Côte d'Ivoire—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Abidjan, March 11, 2002

Mr. Horst Köhler
Managing Director
International Monetary Fund
700-19th Street, N.W.
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1.  In June 2001, the government of Côte d'Ivoire adopted a staff-monitored program (SMP) covering the period July-December 2001, with a view to regaining control over the public finances, accelerating structural reforms, addressing governance issues, restoring confidence, and normalizing financial relations with Côte d'Ivoire's creditors.

2.  In the framework of the SMP, significant progress was made in stabilizing the macroeconomic situation, but further efforts are needed to address forcefully poverty, which has deteriorated in recent years. To tackle this major challenge, the government of Côte d'Ivoire has adopted a medium-term adjustment program for which it requests the support of the Fund through a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), in a total amount equivalent to SDR 292.68 million.

3.  The attached memorandum on economic and financial policies (MEFP) describes the objectives and policies that the government intends to pursue in the framework of its medium-term strategy, as well as the objectives and specific measures for 2002. The technical memorandum of understanding (TMU) of the program, also attached, specifies the modalities for monitoring program implementation, and the information that will be provided for monitoring, as well as the definition of the quantitative criteria and benchmarks and structural criteria and benchmarks under the program.

4.  The government's economic policy objectives over the next three years is to consolidate the public finances, enhance transparency in financial management and governance, and revive structural reforms, so as to put Côte d'Ivoire back on the path of sustainable economic growth, reduce the dependency on external aid, and improve the living conditions of the population. With the participation of civil society and development partners, the government has also initiated the preparation of the poverty reduction strategy paper (PRSP), which should be finalized by July 2002. In the meantime, the government has prepared an interim poverty reduction strategy paper (I-PRSP), which defines the process and the agenda for the completion of the full PRSP, while specifying the preliminary objectives in terms of the poverty reduction strategy. The I-PRSP has been sent to you under separate cover.

5.  The government is determined to strengthen and improve its poverty reduction policy, and to undertake all actions necessary to obtain debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

6.  The government is confident that the policies set forth in the memorandum on economic and financial policies are adequate to achieve the objectives of the program, but it will take any further measures that may prove necessary for this purpose. During the period of the three-year arrangement, the government of Côte d'Ivoire will consult with the Managing Director of the Fund on the adoption of any measures that may be appropriate, either at the initiative of the government or whenever the Managing Director requests such consultation. Moreover, after the period of the arrangement and while Côte d'Ivoire has outstanding financial obligations to the Fund arising from loans under the arrangement, the government will consult with the Fund on a regular basis, at the initiative of the government or whenever the Managing Director requests consultation on Côte d'Ivoire's economic and financial policies.

7.  The government of Côte d'Ivoire will provide the Fund with any information the Fund may request regarding the progress made in policy implementation and the achievement of the program objectives. Côte d'Ivoire will also conduct with the Fund a midterm review of its first-year program, which will be completed no later than mid-September 2002. The review will assess economic and financial developments in 2002 and progress made in the preparation of the poverty reduction strategy.

8.  In the spirit of transparency, the government has decided to publish the program documentation based on current Fund practices and guidelines and authorizes the Fund to publish these documents as widely as possible, including on the Fund web page.

Sincerely yours,

CÔTE D'IVOIRE—Memorandum on Economic and Financial Policies for 2002–04

I.  Introduction

1.  Since 1994, the government has implemented macroeconomic and structural reform programs aimed at achieving robust and balanced growth and attaining financial viability. The International Monetary Fund, with the resources of the Poverty Reduction and Growth Facility (PRGF), supported these programs during the 1994–97 and 1998–2001 periods. In 1998, Côte d'Ivoire was declared eligible for external debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. However, the second program was suspended in 1999, as significant fiscal management and governance problems arose, exacerbated by an unprecedented sociopolitical crisis in the country.

2.  Within the framework of these arrangements, the government made significant progress in reducing macroeconomic imbalances, liberalizing the economy, and creating the basis for sustained economic growth. Real GDP growth averaged more than 5 percent between 1994 and 1998, but the economic and financial situation deteriorated considerably in 1999 and 2000, with a sharp decline in the terms of trade, serious fiscal slippages, and weaknesses in governance.

3.  Faced with these difficulties, which were compounded by the suspension of external assistance, Côte d'Ivoire was unable to achieve the objectives of its adjustment program. During the period 1999–2000, government finances deteriorated rapidly, as reflected in declining revenues, a lack of control over spending, and a significant accumulation of domestic and external payments arrears. In response to the sociopolitical crisis, business confidence eroded, and private investment declined markedly. Economic growth decelerated in 1999, and there was a sharp contraction of activity in 2000. The ensuing downward slide in per capita income in the last few years contributed to an increase in poverty, particularly in the rural areas, and a deterioration in social indicators.

II.  Implementation of the SMP

4.  Against this background, the government adopted a staff-monitored program (SMP) covering the period July–December 2001, with a view to strengthening the management of the public finances, reinvigorating structural reforms, improving financial relations with creditors, enhancing governance, and creating the conditions for sustained economic recovery. Overall, the government made determined efforts to observe the quantitative and structural benchmarks under the program.

5.  With regard to the public finances, tax revenue performed considerably better than envisaged in 2001, while nontax revenue was somewhat lower than programmed because of weak revenue collection of cellular telephone license fees. With grants standing at CFAF 23 billion, total revenue and grants are estimated to have amounted to CFAF 1,358 billion, or CFAF 54 billion more than expected. Total outlays were much lower than envisaged because of the late adoption of the 2001 budget and a sharp fall in capital outlays owing to the suspension of external assistance. Nevertheless, the government was able to carry out the expenditures targeted for the social sectors. The quantitative benchmark on the nonaccumulation of external payments arrears to multilateral creditors was met.

