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Attachment 3

Mali: IDA Lending and Debt Sustainability


The enhanced HIPC Initiative reducedMali’s external debt burden considerably. At its recent completion point in March 2003, Mali’s creditors committed themselves irrevocably to reducing Mali’s external debt by $417 million inNPV terms as o f end-1998, bringing the NPV o f debt down from 184 percent to 126 percent o f exports as o f end-2002. This i s in addition to the $121 million committed under the original HIPC Initiative. The Boards o f the Bank and Fundconcluded inMarch 2003 that inthe absence o f major exogenous shocks, this relief reduced Mali’s debts to a sustainable level. At the same time it i s widely recognized that achieving long-term debt sustainability requires prudent debt management on the part o f the authorities along with the provision o f financing on suitably concessional terms by the international community.

Giventhat the completion point document was presentedto the Board inMarch 2003, the macroeconomic projections underlying the completion point debt sustainability analysis have beenretained inthis annex. The baseline scenario, predicated on base case IDA lending and a successful diversification o f the export base, indicates that Mali’s debt to export ratio may increase gradually over the next decade, but i s expected to remain under 150percent, peaking at 142 percent in2014 and gradually declining thereafter. External debt service i s expected to remain below 7 percent and 10 percent o f exports and revenues respectively over the projection period. Sensitivity analysis, however, indicates that the NPV debt burden indicators could rise sharply ifMali’s exports grow more slowly than projected or ifM a l i i s hit by exogenous shocks (such as declines inthe price o f gold and cotton or a recurrence o f drought).

Sensitivity Analysis

The baseline scenario i s predicated on continued fiscal consolidation, a gradual diversification o f the export base, and the absence o f major external shocks. Reforms are expected to increase productivity inthe cotton sector and to stimulate greater value-added in agricultural production and processing. Reforms to the legal system and regulatory environment are expected to stimulate the private sector and attract foreign investment. The base case scenario also assumes IDA grants at 29 percent under IDA-13, Untilthe successful diversification o f the export base i s achieved, however, Mali’s export earnings remain exposed to price volatility, disruption o f transport links, and climatic conditions. The speed with which the private sector will respond to the reforms undertaken by the G o M i s not yet clear.

An alternative scenario i s therefore provided to indicate the effect on the NPV debt-to-export ratio o f nominal annual export growth at 5.1 percent (the average growth rate 1998-2002) from 2004 onwards (as compared with 6.6 percent average growth from 2004 onwards inthe baseline scenario). New borrowing i s kept to the levels projected inthe baseline scenario, and IDA lendingi s assumed to be at the level o f the base case.

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