work with the Multilateral Development Institutions (MDIs) to arrive at an appropriate solution to outstanding arrears, including the new arrears accumulated in 2000. In line with the understandings reached in this meeting, Niger has approached the relevant MDIs (including the Conseil de l'Entente and ECOWAS) to conclude agreements on the debt relief of these payments arrears shortly. These agreements will take into account the levels of assistance anticipated in the context of the HIPC Initiative, as the concessionality granted in arrears clearance operations by MDIs would count toward assistance required under the HIPC Initiative in line with a methodology agreed with MDIs. With regard to bilateral creditors, the government is seeking debt relief on eligible external payments arrears and debt service due to the Paris Club and will initiate procedures to obtain at least as favorable debt-relief conditions from other bilateral creditors. Given Niger's limited resources for debt servicing, the authorities have also requested from Paris Club and non Paris Club creditors deferral of non-eligible payments arrears on appropriate terms (10-year maturity and 3-year grace period).

Fiscal policy for 2001

41.  The objectives set out in the draft 2001 budget law, which was submitted to the National Assembly on October 1, 2000, confirm the authorities' commitment to restore public finances to an even keel. The basic balance (on a commitment basis, excluding grants) would stabilize at its 2000 level (about 3½ percent of GDP), while the current deficit would be reduced from the equivalent of 2 percent of GDP in 2000 to less than 2 percent of GDP in 2001. This improvement is predicated on a combination of efforts to mobilize additional domestic resources in the amount of CFAF 10 billion, pursue a prudent expenditure management policy, and eliminate all net subsidies on petroleum products.

42.  On the revenue side, the level of 9 percent of GDP projected for 2001 reflects the impact of additional specific revenue measures taken in the 2001 budget law and a number of administrative measures. The specific measures relate to increases in excises on basic consumer goods, such as tea, edible oils, and cola nuts, as well as luxury goods, particularly perfumes, and to a review of the taxation of real estate capital gains. Administrative measures include, inter alia, enhanced direct tax collection procedures involving a self-assessment system for the corporate income tax (BIC) and an increase in the advance payment paid on this tax from 40 percent to 60 percent. Other administrative measures aimed at increasing the productivity of departments and the yield on certain taxes include computerizing revenue collection and introducing a policy for the audit of VAT receipts, increasing the resources available to staff, and on the customs side, introducing a program to computerize offices. These measures are part of a program for the strengthening of the tax and customs administrations (particularly at the local level) that will be finalized in the first half of 2001 and will identify technical assistance needs to address the specific problems of Niger, i.e., a small formal sector and a predominantly agricultural economy in a large landlocked country surrounded by 7 nations The additional revenues anticipated from these legislative and administrative measures are estimated at close to CFAF 4.5 billion for 2001. Further additional revenues of about CFAF 5.5 billion will result from the revisions of the prices and price structures for petroleum products undertaken in September 2000. Given domestic prices, the projected decline in the import price of these products should create a positive margin in excess of the support required for kerosene and the nationwide single price system, which should be transferred to the budget. In this context, the government has decided to revise the taxation of petroleum products in the second half of the year and to introduce an automatic, transparent, and flexible quarterly system for setting prices on the basis of international price trends. Petroleum products will be assessed on the basis of their real import values and no longer on the basis of administrative prices, and ad valorem excise taxes will be converted to specific taxes.

43.  Current expenditure (excluding interest payments) is set at 8½ percent of GDP in the 2001 budget law, the same level as for 2000. Achieving this target is made possible by the complete elimination of all subsidies on petroleum products in 2001, and by an effort to reduce other budgetary transfers and subsidies in real terms and to control the wage bill, while restoring allocations for goods and services to a level commensurate with a normal functioning of public services, particularly in the social sectors. The wage bill should decline by almost 3½ percent in nominal terms, owing to the wage freeze and the full impact, estimated at CFAF 2.4 billion, of the efforts to reduce staffing levels in 2000 and to stabilize them in 2001. Needed recruitment for key vacant positions, particularly owing to the early retirements, will be effected through, first, the redeployment of existing staff and, additionally, the reallocation of positions made available by cleaning up the consolidated civil service payroll and personnel database. In addition, staff will be redeployed to the extent necessary to prevent an impediment of existing public services, especially in the health and education sectors, despite the freeze on net recruitment. In addition, the program of volunteer teachers recruited under local contracts, which has helped increase the school attendance rate significantly, will be continued with World Bank support. The priority that the government will continue to place on the regular payment of wages should also ensure that departments run smoothly. The expenditure program also includes a strengthening of the social safety net through higher budgetary allocations for this budget line item (which includes, inter alia, spending on generic drugs and food security stocks) and continuing support of the early warning system regarding national food supplies.