6.  The government implemented all the structural measures envisaged under the SMP, albeit with some delays. The single export tax on cocoa (DUS) was reduced from CFAF 200 per kilogram to 160 CFAF per kilogram in July 2001. New institutions were set up, including the Cocoa and Coffee Marketing Exchange (BCC), to take over the marketing activities of the stabilization fund (CAISTAB), which was liquidated at end-December 2001 with the transfer of CAISTAB's residual dossier to the treasury, the regulatory authority for coffee and cocoa (ARCC), responsible for devising and enforcing regulations, and a financial regulation fund (FRC) in charge of monitoring the financial transactions associated with export activities. Agreements were signed with a first group of delinquent cocoa exporters, and the treasury has initiated legal action against the remaining exporters in order to recover the claims they owed the former CAISTAB. In the energy sector, power tariffs were increased by 10 percent in September 2001. Other measures taken by the government to reduce the operating deficit of the sector included paying promptly its energy consumption bills. The audit of the autonomous amortization fund (CAA) was completed, in September 2001 and, in consultation with the World Bank, the government has decided to restructure the institution.

III.  Medium-Term Framework for Poverty Reduction

7.  Côte d'Ivoire has made the fight against poverty a key component of its development program. In 1997, the government launched a national program to reduce poverty, which contributed to an improvement in some key social indicators. The incidence of poverty fell to 33.6 percent in 1998, from 36.8 in 1995, but showed considerable variations between urban and rural areas. Although per capita income is about the same as the average for developing countries, Côte d'Ivoire ranks low on the United Nations Development Program (UNDP) human development indicators scale.

8.  Recognizing that poverty has probably worsened over the last few years, the government is determined to make poverty reduction a priority of its economic and social program. To this end, it has prepared an interim poverty reduction strategy paper (I-PRSP) in a participatory manner. The I-PRSP analyzes poverty in the country and sketches the broad outlines of the strategy for poverty reduction, which rests on six main pillars: (i) stabilization of the macroeconomic situation; (ii) promotion of private sector and rural development; (iii) improvement in the access to, and quality of, basic social services; (iv) decentralization; (v) good governance and capacity building; and (vi) strengthening of the security of goods and persons.

9.  The main macroeconomic objectives for the period 2002–04 are as follows: (i) achieving real GDP growth of more than 4 percent on average, which would imply a modest increase in per capita income; (ii) lowering inflation to less than 3 percent from 4 ½ percent in 2001; and (iii) stabilizing the external current account deficit (including official transfers) at about 1 percent of GDP by 2004. Achieving the growth objective will be facilitated by a rebound in activity in the secondary (an average increase of 6 percent annually) and services sectors (an average increase of 4 percent annually). In addition, the rate of investment is projected to increase from 10 percent in 2001 to about 15 percent of GDP, with a concomitant rise in domestic savings to 22 percent of GDP by 2004. All necessary steps will be taken to create a business environment in which private enterprise can flourish. Particular emphasis will be placed on deepening legal and regulatory reforms, as well as implementing a policy of rehabilitating and developing infrastructure that will foster increased private investment, both domestic and foreign.

10.  Fiscal consolidation is a key element of the government's medium-term strategy. The objective is to achieve a primary fiscal surplus averaging about 5 percent during the 2002–04 period and to bring the overall fiscal balance into surplus by 2003. To this end, the government will ensure that the tax-GDP ratio will remain at, at least, 15 percent of GDP. Besides the favorable impact that expected economic recovery will have on revenue, the government will broaden the tax base by not renewing the exemptions granted under special tax regimes. While the government is cognizant of the difficulties encountered by some sectors, it does not intend to reduce the rate of the value-added (VAT) tax during the program period. The government will also review the taxation of the agricultural sector in order to determine the best way to ensure its contribution to the financing of government expenditure. Moreover, it will issue to each taxpayer a single identification number to be used in all transactions with the revenue collection agencies. With respect to government spending, after the significant fall caused by the large drop in external assistance in 2001, the government will use the increase in public investment over the medium term for the rehabilitation of infrastructure and new projects in the social sectors. Consistent with the West African Economic and Monetary Union (WAEMU) recommendations and with a view to freeing resources for higher social outlays, steps will be taken to reduce the government wage bill from 6.3 percent of GDP in 2001 to less that 6 percent of GDP in 2004. In this area, the reform agenda will start in 2002 with an audit of government workers, which will help to verify the accuracy of payroll data. Moreover, the government will effectively control expenditure and not allow off-budget spending during the program period.

11.  Following the financial difficulties experienced in the 1980s, the government froze the payment of salary increases accruing to civil servants in connection with automatic advances in grades. In order to improve morale and boost productivity, the government will initiate discussions with the trade unions on an overall package that will possibly include a settlement of wage arrears, while taking into account the precarious financial situation of the treasury; the package could also include from 2003 onward the return to regular salary payments based on applicable pay scales.

12.  The stock of domestic payments arrears was estimated at CFAF 361 billion (4.7 percent of GDP) at end-December 2001. The government has formulated a plan for settling arrears with all domestic creditors. This plan calls for the payment of CFAF 88 billion in 2002 and the rescheduling of some of the claims beyond the program period. Regarding the banking sector, an agreement was reached with commercial banks on arrears of CFAF 104 billion, which will be repaid over a five-year period at an average interest rate of 8 percent. Of this amount, CFAF 19 billion will be paid in 2002, including CFAF 10 billion for the CAA. As for the other claimants, CFAF 69 billion will be repaid in 2002, with the remaining balance to be settled in subsequent years.

