IN THE AMOUNT OF US$5 MILLION (SDR 3.1 MILLION) TO

Transcription

1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No DJ Public Disclosure Authorized FOOD PRICE CRISIS RESPONSE TRUST FUND PROGRAM DOCUMENT FOR A PROPOSED GRANT IN THE AMOUNT OF US$5 MILLION (SDR 3.1 MILLION) TO Public Disclosure Authorized THE REPUBLIC OF DJIBOUTI FOR A FOOD CRISIS RESPONSE DEVELOPMENT POLICY GRANT May 22,28 Public Disclosure Authorized Sector Department, MNSED Country Department, MNC3 MENA Region Ths document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 DJIBOUTI - GOVERNMENT FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 22, 28) Currency Unit = DE (Djibouti Francs) DJF = 1 US$ ABBREVIATIONS AND ACRONYMS ADDS ADETIP AFD AfDB ANEFI BCD CAS CFAA CPI DJF DISED DPG DUPREP DTC EDIM ERR FOB FDI FSD GAM GDP GEF GFRP GNFS GNP HIPC IBRD ICT IDA IDG IFC IMF INDS IsDB JSAN LDP MDGs MENA MOE MOF Agence Djiboutienne de Dtveloppement Social Agence Djiboutienne d Extcution de Travaux d IntCr&t Public Agence Frangaise de Dtveloppement African Development Bank Agence Nationale de l Emploi, de la Formation et de 1 Insertion Professionnelle Banque Centrale de Djibouti Country Assistance Strategy Country Financial Accountability Assessment Consumer Price Index Djiboutian Franc Direction de la Statistique et des Enqugtes Dtmographques Development Policy Grant Djibouti Urban Poverty Reduction Project Domestic Consumption Tax Enqugte Djiboutienne a Indicateurs Multiples (Household Survey) Economic Rate of Return Free on Board Foreign Direct Investment Fonds Social de Djibouti Global Acute Malnutrition Gross Domestic Product Global Environment Fund Global Food Crisis Response Program Goods and Non-Factor Services Gross National Product Heavily Indebted Poor Countries International Bank for Reconstruction and Development Information and Communication Technology International Development Association International Development Goals International Finance Corporation International Monetary Fund Initiative Nationale de Dtveloppement Social Islamic Development Bank Joint Staff Assessment Note Letter of Development Policy Millennium Development Goals Middle East and North Africa Ministry of Education Ministry of Finance

3 MOH MSP MTEF NGO PER PFMS PHRD PRGF PRSP ROSC SDR SSA UNDP UNICEF USAID USD VAT WFP Ministry of Health Medium-Size Project Medium-Tern Expenditure Framework Non Governmental Organization Public Expenditure Review Public Financial Management System Japan Policy and Human Resources Development Trust Fund Poverty Reduction and Growth Facility Poverty Reduction Support Program Report on the Observance of Standards and Codes Special Drawing Rights Sub-Saharan Africa United Nations Development Programme United Nations Children's Fund United States Agency for International Development United State Dollar Value Added Tax World Food Program Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: Daniela Gressani Emmanuel Mbi Ritva Reinikka Miria Pigato Claudia Nassif.. 11

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5 REPUBLIC OF DJIBOUTI FOOD CRISIS RESPONSE DEVELOPMENT POLICY GRANT TABLE OF CONTENTS I. INTRODUCTION... 1 I1. COUNTRY CONTEXT... 1 I11. Recent Economic Developments in Djibouti... 2 Medium Term Outlook... 5 THE GOVERNMENT S PROGRAM AND PARTICIPATORY PROCESSES... 6 Government s response to food crisis... 8 IV. BANK SUPPORT TO THE GOVERNMENT S PROGRAM... 8 Linkage to the CAS... 8 Collaboration with IMF and other donors... 9 Relations to other Bank Operations... 1 Poverty and Social Impact Environmental Aspects Implementation, Monitoring and Evaluation Risks and Risk Mitigation ANNEX 1 : LETTER OF DEVELOPMENT POLICY ANNEX 2: POLICY MATRIX ANNEX 3: FUND RELATIONS NOTE ANNEX 4: THE INITIATIVE FOR SOCIAL DEVELOPMENT (INDS) ANNEX 5: BUDGET LAW ANNEX 6: EXPANDING SOCIAL ASSISTANCE PROGRAMS ANNEX 7: STATEMENT OF LOANS AND CREDITS ANNEX 8: RELEVANT DONOR OPERATIONS IN DJIBOUTI ANNEX 9: COUNTRY AT GLANCE ADDITIONAL ANNEX: UNOFFICIAL TRANSLATION OF LETTER OF DELOPMENT POLICY

