What remains to be done?

Private Sector Development in Low-Income Countries - Development in Practice (WB, 1996, 188 p.)

Chapter 4-Building robust financial systems— difficult but pressing

		(introduction...)
		What went wrong?
		What has been done?
		What remains to be done?
		The path for reform

(introduction...)

AN efficient and vibrant financial system contributes much to economic development. It mobilizes savings and allocates them to investments by private entrepreneurs. It also screens borrowers, manages risks, and operates the payment and settlement systems. And it ensures that dynamic parts of the economy are well funded. Getting financial systems in low-income countries from where they are to where they should be will not be easy, because financial reforms are among the most difficult to formulate and implement.

Financial reforms must begin by stopping the hemorrhaging of state enterprises that lies at the root of the fiscal deficit and the problems of the banking system. State enterprises account for a good part of the assets of public sector dominated banking systems in low-income countries, and many of these loans are nonperforming. Such loans are a major drain on the banking systems, which are unable to enforce financial discipline on either state enterprises or privileged borrowers. The state enterprises must be liquidated or privatized into a competitive environment. Only then can the banking system be improved. Similarly, a major effort has to be made to privatize the banks. Since this is likely to be difficult and time-consuming, it is best done in conjunction with promoting new entry—the diversification of institutions, mechanisms, and instruments is a prerequisite to competition and to lasting financial deepening. Also needed is a major effort to strengthen prudential regulation and supervision, enhance and multiply information flows, and strengthen accounting and auditing standards. This in turn requires training—to create the critical mass of human resources to strengthen the financial system.

India, Pakistan, and Sri Lanka are making good progress toward building solid financial systems. This has been spurred by the development of a vibrant private sector, the inflow of foreign direct investment, and expanded trade opportunities. And this has attracted new banks and nonbank financial institutions that compete with public sector banks and take market share away from them. Such developments underscore the importance of creating an environment that fosters the growth of strong and creditworthy borrowers—a precondition for a robust and competitive financial system.

Financial reforms must stop the hemorrhaging of state enterprises that lies at the root of the fiscal deficit and the problems of the banking system

Despite some progress, financial systems remain weak in Sub-Saharan Africa, Bangladesh, and economies in transition. Broad money as a percentage of GDP is often used as a measure of financial deepening. In Sub-Saharan Africa, broad money averages between 20 and 25 percent of GDP, compared with 40 percent in Pakistan, 60 percent in India, and 80 percent in China. Even in oil-rich Nigeria, it has been as low as 18 percent of GDP, and in Ghana, despite a decade of macroeconomic adjustment, 17 percent of GDP. These countries must accelerate difficult structural and institutional reforms in the financial sector if their private sectors are to develop.

What went wrong?

Interventionist policies of the past crippled the fledgling financial systems of many low-income countries, including most of those in Sub-Saharan Africa. Large budget deficits were monetized, and inflation followed. To keep nominal rates from rising, interest rates were controlled. But the resulting reduction in real rates reduced incentives for the formal banking system to intermediate savings. It also fostered capital flight and encouraged enterprises with access to credit to overborrow. Inefficient public enterprises grew at the expense of the more efficient private sector. Many commercial banks were nationalized. Credit was allocated by government decree. And banks lost their ability to screen and assess credit risks. Central barking and oversight withered to the detriment of the banking system. Bad loans accumulated, and the losses were periodically recognized and monetized—adding to the bouts of inflation and the unpredictability of the economic environment. This situation has left most low-income countries ill-equipped to generate the private supply response to structural reforms.

What has been done?

During the past few years several low-income countries have begun the difficult and laborious task of reform. Economic stabilization has lowered budget deficits, reduced inflation, and restored trade by bringing the exchange rate toward market clearing levels. There has been important progress in financial sector policies, infrastructure, and institutions. And IDA has been quite active in supporting these reforms (box 4.1)

India, Pakistan, and Sri Lanka reduced state intervention in the financial sector, liberalized interest rates, removed credit ceilings, and allowed some entry by local and foreign banks—though still in a restricted fashion. These countries also restructured insolvent banks, privatized some banks, put into place prudential lending and capital adequacy guidelines accompanied by better supervision, and made major strides in developing their capital markets to attract or accommodate large inflows of foreign portfolio investment. New banks have entered the markets in India (box 4.2) and Pakistan to cater to the large increase in business activity, and total or partial privatizations of public banks are showing positive results.

Bangladesh also has liberalized interest rates and eliminated directed credit except for a small amount for export and small industry. But even with the denationalization of two banks and the entry of new local foreign banks, public sector banks account for 60 percent of the banking system, and nonperforming loans account for more than two-thirds of their assets.

In China, despite recent progress, the banking system remains highly segmented and fragmented. State banks, which still dominate the system, lend mostly to state-owned enterprises with a large portfolio of nonperforming assets at controlled interest rates. Rural and urban cooperatives, which are less controlled and regulated, lend to collectively owned enterprises. And foreign and joint venture banks service joint ventures and foreign firms. Prudential regulations are slowly replacing economic regulations, but information and skills are limited, and a major reform effort will be required to supervise the myriad financial institutions in this rapidly changing environment (box 4.3).

Sub-Saharan Africa has also made major reform efforts (table 4.1). By the end of 1993, interest rates had been freed (in 27 of the 34 Sub-Saharan countries), credit ceilings eliminated (in 23), directed credit reduced (in 27), prudential lending and capital adequacy guidelines introduced, with greater monitoring and enforcement powers for supervisory agencies (in 21), central banks strengthened (in 21), and money markets activated (in 15). New banking laws have been enacted to strengthen the banking system and protect users (for example, bank secrecy). Banks have also been recapitalized and restructured,

BOX 4.1 IDA INVOLVEMENT IN THE FINANCIAL SECTOR: BALANCING SYSTEMIC REFORM WITH FINANCIAL INTERMEDIATION LENDING

IDA has supported financial sector reforms designed to reduce financial repression, strengthen supervisory and regulatory frameworks, restructure and recapitalize distressed financial institutions, and increase competition and efficiency in the financial system. IDA has also been increasingly active in supporting the development of nonbank financial institutions and capital markets.