44.  The public investment budget for 2001 was prepared in coordination with donors, particularly the World Bank. In line with the government's concern to promote growth and reduce poverty, the budget calls for a relatively sizable increase in the investment budget of about 6 percent of GDP. The domestic contribution to the public investment program will also increase to close to 1½ percent of GDP, equivalent to more than 20 percent of the program.

45.  In the context of the settlement of the stock of domestic arrears, the government will complete the validation process under way and establish a multiyear program by end-2000 to clear validated domestic arrears. To this end, the 2001 budget calls for payments on domestic arrears in the amount of CFAF 25 billion. In particular, the government intends to reach an agreement shortly on the settlement of wages arrears relating to fiscal years 1996-99, which are equivalent to 12 months of civil service wages. Given its financial constraints, and based on the negotiations under way with civil service union representatives, the government intends to limit payments of wage arrears to a maximum of 6 months of salary during the 2000/01-2002/03 program period, or CFAF 7½ billion per year. Other payments arrears to be cleared in 2000/01 will be determined in the context of an overall program to clear government payments arrears based on uniform criteria and clearly defined priorities. This program will be prepared under the authority of the agency created in March 2000 for the full settlement of all government payments arrears (CAADIE).

46.  If trends in the prices of imports of petroleum products make it impossible to achieve the projected revenue targets, the government will take the necessary compensatory measures to ensure that the targets for the budgetary balances are met. The government also intends to maintain its cash management system in 2001 to prevent budgetary slippages. The contingency measures that could be triggered in the event of budgetary pressures in 2001 include on the expenditure side, inter alia, a reduction of the budgetary reserve, a scaling down of the investment program financed by domestic resources, a lower pace of spending on goods and services, and a reduced clearance of domestic payments arrears.

47.  Taking into account the reduction of domestic payments arrears, the overall budget deficit (on a cash basis and excluding grants) is targeted to reach CFAF 138 billion or close to 10 percent of GDP in 2001, compared with 17 percent in 2000. The government will reduce substantially the level of statutory advances extended by the central bank, in line with regional monetary objectives, but the projected financing of the Fund will allow the government not to make any recourse to net credit to the government and domestic financing. Thus, with expected project financing amounting to CFAF 66 billion and debt amortization due of CFAF 42 billion, the remaining financing gap is estimated at CFAF 114 billion. This gap is expected to be covered in part by traditional debt relief (CFAF 27 billion) and the remainder (CFAF 87 billion) by grants from the European Union, lending from the World Bank and other multilateral institutions, and funds from various bilateral donors. The authorities intend to ask their development partners to organize a roundtable early next year to confirm their preliminary commitments to the financing of the gaps identified for the 2001-03 period.

C. Monetary Policy

48.  The regional monetary authorities raised the reserve requirement ratio again in August 2000, from 3 percent to 5 percent, clearly indicating their intention of maintaining a relatively restrictive monetary policy to reduce the risk of inflationary pressures related to the demand for credit and increase in import prices. In Niger, measures taken since March 2000 should result in a reduction in the demand for credit during the last six months of the year, bringing the growth in credit to the economy down to 21 percent for the year as a whole. Government debt to the banking system should decline by CFAF 2½ billion in the second half of 2000 and would stay at this level of CFAF 67 billion (equivalent to 4.7 percent of GDP) at end-2001; recourse to the central bank statutory advance should gradually decrease to about CFAF 19 billion (or 1½ percent of GDP) at the end of 2001. The money supply should increase by 6.8 percent in 2001, after increasing by 4.2 percent in 2000.

D. Structural Reforms

49.  Besides the strengthening of tax and customs administration mentioned above, the structural reform program will focus on improving budget management, continuing the privatization program in coordination with the World Bank, introducing a plan to reform the oil sector, liberalizing prices of goods and services still subject to controls, and finalizing a strategy for rehabilitating and expanding the financial sector.

50.  In a development policy letter, the government has made a commitment to deepen the budget management reforms in the coming months. In particular, efforts will focus on modernizing the chain of expenditure, in terms of both management procedures and the information system used. Computerization, which is currently limited to entry of payment orders, will be expanded upstream (appropriation managers and financial controllers) and downstream (Treasury) to cover all stages of the chain. At the same time, execution procedures will be reviewed so that the new information system may be used to full advantage, especially as regards reducing delays in processing expenditures and strengthening control mechanisms. Particular attention will be paid to reforming the execution of decentralized expenditure (delegation of appropriations) in order to improve tracking and shorten the time needed for recording such expenditure in the budget and the accounts. The evaluation of public spending will focus, in particular, on surveys of recipients and other expenditure-tracking methods, so as to measure the impact of public programs on poverty reduction and social development.