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7 REPUBLIC OF DJIBOUTI PROPOSED FOOD CRISIS RESPONSE DEVELOPMENT POLICY GRANT Middle East and North Africa Region - MNSED GRANT AND PROGRAM SUMMARY Borrower: Amount: Terms: Description: Benefits: Republic of Djibouti $5 million (SDR 3.1 million) TF Grant The proposed Food Crisis Response Development Policy Grant of US$5 million, subject to approval of the Food Price Crisis Response Trust Fund, is a development policy operation intended to support the Government s program to mitigate the impact of the food prices on the poor, while maintaining fiscal stability. Achieving these goals will reduce hunger, help avoid an increase in poverty, help prevent social unrest, and ensure the fiscal stability needed to foster social and economic development. The policy measures supported by this grant are: Reduction to zero of the domestic consumption taxes on five basic food items consumed by the poor (rice, sugar, cooking oil, wheat flour and powder milk). Expansion of food aid and existing social assistance programs (e.g. school feeding, mother-child programs and workfare programs). Ramping up programs which help to improve food security and access to water of the drought-affected population. Developing an action plan to improve targeting of the poor and create more cost-effective, direct social protection mechanisms. There are several benefits resulting from the government program: First, the elimination of the tax will reduce the cost share of five basic items which comprise 4-5 percent of total food expenditures of the poor. Second, food aid will help to immediately meet the caloric requirements of the poor and vulnerable households. Third, the scaling up of programs will increase food supply and improve access to water for the most vulnerable population. Fourth, the grant will support the government to develop an action plan to improve targeting of the poor. This will in medium-term improve the effectiveness of social assistance to the poor. iv

8 Risks There are a number of risks associated with the proposed Grant. Djibouti remains vulnerable to commodity price changes and droughts. A further rise in the prices of food and energy could undermine the impact of the Government s program on the poor and may require additional measures to sustain the fiscal balance and macroeconomic stability. However, the Government is currently negotiating a PRGF facility with the IMF and is preparing a number of measures to maintain fiscal stability and debt sustainability even under stronger exogenous shocks. There are also moderate institutional weaknesses which could result in delays in the implementation of the Government s program. In addition, fiduciary risks are significant. These risks are currently being tackled by the Government, in collaboration with the Bank, mainly through technical assistance which addresses budget management, procurement and transparency issues. Disbursements: Poverty Category: The proposed grant will be disbursed in two tranches upon prior actions. The proposed grant creates space for financing food aid and social assistance programs. Project ID No. P11217 V

9 I. INTRODUCTION 1. Djibouti is in the midst of an ongoing food crisis. Djibouti is a small country characterized by pervasive poverty and high inequality. All food is imported and the global rise in food prices is having a disastrous effect on the welfare of the population, particularly the poorest. Pnces for rice, the main food staple, have almost tripled since 26. The very poor can now buy only about 6 percent of their daily minimum food requirements. The famine is visible, even in Djibouti City where the poverty incidence is lower than in the rural areas where the extreme poor live. Several hunger related deaths have been reported over the past months despite an expansion of food aid. 2. Social stability is fragde and unrest in Djibouti could also lead to food shortages for neighboring Ethiopia. The Djibouti port is the sole route for imports to Ethiopia which, like Djibouti, is a net-importer of food. Social unrest in Djibouti, which could occur if there were no improvements (or a worsening) in the food situation, could lead to devastating consequences for Ethiopia if major land transportation routes were blocked. Ensuring food security in Djibouti needs to be therefore considered as a sub-regional priority as any lasting instability could produce negative spillovers in the form of heightened inflationary pressures to the detriment of the millions of poor people in neighboring countries. 3. The government has been quick in responding but it needs help. Short-term interventions in Djibouti have included food distribution and the removal of all tariffs and taxes on basic food items, and these measures are straining the budget. Yet, even with the emergency programs, only about 67, beneficiaries currently receive food assistance. Donor assistance is limited in Djibouti. So far no donor has responded with additional financing to help the government to counter the crisis. The government has therefore turned to the World Bank for help. 11. COUNTRY CONTEXT 4. Djibouti is a small and poorly endowed country of 23,2 square lulometers, strategically located at the Horn of Africa at the southern end of the Red Sea. Djibouti has only limited natural resources, fertile land, rainfall, and underground water. The country s population is estimated at 83,. Djibouti is essentially a city-state with about two-thirds of the population living in the capital city. The hinterland, an extension of the deserts of Ethiopia and Somalia, is sparsely populated by poor pastoral and nomadic people. Djibouti s resources derive mostly from revenues generated from the activities of the modern port, the rental of military bases, and services associated with both. This is reflected in the large share of the service sector in the economy, which accounts for 77 percent of GDP. The scarcity o f water is a major obstacle to the development of agriculture which only accounts for approximately 3 percent of GDP. Extremely high energy prices are depressing manufacturing activities. P 5. Despite a per ca ita income of US$1,24, Djibouti has some of the poorest social indicators in the world. Recent data show that poverty in Djibouti is both extremely high and on the rise. In 22, about three-fourths of the population lived under the relative poverty line and 42 percent in extreme poverty, as compared to 65 percent and 35 percent, respectively, in Surveys show that poverty incidence is highest in rural areas, but the majority (83 percent) of the poor live in Djibouti City. Recurrent droughts and high prices for food staples and electricity weigh heavily on the poor. The result is abysmal social indicators, among them a life expectancy at birth of only 54 years, a mortality rate for 1 The knowledge base on poverty stems primarily from studies based on household surveys of 1996 and its 22. Poverty information and the statistical system in general suffer from severe shortcomings, including the absence of a recent and reliable population census on which household surveys can be anchored. World Development Indicators, 27.