13.  The government will prepare a poverty reduction program aimed at (i) raising the gross primary school enrollment rate from 74 percent in 2000 to 77 percent in 2004, (ii) improving access to primary health care by opening 35 clinics and 45 maternity centers annually, and (iii) enhancing the participation of women in economic development and controlling population growth. Government decisions will be guided by the principle of good governance, with a focus on the transparent use of public funds.

14.  The determination of the government to combat poverty and achieve sustained economic growth requires a further deepening of structural reforms, which will be implemented in close cooperation with the World Bank and other development partners. In this regard, the main objectives of the government are (i) to improve significantly the quality and efficiency of public expenditure in order to increase the population's access to government services; (ii) to complete the reforms of the cocoa and coffee sectors; (iii) to continue the government's retrenchment from industrial and commercial activities; (iv) to improve the regulatory and business environment for enterprises, notably in the energy and financial sectors; (v) to proceed with administrative and financial decentralization of government; (vi) to reform the civil service; and (vii) to play an active role in the sub-regional economic integration process, in particular by observing the convergence criteria defined in the WAEMU stability pact, as well as by implementing the regional structural reform agenda.

15.  As regards external trade, policies are aimed at diversifying exports and reducing the dependency on cocoa and coffee. In view of the heavy external debt burden, the government is cognizant that a prudent debt strategy will need to be pursued, which includes inter-alia abstaining from public external borrowing on commercial terms. The government will seek a rescheduling of all eligible debt on Cologne terms from Paris Club and London Club creditors as soon as Côte d'Ivoire reaches the decision point under the enhanced HIPC Initiative. Steps will be taken to avoid any accumulation of external payment arrears during the program period. Following clearance of arrears vis-à-vis the World Bank in January 2002, the government has reached an agreement with all other multilateral creditors for the full clearance of their outstanding payment arrears by end-March 2002. To this end, the government will strengthen the management and monitoring of public debt, including guaranteed debt and debt of public enterprises.

IV.  Economic and Financial Program for 2002

16.  Consistent with the medium-term macroeconomic framework, the government's adjustment program for 2002 seeks to achieve real GDP growth of about 3 percent, limit inflation to 3 percent, and narrow the external current account deficit (including official transfers) to about 2 percent of GDP. These projections are predicated on a rebound in exports of cocoa and processed products, a moderate increase in imports, and an increase in the investment rate to 13½ percent of GDP.

A.  Public Finance

17.  Strengthening the public finances will remain the cornerstone of the government's economic and financial policy. The medium-term objective is to reduce the dependency of Côte d'Ivoire on external assistance. To this end, the 2002 fiscal program¹ will limit the overall deficit to CFAF 40 billion (0.5 percent of GDP). Out of a total stock of domestic arrears of CFAF 361 billion, the government intends to repay CFAF 88 billion in 2002 in order to help restore normal relations with domestic creditors and stimulate economic activity. Taking into account debt service obligations, a financing gap of CFAF 1,440 billion (17.9 percent of GDP) would emerge in 2002.

18.  Total revenue is projected to rise by 7 percent to CFAF 1,433 billion (17.8 percent of GDP) in 2002. Driven by the expansion of economic activity and imports, tax revenue is projected to increase by some 6 percent, which will be underpinned by the following measures: (i) the imposition of a minimum tax of 5 percent on all new project-related imports after December 31, 2001; (ii) the increase in the cocoa export tax to CFAF 180 per kilogram (equivalent to 17½ percent of the January 2002 export reference price) from CFAF 160 per kilogram (20 percent of July 2001 export reference price); (iii) an overhaul of the process for issuing deeds of trust so as to ensure an effective collection; and (iv) the centralization, for monitoring and control purposes, of data provided by business firms on their transactions with revenue collecting agencies (customs, income tax office, and treasury) and the budget office. Customs administration will be reinforced by the following: (i) the dismantling of illegal channels for clearing customs declarations; (ii) the computerization of the management and control of imports, including imports under special regimes (transit trade, temporary admission and bonded warehouses); (iii) the improvement of the valuation of imports through the strengthening of cooperation with private specialized companies; (iv) the enhancement of cooperation with the customs services in the subregion in order to fight fraud and tax evasion; and (v) the establishment of procedures for the appraisal of customs officers' performance. Nontax revenue will rise to CFAF 200 billion, comprising the receipts of mobile telephone licenses (CFAF 40 billion), and the proceeds from the sale of the government's share of oil and gas companies.

19.  The 2002 fiscal program provides for an increase in total expenditure of almost 20 percent to CFAF 1,513 billion (18.8 percent of GDP) compared with the 2001 outturn. This increase can be attributed to the programmed recovery of public investment after three consecutive years of decline. Owing to the financial difficulties arising from the unsettled sociopolitical situation in 2000–01, foreign-financed capital expenditure dwindled to ½ percent of GDP in 2001 from over 2 percent of GDP in 1998. In 2002, total capital outlays are projected to increase to CFAF 325 billion (4.0 percent of GDP), of which CFAF 135 billion will be financed by own resources, while foreign-financed outlays will account for the remaining CFAF 190 billion. There are four priority areas for investment: (i) the social sectors (education and health) for an amount of CFAF 81 billion, of which CFAF 35 billion for health and CFAF 46 billion for education; (ii) basic infrastructure (water, rural electrification and roads) for an amount of CFAF 123 billion, comprising CFAF 21 billion for water, CFAF 11 billion for rural electricity, and CFAF 91 billion for roads; (iii) public safety for close to an amount of CFAF 5 billion; and (iv) capacity building for almost CFAF 3 billion.