51.  Efforts will also be made to modernize budget preparation, both centrally (consistency of medium-term expenditure) and for the spending ministries (improvement of financial programming). In this regard, work to harmonize the budget and accounting nomenclatures will be undertaken in 2001 for possible application in the 2002 budget law. In addition, the procedures for the allocation of subsidies to public institutions will be reviewed and a harmonized accounting framework adopted for their operations. The process of restoring ex post controls on budget execution will be stepped up with the forthcoming submission of the budget review laws and revenue and expenditure accounts for fiscal years 1998 and 1999. The medium-term objective is to restore a budget timetable that is in compliance with the legislation, under which the documents reporting on budget execution for the year just ended are submitted to the legislative and judicial authorities before presentation of the budget law for the subsequent year.

52.  In the context of regional cooperation, the government will implement, according to the timetable set within WAEMU, the set of regional reforms on government finance, particularly the draft organic law on the harmonization of government finance laws, the new regional regulations on public accounting, and the new regional government chart of accounts. As part of the WAEMU convergence pact, the government will submit its medium-term convergence program to the commission. The government will endeavor to respect the convergence criteria. In addition, the government will continue its efforts to produce final government accounts by the end of each year and have them audited by the Accounting Office of the Supreme Court, as well as submitted to the National Assembly (budget review law).

53.  The government is determined to pursue the privatization program. The next stages in the privatization of the four largest government enterprises have been established in agreement with the World Bank. They involve, for the telecommunications sector, the enactment of decrees implementing the framework law for the sector and the selection of the strategic buyer for SONITEL by end-2000. The sale of two cellular telephone licenses was effective in October 2000. In the water sector, the new operator could be selected by March 2001. It is anticipated that the sale of the shares in SONIDEP and the choice of a strategic investor for NIGELEC will be completed by end-September 2001. The issue of the clearance of the cross debts between the government and the public enterprises that are being privatized will be dealt with first. To ensure the transparency of the privatization program, its revenues and costs will be covered in detailed half-yearly reports and internal and external annual audits that will be subject to the approval of the National Assembly. A system for incorporating these financial operations into the budget will be put in place by the end of 2000, and the government will undertake to use any net proceeds from these privatization operations to reduce Niger's domestic debt. In connection with the development of the private sector, the government will also conduct a study of the business environment and investment conditions in Niger in 2001.

54.  With regard to the liberalization of prices, priority will be given to defining a flexible rate policy for public utilities. The specifications prepared in the context of the government's privatization program will describe in detail the new price policy applicable to telecommunications, water, and electricity. For petroleum products, the automatic adjustment mechanism described above will supplement the price increases and the significant revision of the cost structure for petroleum products in 2000.

55.  The government also plans to reform the financial system, based on the detailed analysis of the sector carried out in 2000 with the help of the World Bank. A financial system development and reform strategy, covering banks, microfinance, postal savings, insurance, and the social security fund, will be defined by end-March 2001 with the help of the World Bank. In this context, particular attention will be paid to the financial regulations and difficulties in applying them, especially in the insurance sector (CIMA Code). Recommendations will also be made to improve the management of financial institutions. For the banks, the monetary authorities will continue to monitor compliance with the prudential regulations. The government also intends to support the implementation of the measures provided in the banking regulations for banks in difficulty. In the case of two insolvent public banks, Crédit du Niger (CDN) and Caisse des prêts aux collectivités territoriales (CPCT), the decision of the Banking Commission, expected in December 2000 in response to the report of the temporary administrator, will be applied without delay. As part of the effort to mobilize savings across the country, an audit of the Office national des postes et de l'épargne (ONPE) will be carried out in 2001 with the assistance of the World Bank in order to revitalize the postal checking account system (CCP) and the national savings bank (CNE).

56.  The government, assisted by donors, intends to strengthen and professionalize the decentralized financing structures (mutual credit and microfinance institutions). A strategy to be finalized by end-2000 provides in particular for (1) increased supervision of all microfinance institutions; (2) implementation of subregional regulatory provisions in the mutual credit sector and changes to the regulations on a number of points (e.g., liberalization of interest rates); (3) definition of a regulatory framework for the nonmutual sector; and (4) enhancement of the professional competencies of those working in the microfinance sector.