10 children (under 5 years of age) of 13 per 1 live births, a 35 percent primary school completion rate, a 76 percent ratio of girls to boys in the primary and secondary education, and a high prevalence of HIV. 6. Economic growth in recent years has been strong but the benefits have not been equally shared. Annual Economic growth averaged 4.1 percent between 24 and 27, and has accelerated in recent years. Yet, very few new jobs were created, less than the economy needs in order to absorb the many unemployed and to alleviate the pervasive poverty. The unemployment rate has reached over 5 percent of the labor force. Growth has only benefited few for at least three reasons: (i) Investments, especially in the Free Zone, take place mainly in economic activities that produce only few jobs like warehousing or transit hubs. The backward and forward linkages to the local economy are limited; (ii) the labor force is poorly skilled and has low productivity; and (iii) high energy costs weigh heavily on Djibouti s competitiveness. Attracting a manufacturing industry is therefore very difficult, even in the Free Zone, which is governed by a generous incentive regime. Recent Economic Developments in Djibouti 7. Djibouti is a dualistic economy, characterized by a segmented labor market. The small formal sector is dominated by a large public sector administration and a number of foreign-owned businesses, mostly operating in the free trade zone and several foreign military bases. The growing informal sector, small entrepreneurs and unskdled workers, is mainly involved in construction and trading activities. Agriculture and manufacturing represent only 3 and 16.9 percent of total GDP respectively. Local production remains limited, owing to the arid climate, high production costs, and the paucity of slulled workers. 8. Economic performance has improved in recent years, driven by FDI. The share of investment to GDP grew from 19 percent in 25 to 29.6 percent in 26 and further to 38.3 percent in 27. Foreign direct investment, constitutes a large part of total investments. Figure 1: Sources of Growth (in %) Figure 2: Sectoral GDP Growth (in %) 3 22 fq u mbfa1 XQZ zcmx.3 24 ZWQ ma& zooll ZQDZ MU7 aopl MOP; XI6 Source: International Monetary Fund, New investments in port and free zones have failed to increase employment. FDI grew from US$22 million in 25 to US$176 million in 27, the direct result of investments in the new port and airport facilities in Doraleh, largely financed by the United Arab Emirates, and investments in the new free trade zone. But these investments created only 1, new jobs, of which around 2 were for foreign workers. In response to the unemployment problem, the government created the national employment agency I Agence Nationale de 1 Emploi, de la Formation et de 1 Insertion Professionnelle (ANEFIP). It 2

11 is planned that the new agency will diffuse information on employment and qualification opportunities, provide vocational training, and implement more active labor market policies. The Free Zones has a long history in ~Jiboutl. Unril May 24, the Free Zonc regime was complex, cmnprising imny drt'ferenr instl~urional arrangements and adntintstrative procedtires, oaer1 inconsistent with each other. This prevented the Free Zone from fiilly playing the role assigned to it It almost exclusively served as an in-bond warehouse for ~~ibou~jan and foreign compnies and merchants supplying neighboring countries. In May 24, a new law was issued to govern the Frcc Zone. The rncentises provided under this law include thc exemption from cu~toin rules and formalities for imports and exports as well as from taxes, surcharges, and other direct and indirect taxes. Other incentives comprise the ficcdorn to tmnsfes capital abroad, the provision of quality infrastructure services, and a one-stop shop that simplifies installation procedures. The inpact ofthesc mcasures has been, however, mixed. Propelled by the construction ofthe new port Picilittes in Domleh, they were certainly successful in attracting more foreign direct investment. More than 4 foretgn companies have set tip shop already (out of ~pproxim~tely 7) But the new incentivc rcgime IS atso attractive for local companies, which are increastngly obtaining licenses to operate in the Free Zone, 'I'his has direct implications for the national budget: the authontres esrimate that if the 1 biggest companies gradually $hi& cven 25-5 percent of their activities to the Free Zone, the government could lose revenues up to IJS$X.# mitlion annually by 21 (about 2.2 percent of total estimated revenues in 21}, which could, in the absence of additional revenues swain the budget aiid limit the country's ability to increase social expenditures 1. The food crisis in Djibouti is severe. The country has always been prone to food shortages. All food is imported and the small agncultural sector has been weakened by the recurrent drought during the past several years. But prior to this crisis, droughts usually affected less than 15 percent of the population which resides in rural areas (14, out of total population 83,) albeit in a very negative way. The malnutrition rate among adults in rural areas is over 25 percent. This is unusually high as 15 percent malnutrition among adults is considered as extremely food insecure. In contrast to the prior food crises, the poor population in Djibouti is this time affected in its entirety. 11. Inflationary pressures are intensifying. As most food is imported and there are no subsidies or price controls, domestic consumers immediately feel the impact of changes in international prices. The price of a small bag of low-quality rice, for instance, jumped from DJF 3,5 in 26 to DE 8, today. Consumer prices increased by 5 percent in 27 and reached an annualized inflation rate of over 8 percent in the first months of 28 (9.7 percent in end-february 28). The Djibouti franc is pegged to the U.S. dollar, which continued to depreciate against the Euro in Drought and global food price increase are not the only factors that threaten food security. The relatively small market size of Djibouti has important implications. First, physical stock availability is a problem. Due to extreme heat and humidity, it is not possible to stock large quantities at the port (stocks of rice or flour seldom exceed 1 metric tons). In addition, the domestic market organization is unfavorable. There are only 2-3 traders serving the local market, controlling all of the supplies to the country. Since a single cargo ship of rice covers several months of Djibouti's consumption, there are only few market operations which are highly specialized (there are no more than 2-3 operators per product). The oligopolistic market structure incites collusive behavior and traders are believed to be in tacit agreements. There are also local monopolies in the retail market. This causes higher price levels than in neighboring markets. Finally, supply from the region is limited since Ethiopia banned cereal exports last year. 13. Poor households are disproportionately affected by inflation because the food share in the expenditure basket of poor households (65 percent) is higher than that of the average household (53 percent). Higher prices for basic services (electricity, transportation) are additionally burdening household 3