20.  Current expenditure policy will remain restrained. The wage bill will be limited to CFAF 510 billion in 2002 (6.3 percent of GDP), which includes provisions for the salary adjustment of police officers and the recruitments of 5,308 new government workers—including primary level teachers (2,000), and health technicians (256). The hiring will be spread over the year in order to minimize the impact on the budget. About 3,100 workers will be retired in 2002, based on the strict enforcement of retirement provisions. In order to eliminate illegitimate recipients of wages, the government will undertake an audit of the civil servants with the help of a firm of international reputation. Based on this audit, which is to be completed by end-June 2002, the government will prepare a single master payroll file.

21.  Until 2001, expenditure was recorded on the basis of approved payments orders by the Treasury, and not on the basis of orders issued after validation by the financial comptrollers. The total amount of issued payment orders, which had not yet been approved, were identified and monitored as DENOs. The efforts made in the context of the SMP enabled the government to eliminate a significant amount of DENOs. From now on, expenditure will be recorded in the fiscal accounts on the basis of the amounts cleared by the issuers of payment orders and approved by the financial comptrollers.

22.  The government strategy on poverty reduction, as stated in the I-PRSP, revolves around better-focused and stronger actions in favor of the priority sectors of education, health, security, and basic infrastructure. In this regard, the 2002 budget appropriations (financed by own resources) for education are equivalent to 3.9 percent of GDP and for health 1.9 percent of GDP. In addition to increasing appropriations for the social sectors, efforts will also be made to improve the efficiency of social spending.

23.  Faced with a sharp decrease in the prices of coffee and cotton, which may lead to a worsening of poverty in rural areas, the government has decided to grant a subsidy of CFAF 31.5 billion in support of these sectors. This subsidy will be financed by the European Union (CFAF 10.5 billion), the cocoa sector (CFAF 12.9 billion), and the budget (CFAF 8.1 billion). It will allow for temporarily raising the producer price of coffee to CFAF 200 per kilogram, from CFAF 100, and that of cotton to CFAF 195 per kilogram, from CFAF 170 at present.

B.  Monetary Policy and Financial Sector Reform

24.  Monetary policy, which is conducted at the regional level by the Central Bank of West African States (BCEAO), will be consistent with the objective of improving the net foreign assets position of the zone and maintaining the fixed parity of the CFA franc. In this regard, broad money is projected to increase by 7.2 percent in 2002, compared with an increase in nominal GDP of 5½ percent. Net credit to the government (excluding the counterpart of IMF resources) will be reduced by 33 percent reflecting the projected improvement in the fiscal position. Based on these projections, the credit needs of the private sector to support productive and investment activities would be adequately covered, as private sector credit is slated to increase by about 8 percent.

25.  The government will continue to support the efforts of the regional banking commission to ensure that Ivoirien banks observe prudential regulations and that the decisions of the commission are effectively implemented. It will endeavor to improve the legal, regulatory, and institutional framework for the financial sector; promote long-term savings instruments and nonbank financial institutions (in particular insurance and leasing companies); and strengthen financial services provided to small businesses and to rural areas.

26.  Based on the findings of the audit report, the government has agreed with its partners on the restructuring of the CAA (Caisse Autonome d'Amortissement). The new management appointed in November 2001 will draft a restructuring plan by end-June 2002 that will include the modalities for the repayment of the government's debt to the CAA. The plan will also define the modalities for opening the CAA capital to private shareholders. In this regard, on the basis of a memorandum reflecting the provisional financial results and the restructuring measures taken by the new management, a first consultation will be launched by end-December 2002 with a view to selecting potential investors. If necessary, the government will request the World Bank's assistance in recruiting a consultant who will be in charge of preparing the memorandum and conducting the privatization. The government will launch a second consultation by March 2003 on the basis of the shortlist to select a strategic shareholder, and will reduce its participation to below 50 percent by end-June 2003, and to below 20 percent by December 31, 2003.

27.  Following the decree separating the postal savings agency (CECP) from the postal service, a provisional agreement on the settlement of cross debts between the CECP and the postal service were signed in October 2001. On this basis, the CECP and the postal service will need to reach an agreement that will clearly define a timetable for settling the debts and for dividing the assets between the two institutions. Moreover, the BCEAO has completed an audit of the CECP, that identified a number of constraints and weaknesses, particularly the outdated legal and institutional framework under which the CECP operates. The government will implement the key recommendations of the BCEAO report; in particular, it will update the legal and institutional framework, recapitalize the CECP, and limit budgetary transfers to CFAF 7 billion in 2002, while eliminating them in the budget for 2004. The government will adopt a reform plan for the CECP by June 30, 2002, with a view to securing the financial viability of the institution.

C.  Structural reforms

28.  The privatization of public enterprises will continue, and enterprises that remain in the government's portfolio will be better monitored. Following a review of its portfolio, the government has identified residual equity holdings that can be sold in the near term. In addition, the divestment of the government's majority participation in the following companies will be completed in 2002: SIB and BICICI (banks), CIDT (cotton), UTEXI (textile), CEDA (printing), SUCRIVOIRE and SUCAF (sugar plantations), SAPH and SOGB (natural rubber), and PALM-CI and COTIVO (palm oil and pineapple plantations). The state-owned oil refinery (SIR) will also be offered for sale by end-December 2002 (see para. 30 below). Through these operations, total privatization receipts are projected to reach CFAF 16.5 billion in 2002 (0.2 percent of GDP).