E. Poverty Reduction

57.  Niger remains one of the poorest countries in the world, with real GDP per capita estimated to have declined by more than 40 percent over the past twenty years due to economic stagnation and a population growing at about 3.3 percent per annum. According to the 2000 Human Development Index (HDI) of the United Nations Development Program (UNDP), Niger ranks 173^rd out of 174 countries listed, and its social development indicators are among the weakest of sub-Saharan Africa, illustrated by a low life expectancy (46 years), high adult illiteracy (over 90 percent), low primary enrollment rates (26 percent overall, and 21 percent for girls), high infant mortality (118 per thousand live births), and severe deficiencies in basic health and nutrition (see Annex 2 for selected poverty and social development indicators). The burden of poverty and low social development falls disproportionately on women, whose access to land, credit, technology and social services remains limited. Widespread unemployment and low labor productivity are major constraints to development.

58.  As part of its policy for reducing poverty and improving the living conditions of the population, the government will undertake a series of measures in the fields of education, health, rural development, and transportation in line with the preliminary strategy developed in the interim PRSP. These measures and strategies for reforming the sectors concerned are reflected in the 2001 budget law and will be strengthened, with the help of donors, in the context of finalization of the PRSP.

59.  In the education sector, efforts will continue to focus on increasing the resources allocated to the primary sector while reducing operating costs. The key measures will include construction and repair of classrooms and redeployment of human and physical resources to better respond to the needs of rural communities. In addition, new measures will focus in particular on (1) continuation of the program to recruit volunteer teachers in primary and secondary schools; (2) revision of the system for awarding and monitoring scholarships; (3) specific measures to promote school attendance by girls; and (4) the giving of priority to the distribution of schoolbooks and supplies in rural areas.

60.  In the health sector, the actions taken will be based directly on the strategy adopted in 1994, which set out the major policy directions and objectives for development of the sector. Efforts will thus continue to focus on (1) extension of health coverage (which increased from 32 percent to 45 percent between 1994 and 2000); (2) reorganization of the health system; (3) an increase in the budgetary resources allocated to the sector; (4) redeployment and training of personnel; (5) improvement of the supply and availability of generic essential drugs; and (6) dissemination of information and promotion of communication and education on health. In addition, a pilot project for the decentralization of budget items will be undertaken, and the government will finalize and adopt its AIDS strategy and strengthen epidemiological surveillance.

61.  In the rural sector, the highest priority is expanding irrigated land, especially by restructuring the national irrigation company (ONAHA) and transferring management of the irrigation systems to producers' associations. The government will also prepare a code governing grazing lands and present it to the National Assembly, ensure that the property rights of producers are respected in the application of rural law, and continue to liberalize trade in agricultural products.

62.  To improve the efficiency of the transportation sector, the government will complete the liberalization of passenger transportation and put in place an adequate road maintenance system, in accordance with its commitments to its partners in development.

V. External Policies and Financing

63. The overall balance of payments should show a deficit of approximately CFAF 62 billion in 2000 (including already disbursed budgetary assistance of CFAF 40 billion) and CFAF 115 billion in 2001, before declining to CFAF 97 billion in 2003. The external current account deficit (excluding official transfers) should widen by almost 3 percentage points in 2000 to 10.3 percent of GDP, owing to the decline in uranium exports (the main export commodity of Niger accounting for about 40 percent of total exports in 1999) and the deterioration of the terms of trade resulting from the increase in the cost of imported petroleum products. The current account deficit is then projected to gradually narrow to slightly less than 10 percent of GDP in 2003, following the anticipated improvement in the terms of trade. In the meantime, the volume of exports is projected to increase by 4 percent annually (reflecting the weak prospects of uranium exports and their weight in total exports), while the volume of imports is expected to increase by more than 5.5 percent per year (reflecting in part higher capital spending). Niger will continue to benefit from considerable external assistance in support of investment projects and sectoral restructuring programs, particularly in the education, health, and infrastructure sectors. In 2000, exceptional financing needs were estimated at CFAF 224.8 billion, including CFAF 164.5 billion of debt relief. Of the remaining CFAF 60.3 billion, CFAF 14 billion has already been provided by bilateral donors and CFAF 26 billion by the World Bank. It is expected that the balance of CFAF 20.3 billion will be provided by the Fund (CFAF 7.8 billion or SDR 8.5 million) and secured commitments from other multilateral agencies and bilateral donors. In 2001, exceptional financial needs, after expected disbursements of CFAF 15.8 billion from the IMF (SDR 16.9 million), amount to CFAF 114.5 billion, of which CFAF 26.7 billion is expected from traditional debt relief on debt-service and CFAF 87.8 billion from multilateral and bilateral lenders. Program implementation remains subject to risks, however, because of such factors as delays in the disbursement of foreign aid and a deterioration of the terms of trade.

VI. Program Monitoring

Technical Memorandum of Understanding

November 21, 2000

65.  This memorandum provides the definitions of the performance criteria and benchmarks of the three-year program expected to be supported under the Poverty Reduction and Growth Facility (PRGF). It also sets out the data-reporting requirements for monitoring the program.