12 budgets and poor families in Djibouti find themselves at the margin of survival. Poor urban households can currently buy only about 6 percent of their daily minimum food requirements. As a result, the already exceptionally high malnutrition levels are increasing. Mostly affected by the crisis are the children up to age 5, pregnant women, nomads who are unable to help their languishing cattle and are now flochng into Djibouti City to find work, and refugees who are fleeing from the conflicts in the neighboring countries. The famine is visible and has already led to a number of deaths. 14. The upcoming summer season is likely to aggravate the situation further. The summer season normally sees higher rates of unemployment as there are fewer opportunities for casual labor and petty trade. In rural areas, the prolonged drought is threatening the lives of the extreme poor (about 8, people) who are engaged in pastoral farming. Conditions for livestock are deteriorating progressively. In urban areas about 2, poor people or one-forth of the population are estimated to be highly or extremely food-insecure. At a national level, the global acute malnutrition (GAM) rate stands at 16.8 percent. However, it is expected that rain levels will fall below normal and prolong the drought season this summer. USAID s Famine Early Warning System has therefore currently placed Djibouti on a high to an extremely high level of alert from April to June. Figure 3: Cost of expenditure basket for poor households ( DJF) Figure 4: Drought Alert Status by Zone for 2428 I -Total basket cost -Emergency level ----Warning level Source: FEWS, May Djibouti s budget deficit widened from 2.4 percent of GDP in 26 to an expected 3.5 percent in 27. Overruns in expenditure on wages and goods and services, largely related to the recent parliamentary elections and employment of new public health and education personnel, have more than offset the strong revenue performance. The public wage bill accounts for 14.6 percent of GDP and roughly one-third of total government expenditures. This is much higher than in comparator countries such as Yemen, Ethiopia, Burluna Faso, and Mauritania, where wage bills amount to less than 7 percent of GDP, and is limiting the fiscal space to redistribute income to the poor. However, health and education expenditures have increased in recent years, as a share of total public expenditures, although to most part in form of increase in public employees. Public investment expenditures have also shown an increasing trend and stand at around 1 percent of GDP. 16. The trade and current account deficits in 27 were largely offset by a capital and financial account surplus. Djibouti experienced a sharp increase in merchandise imports over the last several years, largely the result of investment-related imports such as equipment and other capital goods. Djibouti imports almost 1 percent of its consumer and capital goods. The trade deficit is structural and is worsening. However, services continue to show a strong surplus, at approximately 3 percent of GDP in 27. Still, the current account widened to a deficit of 25.3 percent of GDP in 27 (from 8.8 percent in 26). However, the large capital and financial account surplus has more than offset the deficit in the 4

13 current account, resulting in an increase in gross official reserves to US$13 million at end-27. External reserves stand at an equivalent of 2.1 months of imports (up from 2.2.). In line with the increase in FDI and export of goods and services expected in the coming years, reserves are expected to increase more strongly in External debt remains high but appears manageable in spite of heightened risk of debt distress. This is reflected in the large net present value of total government debt relative to GDP (5 1.9 percent) and of total external debt relative to exports (125 percent) as of end-26. Some 9 percent of Djibouti s debt is concessional and long term. Current scenarios see debt to GDP ratio increasing to 54.2 percent in 28, reflecting already identified loans for social and infrastructure projects. Measured as a share of GDP, debt service remains stable at 3.4 percent in Negotiations for an IMF supported Poverty Reduction and Growth Facility (PRGF) are under way. The Government requested a PRGF facility, to support the reform program and to boost the confidence of investors and donors for the ongoing reforms and economic developments. The focus of the program will be to: (i) improve the overall fiscal position; (ii) increase the share of social and infrastructure projects in total spending; and (iii) improve competitiveness. The program would provide Djibouti with access to SDR million (US6.5 million; disbursed over three years). Other commitments are the introduction of the VAT, reducing the current expenditures (including wage bill) in terms of GDP and limiting the losses of state-owned companies, especially utilities. Negotiations of the PRGF are expected to be concluded in June. Medium Term Outlook 19. Despite the recent food price increases, economic growth prospects remain positive. Table 1 presents the recent economic developments and baseline projections of the Government, updated during the last IMF staff visit in March 28. These forecasts do not include the full impact of the rise in oil and food prices as they are based on information up to end 27. The government is currently updating the medium-term framework which will be discussed with the IMF and the Bank during the upcoming PRGF negotiation mission in June. On the basis of available information, GDP growth is expected to accelerate, reaching 6.6 percent in 28. Inflation will continue to rise as international food prices remain high. Rising investments are likely to result in sharper increases in imports, while exports should remain stable. More service exports may keep the service accounts in surplus, but deficits in income and current transfers will likely cause the current account deficit to grow. 2. The food crisis is expected to have inflationary and budgetary implications. In preparing this operation, the appraisal team has discussed with the Government the likely macroeconomic impact of the crisis over the next fiscal year. The team i s satisfied with the macroeconomic policy framework of the Government and concurs with the following preliminary impact assessment of the Government s programs to counter the food crisis:.. Inflation is expected to be higher than projected in table 1 and to reach 7.8 percent in 28 on average. On the fiscal revenue side, the government will lose about US$3.8 to 4 million or.7 percent in GDP in FY8 owing to the direct impact of the tax exemption on basic food items. The increase in expenditures associated with expanding food assistance and ramping up social assistance is about US$3 million. This will increase the fiscal deficit from the projected 2.6 to 3.3 percent in GDP in In the medium-term, the biggest challenge for the government will be to ensure fiscal stability and broad-based, employment-generating growth. Growth will continue to be driven by investments in economic activities that are not particularly labor intensive. However, this will not provide 5