29.  In the coffee/cocoa sector, the government will consolidate the liberalization of the sector and continue building an institutional framework that (i) eliminates any direct government intervention and any direct or indirect financial support in the marketing of major commodities; (ii) ensures that international price changes are adequately passed on to producers; and (iii) guarantees free and fair competition at all levels, while preventing monopolistic practices or a return to a system of export quotas. The authorities have requested the World Bank to help undertake an analysis of the marketing arrangements in the cocoa sector, which will be finalized by end-May 2002. On the basis of the agreed recommendations of this study, the marketing arrangements for the 2002/03 crop season will be announced by end-July 2002. In order to safeguard the general interest of all producers and exporters, a new high-level committee was created to oversee the Cocoa and Coffee marketing Exchange (BCC), the Regulatory Authority for Coffee and Cocoa (ARCC), and the Coffee and Cocoa Producers' Development Fund (FDPCC). The government has decided to limit export taxes to 20 percent of the c.i.f. price for cocoa beans and to restrict all taxes, including parafiscal levies, and fees applied to this sector to less than 30 percent of the c.i.f. price.

30.  In recent months, the retail prices of some basic consumption items (rice, sugar, milk, meat, cooking oil, soap) increased sharply, which the government attributed to the increase in the VAT rate on food items from 11.1 percent to 20 percent in July 2001, the increase in electricity tariffs, and the lack of competition in some markets. In reaction to these developments, on December 11, 2001, a protocol was signed with private sector operators on voluntary price ranges for the sale of rice in the Abidjan region. As the government realized that this protocol may be construed as contrary to the policy of price liberalization, it rescinded the agreement on March11, 2002. In the meantime, private operators have agreed among themselves to keep retail prices of some basic commodities within pre-defined ranges. The government is of the view that monopolistic pricing practices should be addressed in the framework of anti-monopoly legislation, and will refrain from any form of price controls during the program period.

31.  The government is determined to continue the rehabilitation of the electricity sector by eliminating the sizable deficits it has accumulated, reducing its structural operating costs, in consultation with private operators, and putting in place a new regulatory framework with a view to enhancing its long-term financial viability. In this regard, the government will strengthen the monitoring of the activities in the sector, including undertaking a technical and financial audit by March 31, 2002 of the convention with the electricity company (CIE). The inventory of the cross debts between the government and the operators and a plan for their settlement will be prepared by end-March 2002 (a structural benchmark). Moreover, the government will accelerate the preparation of a tariff study that will be completed by June 2002. Its implementation by September 30, 2002 will help the sector to achieve long-term financial equilibrium. With regard to petroleum products, the government will put in place, by end-September 2002, the new regulatory framework needed to achieve an orderly liberalization of the hydrocarbons market and the offering for sale of the SIR by December 31, 2002. The government will reestablish a monthly automatic adjustment mechanism of petroleum product prices by September 1, 2002. This mechanism will ensure that the changes in world prices will be reflected in retail prices.

32.  With respect to the pension fund for government employees (CGRAE), the government is committed to taking forceful action to improve the institution's overall financial situation, and its performance in collecting premiums. These actions will include the following: (i) an increase in the contribution rate to 24 percent in 2003, from 18 percent at present, with a gradual rise to 30 percent by 2012, while including employees' fringe benefits, such as housing, in the base; (ii) a reduction in the credit granted for each year of completed service; and (iii) a phased increase in the retirement age. These measures are being negotiated with social partners, which are expected to be concluded by June 2002. A comprehensive reform of the pension fund will be implemented in the framework of the 2003 budget. In the meantime, the government has launched a census of all pensioners.

33.  Although the government has recently taken measures to combat corruption, fraud, and embezzlement, the consolidation of the culture of good governance remains a complex and daunting task. Yet, to underscore its resolve, the government intends to reinforce the actions it has initiated, by (i) gradually extending the procedures of competitive recruitment to senior government appointments; (ii) implementing and publishing with World Bank assistance, a value-for-money audit of (selected) public expenditures aimed at establishing the conformity of expenditure with existing regulations and cost effectiveness; and (iii) strengthening the fight against corruption and recovering rapidly diverted funds. As regards delinquent cocoa exporters, the government will not grant export licenses to companies that had not signed a reimbursement plan or made the required down payment by September 30, 2001. The government will communicate to Fund staff a quarterly progress report on the amount of funds recovered.

34.  The decentralization policy of the government seeks to empower citizens in the design and management of development programs. This will translate into the reorganization of the national territory into new types of local authorities, including 56 departments, 10 regions, and 2 districts. The decentralization will be gradual and will start with elections at the grassroots level, the installation of departmental councils, and the transfer of budgetary appropriations of CFAF 32 billion to local authorities in 2002. This amount comprises CFAF 7 billion for recurrent spending and CFAF 25 billion for investments financed by the Treasury that were previously carried out at the central level.

D.  Capacity Building and Technical Assistance

35.  Recognizing that the successful implementation of the program requires quality human resources and effective institutions, the government has prepared a national capacity building plan supported by the development partners. This plan aims at modernizing public administration, both central and decentralized, in order to improve the management of public resources and access to basic services. The plan also aims at strengthening the private sector and civil society. It focuses on (i) strengthening and improving training systems and programs; (ii) drawing on national expertise, including of nationals living abroad; and (iii) improving recruitment procedures and compensation. The government is seeking technical assistance in the following areas: (i) strengthening the capacity to mobilize and manage external assistance; (ii) strengthening the formulation of economic policies; (iii) overhauling the legal framework on the preparation, execution, and monitoring of the budget; (iv) strengthening the capacity to implement and monitor project and programs; (v) strengthening tools for macroeconomic forecasting and projection; (vi) managing the public debt; (vii) collecting and producing economic and financial data; (viii) strengthening the capacity to monitor and supervise the decentralized financial system; and (ix) providing technical support to the effort under way to prepare and implement the government strategy on poverty reduction.

36.  The government also intends to strengthen the statistical services in the country. In particular, a national survey of the agricultural sector will be conducted in order to improve agricultural statistics. Other areas of special attention include government finance statistics, national accounts, and balance of payment statistics, as well as the enhancement of information through more regular publication of data.