14 sufficient employment for the country s low-skilled poor. It will therefore be critical to address policies related to the country s competitiveness, skewed income distribution, and access to basic services for the poor. 22. Fiscal reforms and strengthened competitiveness associated with the measures included in the PRGF, and the good prospects for FDI, could result in a substantial improvement of debt and fiscal sustainability in the medium term. However, debt and fiscal sustainability remain vulnerable to external and domestic shocks. On the external front, persistently high international oil and food prices would create continuous inflationary pressures. Policy slippages and lower foreign direct investment could severely affect debt sustainability and threaten fiscal sustainability. Much will depend on the Government s commitment to increase external competitiveness, improve the business environment, and strengthen the fiscal position. Table 1 : Macroeconomic Indicators Proj. Est. Est Real sector Real GDP (annual change in %) Real GDP per capita (annual percentage change) Money and prices CPI inflation (annual average) Investment & saving Total Investment (% of GDP) Gross Domestic Savings (% of GDP) Government finance Revenue & grants ( 41 of GDP) olw: tax revenue Total expenditure and net lending (% of GDP) Current Capital & NL Overall balance (deficit(-), commitment basis) (% of GDP) External sector Current account ( In millions of $) Exports FOB Imports FOB Gross reserves (months of imports GNFS) Current account balance (% of GDP) Total External Debt Debt to GDP Ratio (%) \ I Source: IMF, World Bank and Government data. Table does not yet reflect the impact of the increase in food prices THE GOVERNMENT S PROGRAM AND PARTICIPATORY PROCESSES 23. The key development challenge faced by the Government is to find ways to make growth more equitable and public spending pro-poor. The limited employment and poverty impact of the new investments in the free trade zone has increased the sense of inequality among the population. Access to good basic services (water, sanitation, electricity) is limited. The public administration is weak and lacks the capacity to effectively provide necessary services to the poor. 24. Reforms are expected to accelerate. The new and more flexible labor code, introduced in 25, has been enacted. Preparations for the introduction of a value-added tax in 29 are well under

15 way. Drafting of a new Code of Commerce is in its final stages and is expected to be sent to the National Assembly during 28. The audited financial statements of key public enterprises were posted on the website of the Ministry of Finance, thus increasing fiscal transparency. Finally, the implementation of a single registry of civil servants at the Ministry of Employment and Civil Service and the Ministry of Finance, which was completed in January 28, provides an important tool for the completion of the civil service reform undertaken by the Government. 25. Aware of the social risks fostered by unequal economic development, the Government created the National Initiative for Social Development (INDS). In 27 the government launched the INDS, a second generation PRSP, which aims at improving access to basic social services, generating employment and assisting the most vulnerable groups through provision of clean water, urban upgrading of disadvantaged neighborhoods, construction and improvements of housing, expansion of the road network, provision of facilities (school, health centers), access to micro-credit and micro-project training (agriculture, craftsmanship, services, small trade activities), and public financial contribution to the development projects supported by international donors. The Initiative denotes the clear intention of the Government to put in place more inclusive social policies and is the major vehicle for reform processes. 26. The INDS includes a comprehensive set of actions resting on four main pillars. The first pillar seeks to strengthen the country s competitiveness and to create conditions conducive to a strong and sustainable economic growth through (i) the pursuit of fiscal prudence and overall macroeconomic stability; (ii) the implementation of structural reforms to attract private investment, including the revision of the legal and judicial framework; (iii) the promotion of Djibouti as a competitive economic and financial hub; (iv) the reduction in the costs of production factors through improved efficiency of investments in the infrastructure sectors (water, power, transports); and (v) a diversification of the sources of growth. The second pillar aims to accelerate the development of human resources through improving access to basic public services. In particular, it aims at: (i) improving the coverage and quality of health care and education; (ii) reducing unemployment through the development of high-labor intensive activities, self-employment programs, micro-finance and job training; (iii) setting up social safety nets and providing emergency assistance to the most vulnerable segments of the population; and (iv) implementing the national gender strategy. The third pillar focuses on local development, preservation of the natural environment and social assistance to the vulnerable groups. This will be achieved through micro finance, active labor market policy, social assistance to the poor, and investments on water and sanitation services in poor neighborhoods located in rural and urban areas of the country. The fourth pillar seeks to improve governance and public sector management. The priority will be to strengthen the transparency and accountability of public expenditure management to improve its distributional impact on the poor and its efficiency, as well as to improve the participation of the private sector and the civil society in planning and implementation processes. 27. The government encourages the participation of the civil society in policy planning and implementation processes. The INDS was prepared in close consultation with the civil society and the poor. Several programs within the INDS are being implemented by local NGOs. The government is workmg on becoming more transparent, e.g. through informing the public on the INDS progress, or through publishing data, monitoring and audit reports, as well as other government information in print and online media. 7

16 Government s response to food crisis 28. The Government is responding to the food crisis by strengthening the food security aspects of the social protection and poverty reduction programs, through the following measures: Reduction of the consumption tax rate3 from 8 percent to on five basic food items predominantly consumed by the poor: rice, sugar, cookrng oil, wheat flour and powder milk. This has helped to stabilize the market prize for these foodstuffs and kept the price inflation in check but will result in a revenue loss in the order of US$ 4. million annually. Maintaining the tax exemption on food items beyond fiscal year 28/9 will be contingent on budgetary support or sufficient increase in other revenues. Expansion of the food aid programs, administered by the World Food Program in cooperation with UNICEF and local NGOs. Ramping up of social assistance and community based infrastructure programs for the most vulnerable population. The INDS includes two programs which the government is considering to scale up: (i.) a fisheries support program to increase food supply and augment immediate fish output; and (ii.) a small scale water operations that can be activated to mitigate the impact of drought on the most vulnerable population in rural areas, nomads and their live-stock. 29. There are only a few social assistance programs in place which cover a minority of the poor. Aside from a micro-finance program which targets almost exclusively women, there is no social protection mechanism in Djibouti. The WFP provides emergency food assistance for 55, to the rural poor and to 12, children, mainly targeted through school feeding (in cooperation with UNICEF), food for work or food for training programs. Part of the food aid goes to refugees (about 8,). However, the WFP only operates in rural areas where the extreme poor live, while Djibouti City, where the majority of the poor live (83 percent of total), is under-served. Due to the prolonged and severe drought conditions, the WFP increased emergency relief to more recipients in rural regions and shifted away from the food for work projects. Given the current trends, the total number of food aid recipients is likely to increase to 82,. The cost of providing emergency aid to 55, people i s approximately US$l million per month. The WFP program is the only functioning targeting mechanism in place through which emergency assistance to the poor can be provided. The absence of an adequate targeting mechanism, especially in the urban neighborhoods, poses a considerable problem for the design of interventions (e.g. cash transfers). Identifying the poor is also very difficult because most citizens are not registered and thus, have no ID cards. rv. BANK SUPPORT TO THE GOVERNMENT S PROGRAM Linkage to the CAS 3. The Country Assistance Strategy (CAS) was aligned to the 22 PRSP, and was focused on: (i) improving competitiveness, growth and income distribution, through a mix of analytical work and investment operations in energy (power project), as well as the development and rehabilitation of the transport infrastructure in support of the Port of Djibouti as the engine of economic growth and employment (IDA partial risk guarantee for the Djibouti-Ethiopia Railway); (ii) developing human resources through support for an accelerated school access, employment generation through public works, and support to poor victims of the flood; and (iii) promoting good governance by supporting financial Taxe Intirieure de Consommation, TIC 8

17 management and public procurement. The CAS did not include this operation because the recent price increases and their impact on the poor were not anticipated. 31. The new CAS (29-11) is under preparation, and consultations with the Government and stakeholders are at an advanced stage. The CAS is expected to support the objectives of the INDS, including strengthening the social safety net. Possibilities to address food security monitoring and establish an early warning system within the on-going IDF grant for the establishment of a national M&E system are currently being explored. Funds will be provided from the regional allocation to ensure close supervision of the execution of this grant. The country team is planning to step up the dialogue with the authorities on a reform of the social protection system. Collaboration with IMF and other donors 32. The Government of Djibouti cooperates closely with the IMF within the framework of regular Article IV consultations. Overall, the IMF is satisfied with the medium-term framework and the sustainability of the macroeconomic policy stance (annex 3). The IMF also provides technical assistance to the Central Bank and the Ministry of Finance, e.g. for the introduction of the VAT. 33. The Bank s country team works closely with the IMF team and maintains excellent working relations. Missions of Bank staff are coordinated to overlap with Fund missions in order to ensure an effective information flow and allow for concerted action. As part of the Article IV consultation, the IMF and the World Bank country teams jointly perform debt sustainability analyses. The last one was concluded in January 27. A new debt sustainability analysis is presently under preparation and will reflect the impact of the recent food crisis on the fiscal budget and overall economy. Within the framework of the PRGF, the World Bank provides input to the formulation of structural performance criteria and benchmarks, especially in the areas of energy, public administration reform and PRSP/INDS process. Following a request of the Djiboutian authorities, the Bank will undertake a joint FSAP mission in There is not much donor involvement in Djibouti. The largest donor is the European Commission followed by the Ahcan Development Bank and the Arab Bank for Development. Cooperation is focused on water and energy infrastructure, health and education. UNICEF, WFP, UNDP and USAID finance projects related to food security and social protection of the poor (annex 8). However, the funding for these projects is fairly small. 35. The Bank team also interacts frequently with donors which are active in Djibouti. In fact, country based donors such as the European Commission or UNDP are an important source of information and are as such frequently consulted, since the World Bank does not have a country office in Djibouti. All new Bank activities are discussed extensively with other donors during the preparation phase. Close collaboration is taking place within the framework of the Djibouti Urban Poverty Reduction Project (DUPREP) which is part of a larger program supported by the AfDB and the IsDB. The World Bank is planning to organize a donor meeting in October 28 in order to discuss how to coordinate best actions and support the PRSP/INDS process. 36. The government of Djibouti also declared its intention to scale up existing food aid programs administered by the World Food Program (WFP) and UNlCEF in response to the food crisis. Consultations with the WFP and UNICEF on food assistance were held during the World Bank appraisal mission for the proposed grant in May 28. 9