37.  In December 2001, an IMF technical assistance mission advised the authorities on ways to improve the public finance management. The mission noted that there were still some weaknesses in the expenditure control system, notably in the following areas: (i) the nonaccounting of expenditure corresponding to some services provided to the government that were committed and for which a validated payment order had been issued; and (ii) long delays in the issuance of payment vouchers on delivered goods and services. To address these issues, the Ministry of Finance will record from 2002 expenditures on the basis of validated payment orders and will reduce the time lags in the issuance of payment orders.

38.  The main thrust of the poverty reduction strategy has been set out in the I-PRSP. To ensure an effective follow-up of progress being made in monitoring and implementation, a set of key social indicators will need to be developed.

V.  External Sector and Financing Needs

39.  Implementation of the economic program for 2002 will help result in external financing needs of CFAF 1,440 billion (17.9 percent of GDP). The government will request rescheduling from Paris Club creditors of eligible debt and from other bilateral creditors, including the London Club, on terms which would be at least as favorable as those obtained from the Paris Club. In addition, the gap is expected to be covered by World Bank program assistance (CFAF 147 billion) the African Development Bank (CFAF 42 billion), the European Union (CFAF 39 billion), and France (CFAF 120 billion). IMF assistance under the PRGF will amount to CFAF 108 billion.

VI.  Prior Actions, Performance Criteria, and benchmarks

40.  To ensure a successful implementation of the program, the government has already taken the following measures as prior actions for approval of the arrangement: (i) adoption of a settlement plan for domestic payments arrears for the period 2002–04 ; (ii) application of the 5 percent customs duty to new project-related imports of investment goods after December 31, 2001; (iii) publication of a presidential circular requiring all ministerial departments and public enterprises to submit for the signature of the Minister of Economy and Finance all contracts with financial implications for the treasury (November 2001); (iv) request by the authorities to the World Bank to help undertake a study on the cocoa marketing mechanism; and (v) revocation of the December 11, 2001 protocol on price ranges for rice in the Abidjan region (March 11, 2002).

41.  Moreover, the budgetary results at end-December 31, 2001, as well as the implementation of all structural reforms, were consistent with the SMP. Program execution will be monitored through the quarterly quantitative performance criteria and benchmarks specified in Table 1 and set out in the technical memorandum of understanding: (i) a floor on the primary balance of government finance operations; (ii) a ceiling on bank credit to the government; (iii) a floor on the net reduction of domestic payments arrears; (iv) a floor on the net reduction of external payments arrears; (v) a ceiling on new nonconcessional external debt (with a grant element of less than 35 percent) contracted or guaranteed by the government with a maturity of one year or more (excluding the West African Development Bank and IMF resources); (vi) a ceiling on the stock of nonconcessional external debt with an original maturity of less than one year contracted or guaranteed by the government except for normal import-related credits; (vii) a ceiling on the wage bill (cumulative); and (viii) a ceiling on spending committed for which payment orders have not been issued. Moreover, the government will not accumulate new domestic or external payments arrears for the duration of the program, which will constitute a continuous performance criterion. The program includes automatic adjustors as specified in Table 1 of this attachment.

42.  The program also includes a number of structural benchmarks and performance criteria, as described in Table 2 of this attachment: (i) an audit of civil servants (June 30, 2002); (ii) the reintroduction of an automatic adjustment mechanism for petroleum product prices (September 1, 2002); (iii) the publication by July 31, 2002 of a cocoa marketing arrangement for 2002/2003 crop season that is satisfactory to the World Bank; (iv) the publication by December 31, 2002 of the invitation to express interest in the privatization of the CAA with a view to short listing potential investors; (v) the offering for sale of government shares in the SIR by December 31, 2002 ; (vi) the clearing of cross debts between the government and the energy sector (March 31, 2002); and (vii) the implementation by September 30, 2002 of the recommendation of the tariff study in the electricity sector. During the program period, the government will not impose or intensify restrictions on the making of payments and transfers for current international transactions, introduce or modify any multiple currency practices, enter into any bilateral payments agreement inconsistent with Article VIII of the Articles of Agreement of the IMF, or introduce or intensify restrictions on imports for balance of payments purposes. Finally, during the first year of the arrangement, the government will conduct two reviews of the program with the IMF, by mid-September 2002 and February 15, 2003, respectively; the conditions for disbursements after the first year of the arrangement will be set in the context of the second review. The first review will focus on the implementation of the budget for 2002, the formulation of the budget parameters for 2003, a review of the impact of retail price arrangements for basic commodities, and the implementation of structural reforms under the program.

CÔTE D'IVOIRE—Technical Memorandum of Understanding

1.  This technical memorandum of understanding defines the quantitative and structural performance criteria and benchmarks established by the government of Côte d'Ivoire and International Monetary Fund staff for monitoring the program supported under the Poverty Reduction and Growth Facility. It also establishes the terms and conditions for adjusting the performance criteria and quantitative benchmarks, as well as the procedures and time limits for transmitting to Fund staff the data that would enable them to monitor the ongoing program.

I.  Quantitative Performance Criteria

2.   Quantitative performance criteria are proposed for June 30, 2002 and December 31, 2002. They include: (a) a floor on the basic primary balance; (b) a ceiling on the net banking system claims on the government; (c) a ceiling on contracting or guaranteeing by the central government of new nonconcessional external debt with initial maturity of over 1 year; (d) a ceiling on nonconcessional external debt with original maturity of less than a year; (e) a floor on the net reduction of external payments arrears; and (f) a floor on the net reduction of the government's domestic payments arrears.

3.  Quantitative benchmarks are established for these same variables at March 31, 2002, and September 30, 2002. In addition, the following quantitative benchmarks are set at March 31, June 30, September 30, and December 31, 2002: (a) a ceiling on the government wage bill and (b) a ceiling on expenditure commitments for which no payment orders have been issued (DENOs).