18 Relations to other Bank Operations 37. The most recent project approved by the Bank (April 28) in the area of poverty reduction is a US$3 million Urban Poverty Reduction Project, which aims at increasing access of the (poor) population in urban areas to basic public services (infrastructure and sanitation). There is also a community development and micro-finance component in this project. However, the food price crisis has aggravated poverty in both the rural and urban areas and requires immediate assistance beyond public services to mitigate its negative impact. Also, implementation of the project still requires time and is unlikely to show impact in the short-term. 38. There are four IDF projects which address aspects regarding the implementation of policies and projects. A recently approved IDF will help the government to establish a national monitoring and evaluation system to track INDS project implementation. The second IDF provides technical assistance to the Ministry of Finance to enhance the budget management system and upgrade the internal audit. The third IDF grant has helped the authorities to revise the Code for Public Procurement and provided technical assistance to strengthen the procurement system. Both IDF projects are coming to closure in 28. Finally, the fourth IDF grant (approved in 27) assists the Government with the reform of the pension system. 39. The World Bank is one of the main donors in the energy sector. A power access and diversification project was approved by the Board in November 25 (US$7 million IDA) and the preparation of a GEF medium-size project (MSP) on wind development is approaching completion. The World Bank assists the Government in producing an Electricity Sector Master Plan. Lessons Learned 4. Implementation of World Bank projects in Djibouti has been on average satisfactory to highly satisfactory over the last CAS period. Development objective and implementation progress of all projects in the portfolio are currently rated as satisfactory. Disbursement lags have been reduced significantly, and project implementation time and efficiency have also improved in comparison with the previous CAS period. Factors that have contributed to the improvement in the quality and speed of implementation include: (i) focused, and simpler design of the projects adapted to local implementation capacity; (ii) a more intensive supervision of the portfolio with a problem-solving approach; and (iii) a more proactive and professional External Financing Coordination Unit within the Ministry of Finance that helped quickly address the problems as they arose. Another factor that helped significantly was the creation of ADETIP4, now ADDS, which acted as management and implementation unit for the government and donor-funded social spending programs, especially in the area of infrastructure. Analytical Underpinnings 41. Analytical underpinnings were provided by a recent assessment of the achievements of the first PRSP (24-26) and a poverty map prepared in 27. A Country Economic Memorandum and a Public Expenditure Review were finalized in late A World Bank team visited Djibouti recently. The objectives of the appraisal mission were to analyze the impact of the food crisis on households, the budget, and the economy. The team also took stock of all policies and measures which the government enacted to counter the food crisis. It also advised the government on further feasible and cost-effective short and medium term solutions to mitigate the impact of the food price increase on the poor. The proposed grant reflects the findings of the mission. Agence Djiboutienne d Extcution de Travaux d InttrEt Public Agence Djiboutienne de Dkveloppement Social 1

19 V. THE PROPOSED OPERATION 43. The severity of Djibouti s situation calls for a rapid response by the Bank. There is very limited donor involvement in Djibouti and the financing requirements for any interventions are very high. Without additional assistance, the food crisis may result in increased hardship on the population. Rising social discontent could trigger unrest with considerable negative consequences in the sub-region. So far, no donor has provided budget support the government to counter the food crisis. However, the European Commission funded emergency assistance through the WFP and UNICEF (US$2 million). 44. The proposed Food Crisis Response Development Policy of US$5 million is a development policy operation intended to support the implementation of the Government s program to mitigate the impact of the rising food prices on the poor, while maintaining fiscal stability. The Grant will be financed through the Food Price Crisis Response Trust Fund, which is being circulated in parallel for approval by the Executive Directors. 45. Objective. The objective of the proposed Grant is to help the Government of Djibouti in reducing hunger, preventing an increase in poverty and social unrest, and ensuring the fiscal stability needed to foster medium-tern social and economic development. The supported policy measures are a tax exemption on basic food items, expansion of food aid, social assistance and related programs. 46. The Grant will be disbursed in two tranches conditional on the following prior actions: First Tranche (US$4 million): Adoption of a draft additional budget law for fiscal year 28 providing, in particular, for the exemption from payment of the domestic consumption tax on five basic food items (rice, sugar, coolung oil, wheat flour and powder milk) - done prior to Board approval. Second Tranche (US$l million): Preparation of an action plan, satisfactory to the World Bank, to channel direct support to the most vulnerable households - to be done prior to disbursement of the tranche. The action plan aims at guiding the Government s social protection policy towards a system which is characterized by better and more direct targeting of social assistance. The proposed operation is also conditional on maintenance of a sound macroeconomic framework Disbursements under the proposed operation are conditional on the maintenance of a sound macroeconomic policy framework. 47. Consultations on the content of the proposed Grant were carried out with the Cabinet, the Ministry of Finance, the Ministry of Solidarity as well as different donors during the Bank mission in early-may 28. The mission provided advice on short and medium term interventions to counter the food crisis. An analysis was carried out to investigate the poverty impact of recent interventions and alternatives. A stocktalung of all existing social assistance programs was also undertaken with the aim to verify opportunities for scaling up of existing programs, in particular, of food emergency programs. 48. Institutional capacity exists for expanding school feeding, mother-child, livestock feeding and related programs. The operation would help the government to finance the expansiodscaling-up of social assistance and related programs which is otherwise not possible. Based on the assessment of the country team, there are several programs in Djibouti which could be rapidly expanded to increase their geographic coverage and beneficiaries base or scaled up to accelerate the implementation (table 2 and annex 6). 11

20 Table 2: Potential benefits of expanding social assistance and related programs Potential Prograrris for Iargct Group Hcricfiriaries Scaling Up School feeding program Prinmry school children The school feeding program provides two meals per day for over 12, primary school students in rural areas, creating positive incentive for poor flami iies to send their cl.til&en to school. Expansion of the program to &e poorest qwarters of urban areas may increasc bencficiaries to IX, by 212. Filod~vouchcrkash for work I!nrmployed but able bodied working age By distributing liiod in exchange for work on public works projects suck 8s wc.11 construction, population approximately 28, poor unenip1oyt.d individuals who are willing to work for food rations are likely to he self-selected into these programs. Also, public assets that are created from these program can serve an entire community. By expanding these projects to urban areas, over 5, heneticiaries can be reac tied. Emergency food aid during fcan season (or prolonged drought) Maternal-child health Fisheries Progratns Water wells t pumps 8r enicrgency distribution of livestock feed io rural areas (the latter does not exist but can easily be dcployed tlirough LVW) Nomadic pastoralists and mal poor Pregnant women, children -5 years Poor population in coastal region; by extension, the poor in other regions Nomadic pastoralists and run1 conununitics Currently 55, rural poor receive food aid due to the prolonged &ought. It is expected that this ilumber may increase to 7, or more in the lean season this summer. Ptegrlant or lactating triotheis and children under the age of tive at risk of nidnourishment. I tie fisheries project aims at increasrng fish-output and generating emptoynient by upgrading small-scale fishing operations- 16 fishermen were trained over the last year 111 improved modem fishing techniques and will be equipped with larger boats and dishing equipment to scale up their operations. Assuming that the creation of two ad onal jobs is enabled by the Fisheries Program for each fishernun trained, 1,8 househ~lds (7,56 individuals) may benefit from this on, there is an indirect ef%ct to the largcr poor population in Djibouti because the poor would be able to purchase nutritious food to affordtdble prices. 12

21 49. The Bank has comparative advantages to assist Djibouti in managing the crisis. These advantages stem from (i) the Bank's involvement in assisting the Government in the PRSP/INDS process; (ii) its ability to swiftly provide significant funds to countries at risk; (ii) policy and poverty analysis drawing upon country, regional and global experience; and (iv) its capacity to provide support for medium and longer term measures critical to improving the social protection system. The Bank has also multi-sectoral expertise that is required to put in place integrated technical, social, economic, and institutional solutions to address food security concerns and to effectively mitigate the adverse effects of rising food prices. 5. The proposed Development Policy Grant meets all the requirements as proposed under the framework of the trust fund Global Food Crisis Response Program (GFRP). Djibouti is an IDA-eligible country which as a food and oil net-importer is highly vulnerable to price fluctuations for both commodities. The appraisal mission provided policy analysis and advice to the Government on feasible pricing responses to the food crisis. However, the total IDA 14 allocation of US$23.8 for for Djibouti (of which US$3 million in FY8) is minimal and all available funds are committed in energy, health, education and urban development projects. Hence, there are no other options available to the country team to finance any further emergency assistance but the GFRP facility. 51. The expected outcome of the grant is to reduce pressures on the household budgets of the poor while maintaining fiscal stability. Indicators to track the achievement of the grant were based on the following three dimensions: (i) The food price dimension to measure the impact of the interventions on the price of basic food items. (ii) Thepoverty dimension to measure the impact of the interventions at the household level. (iii) Thefiscal dimension to measure the impact of the interventions on the government budget. Fiscal and economic indicators will be monitored in cooperation with the IMF which collects relevant data within the framework of the Article IV consultation and PRGF implementation. 13