A.  Primary fiscal balance

4.  The basic primary fiscal balance is the difference between the government's total revenue (excluding grants) and total expenditure plus net lending, excluding interest payments and externally financed capital expenditure.

5.  The performance criteria established for the primary balance are CFAF 147 billion at June 30, 2002 and CFAF 358 billion at December 31, 2002, and the performance indicators are set at CFAF 97 billion at March 31 2002 and CFAF 163 billion at September 30, 2002.

6.   Where disbursements of exceptional financial assistance in a given quarter exceed the programmed amounts, the floor on the fiscal primary balance will be lowered by an amount equivalent to any shortfall in domestic resources up to a cumulative maximum of CFAF 50 billion and the remainder of the surplus will only be used to accelerate the reduction of payments arrears. The floor on the fiscal primary fiscal balance at December 31, 2002 will be lowered by the amount of expenditures financed by debt relief under the Heavily Indebted Poor Countries (HIPC) initiative.

7.  The Ivoirien authorities will report the fiscal primary balance data to the Fund staff every month within 20 days of the end of the month under review. These data will be drawn from the balance of the Treasury accounts.

B.  Net Banking System Claims on the Government

8.  Net banking system claims on the government consist of the stock of claims held by the banking system on the government, less total government deposits with the banking system. The scope of the government's net position vis-à-vis the banking system is the same as that shown in the government's flow-of-funds table and includes all central government departments. Except as otherwise stated, government is defined as the central administration of the Republic of Côte d'Ivoire and does not include local governments, the central bank, or any other public body with an autonomous legal identity.

9.  The stock of net banking system claims on the government is measured in accordance with the WAEMU accounting practice and consistent with the IMF presentation. For illustration, this stock totaled CFAF 446 billion at December 31, 2001, broken down as follows:

10.  The performance criteria established for net bank credit to the government (in cumulative flows since the beginning of the year) are CFAF 13 billion at June 30, 2002 and CFAF 19 billion at December 31, 2002; and the performance indicators set are CFAF 52 billion at March 31 2002 and CFAF 58 billion at September 30, 2002.

11.  As stated in footnote 5 of Table 1 in Annex I, the ceiling on net bank credit to the government will be increased for any shortfalls in programmed external financing (excluding debt relief and financing from the IMF) with a cap of CFAF 50 billion. No adjustment will be made for excess in programmed external financing.

12.  The BCEAO will report every month the provisional net government position data to Fund staff within 30 days of the end of the period under review and will provide the final data within 45 days of the end of the period in question. For period (t), the provisional data will thus be provided by (t+30 days), and the final data by (t +45 days).

C.  New Non-concessional Foreign Borrowing

13.   The term "debt" has the meaning set forth in point No. 9 of the Fund's Guidelines on Performance Criteria with Respect to Foreign Debt. The performance criterion on contracting or guaranteeing of nonconcessional external debt with original maturity of one year or more applies not only to debt as defined above, but also to commitments contracted or guaranteed for which value has not been received. These performance criteria do not apply to rescheduling arrangements, loans from BOAD up to U$20 million, drawings on the Fund, or normal import-related commercial credits. A loan is concessional if its grant element is at least 35 percent, calculated using a discount rate based on the average of the OECD's Commercial Interest Reference Rates (CIRRs) over the last ten years for loans of a maturity of at least 15 years; for loans of a maturity of less than 15 years the discount rate is based on the average CIRRs of the preceding six-month period (February 15 to August 14 or August 15 to February 14). To both the ten-year and six-month averages, the same margins for differing repayment periods would be added (0.75 percentage points for repayment periods of less than 15 years, 1 percentage points for 15 to 19 years, 1.15 percentage points for 20 to 29 years, and 1.25 percentage points for 30 years or more). The central government is defined to include central government departments, administrative public bodies, industrial and commercial public bodies, and local governments.

14.  Within the framework of the program, the central government undertakes not to contract or guarantee nonconcessional external loans.

15.  The government will consult with the Fund staff and report to it any signing or backing of any new foreign borrowing contracts, as well as the terms of such contracts.

D.  Stock of Domestic Payments Arrears

16.  Domestic payments arrears represent committed and validated expenditure that is not paid within the time frame stipulated by the administrative regulations in force (90 days). They include bills due and not paid to public enterprises, as well as audited liabilities, but excludes floating debt estimated at CFAF 50 billion. Changes in the government's domestic payments arrears correspond to the difference between government overdue obligations and the payments made.

17.  Within the framework of the program, the government undertakes to reduce the stock of domestic payments arrears to CFAF 301 billion at March 31, CFAF 280 billion at June 30, CFAF 254 billion at September 30, and CFAF 223 billion at December 31, 2002. It undertakes to not accumulate new domestic payments arrears.

18.  The government undertakes to provide Fund staff with accounting statements showing commitments validated and not paid after the agreed regulatory time frames. The detailed monthly table of domestic arrears, defined as amounts receivable from the Treasury (PGT, TPA, TGE, ACDP, subsidies to municipalities and EPNs), as well as audited liabilities, will have to be forwarded to Fund staff no more than 20 days after the end of the month under review.

E.  Stock of External Payments Arrears

19.  The stock of external payments is defined as the sum of payments arrears to multilateral, and bilateral, and commercial creditors, which are not subject to rescheduling. The accumulation of external payments arrears is the difference between (a) the gross amount of maturities due in foreign debt service (principal and interest), including penalty interest, and (b) the amount actually paid during the period under consideration.

20.  Within the framework of the program, the government undertakes to reduce the stock of external payments arrears to CFAF 186 billion by March 31, CFAF 186 billion by June 30, CFAF 95 billion by September 30, and CFAF 0 by December 31, 2002. It undertakes not to accumulate new external payments arrears during the program period.

21.  The government undertakes to report any accumulation of external payments arrears to Fund staff as soon as it becomes aware of such developments. The detailed monthly table of external arrears should be forwarded to Fund staff no later than one week after the end of the month under review.

II.  Structural Performance Criteria

22.  The Program contains the following structural performance criteria: (a) an audit of civil servants (June 30, 2002); (b) publication of the cocoa marketing arrangement for 2002/2003 crop season (July 31, 2002); (c) reintroduction of an automatic adjustment mechanism for petroleum product prices (September 1, 2002); (d) publication of the invitation to express interest in the privatization of the share capital of the CAA (December 31, 2002); and (e) the offering for sale of government shares in the oil refinery, Société Ivoirienne de Raffinage (December 31, 2002).

A.  Audit of Government Employees

23.  An internationally recognized consultancy firm will undertake the audit of government employees. The government will submit the audit report to Fund staff by July 31, 2002.

B.  Publication of the Cocoa Marketing Mechanism for 2002/2003 Crop Season

24.  The ministerial decision describing the definitive cocoa marketing mechanism, including the modalities for purchasing cocoa from producers and for setting the minimum purchase price, should be published by July 31, 2002, and a copy forwarded to Fund staff. The provisions of the ministerial decision should be satisfactory to the World Bank.

C.  Reintroduction of the Automatic Petroleum Products Price Adjustment Mechanism

25.  The petroleum products price adjustment mechanism will incorporate the average monthly market price and dollar exchange rate fluctuations, according to the following formula: on the 25^th of each month, the average daily price listed for each product (in dollars per metric ton) is calculated for a reference period from the 25^th of the preceding month to the 24^th of the current month. This average, converted to CFA francs, is compared with that of the previous reference period. If this average is at least 2.5 percent higher or lower than the previous month's, the product price is recalculated and posted at least two days before the end of the month.

26.  The government will report to the Fund staff information on the petroleum price structure at the end of every month.

D.  Publication of the Call for Expressions of Interest in the Privatization of the CAA and Consultation with a View to Selecting a List of Potential Investors

27.  The government is to publish a call for expressions of interest in the privatization of the CAA by December 31, 2002. After this publication, it is to undertake consultations with a view to preparing a list of potential investors.

E.  Calls for bids for Privatization of the SIR

28.  Call for bids on the sale of government shares in the SIR will take place by end-December 2002.

III.  Quantitative Benchmarks

A.  Wage Bill

29.  The government wage bill is defined as all expenditure (on a commitment basis) on pay, bonuses, and allowances paid to government employees, military personnel, and other law and order personnel, and includes expenditure on special contracts and other temporary or permanent government jobs.

30.  The quantitative benchmarks (in quarterly flows) for the wage bill are set at CFAF 135 billion at March 31, 2002, CFAF 135 billion at June 30, 2002, CFAF 120 billion at September 30, 2002, and CFAF 120 billion at December 31, 2002.

31.  The government will report wage bill data to Fund staff on a monthly basis, with a lag of no more than 20 days.

B.  Committed Expenditure Not Yet Authorized (DENOs)

32.  DENOs are defined as all expenditure items that have been committed by the government, but not yet validated and approved by the financial controller. The stock of DENOs at end-December 2001 will be reduced by CFAF 11.5 billion by March 31, 2002, CFAF 10 billion by June 30, 2002, CFAF 10 billion by September 30, 2002, and CFAF 30 billion by December 31, 2002.

33.  The government will report data on the stock of DENOs to Fund staff on a monthly basis and with a lag of no more than 20 days.

IV.  Structural Benchmarks

A.  Settlement of Cross-claims and Cross-debts Between the Government and the Energy Sector

34.  Based on an inventory to be compiled, a settlement schedule for claims and debts between the government and the energy sector is to be prepared and implemented by end-March 2002.

B.  Implementation of the Recommendations of the Study on Electricity Tariffs

35.  The government will publish the recommendations of the study and will take action to implement them by end-September 2002.

V.  Supplementary Information for Program Monitoring

36.  The government will transmit the following supplementary information to the Fund staff:

• The monthly government fiscal account table, drawn up on a payment order basis (spending validated and approved by the financial controller);

• Detailed monthly tax and nontax revenue data, including the proceeds of privatization, transfers of enterprises, and sales of government assets;

• Detailed monthly expenditure data, including commitments, payment authorizations, payment orders, assumptions of liability, and payments;

• Monthly data on social spending by broad categories (current and capital spending);

• Detailed data on domestic and foreign public debt service, the stock of foreign debt arrears, including a breakdown into principal and interest, as well as by creditor;

• The amount of new foreign debt contracted or guaranteed by the government, with detailed information on the terms (currency, interest rate, grace period, maturity);

• Actual disbursements of foreign nonproject financial assistance, including new loans and foreign debt relief granted by foreign creditors;

• A quarterly report from the Directorate of Planning on monitoring the public investment program, including project financing;

• Any decision, edict, law, decree, ordinance, or circular with economic or financial implications for the current program;

• The monetary survey, the central bank survey, and the commercial banks survey, on a quarterly basis, with a lag of no more than 45 days;

• The usual banking supervision indicators for bank and nonbank financial institutions, on a quarterly basis;

• The indicators and other statistics required to assess overall economic developments, such as the household consumer price index; imports and exports of goods (by volume and value), by main category; production and exports of cocoa and coffee (by volume and value); the industrial production index; activity in the other sectors; and the economic memorandum prepared quarterly by the Ministry of Finance; and

• A review of implementation of the structural measures in the program, as detailed in Table 2 of Annex 1.