At the policy level, as part of an overall macroeconomic stabilization program, reforms have sought to liberalize interest rates, phase out sectoral allocation of credit, reduce implicit and explicit taxation on financial institutions, and phase in indirect monetary control procedures. Such measures have been important components of lending operations in countries such as Bangladesh, Cd'lvoire, Ghana, Kenya, Pakistan, Tanzania, and Uganda.

In such low-income countries as Bangladesh, Egypt, Ghana, Guinea Bissau, Malawi, Mauritius, Pakistan, and Uganda, lending operations in the financial sector have also focused on improving the supervisory and regulatory framework. Banking laws have been revised to strengthen supervisory and regulatory powers of central banks and introduce internationally acceptable prudential lending and capital adequacy standards. Technical assistance programs and twinning arrangements have been used to strengthen off-site and on-site supervicinn systems and to train hank examiners and supervisors, as well as to improve accounting and auditing capabilities.

At the financial intermediary level in such countries as Bangladesh, Cote d'Ivoire, Ghana, Kenya, Mauritania, Tanzania, and Uganda, financial and technical assistance has been provided for restructuring and recapitalizing financial institutions. In many instances, nonperforming loans of banks have been transferred to special debt collection and restructuring agencies and replaced by government obligations. Accompanying these measures have been privatization programs and reform of bank licensing policies that encourage entry by well-capitalized and reputable banks, legislation allowing entry and operations by nonbank financial institutions, reform of debt recovery procedures, and training programs for strengthening banking skills and know-how.

Between fiscal 1988 and 1995, IDA support for financial sector reforms amounted to about $3.9 billion. About 55 percent of the support was provided under Structural Adjustment Credits, and the balance was through Technical Assistance Projects and Financial Intermediation Credits that are being extended at market rates, in a competitive manner, and through qualified financial institutions that meet prudential capital adequacy ratios and lending criteria. Low-income countries in Africa accounted for about 65 percent of the adjustment operations.

BOX 4.2 LIBERALIZING INDIA'S FINANCIAL SECTOR

The sector. Publicly owned banks, comprising the State Bank Group and 19 banks nationalized in 1969 and 1980, dominate India's commercial banking system. Privately owned banks and branches of foreign banks account for a little more than 10 percent of assets (totaling about $110 billion) and deposits. Following nationalization, the government instructed publicly owned banks to pursue social and developmental goals. During the 1 970s and 1 980s, these activities—combined with high operating costs, obsolescent technology (bank labor unions opposed computerization), interest controls, high reserve requirements, directed credit, forced investments in government securities, and loan forgiveness—eroded the effectiveness and performance of these institutions.

India has four "All-lndia" developmental lending institutions, three of which are majority-owned by the government (with about $17 billion in assets), and several other development institutions specialized for such sectors as agriculture, small industry, and housing. There also are more than 30,000 nonbank financial institutions, most privately owned, and a large number of credit cooperatives. India has one of the world's largest capital markets, featuring capitalization exceeding $100 billion and more than 6,000 listed companies.

Reforming the banks. Indian commercial banking is now undergoing thorough reform. Policy changes since 1991 have included the introduction of tighter asset classification, income recognition, and disclosure norms. Reserve requirements and forced investments are being scaled back. And interest rates are being rationalized and liberalized. The minimum lending rate was removed in October 1994, and the government plans eventually to remove a deposit rate ceiling (currently above market levels).

The government hopes to transform the publicly owned banks from bureaucratic entities into vigorous commercial enterprises. These institutions are now engaged in far-reaching reform, including recapitalization, the introduction of modern computer based technology, organizational streamlining, and the recovery of nonperforming loans. Over the next few years, the government intends to increase nongovernment equity in the banks to as much as 49 percent (of total equity) and to increase private sector representation on bank boards accordingly.

To improve competition, the Reserve Bank of India (RBI) has authorized several new, wellcapitalized private banks and branches of some foreign banks to enter the market, although it continues to restrict entry generally. A functionally autonomous Board of Financial Supervision was established in late 1994 within the RBI, now responsible for commercial banks, development finance institutions, and nonbank financial institutions. The RBI now has a program to upgrade its supervision capabilities.

Public securities markets. The RBI has begun to develop and deepen India's markets for public securities. This should enable India's various governmental entities to meet their financing needs more efficiently. For the past two years, the RBI has steadily increased its reliance on open market operations rather than direct controls for monetary management. Under a 1994 RBI-Finance Ministry accord, the Treasury's access to direct RBI financing is to be phased out.

Strengthening capital markets. Liberalized regulation has improved the functioning of India's capital markets. In 1992, the Controller of Capital Issues, which set the pricing of new equity issues, was abolished. The Securities and Exchange Board (SEBI), established in 1 988, now reviews the pricing of initial share offerings. The SEBI has acted vigorously to modernize outmoded practices in India's equity markets but has generally set a more liberal approach to market regulation. Twenty-two new private sector mutual funds now compete with funds offered by the government-owned Unit Trust of India. Overseas investors have placed a large volume of funds in India's equity markets since they were liberalized in late 1992. Equity trading has strained the capacity of the existing transactions and custody system, and the authorities have acted rapidly to help ease regulations and practices designed for a smaller system.

BOX 4.3 CHINA: THE MAKING OF A FINANCIAL SYSTEM

The development of China's financial sector has lagged behind that of its fast-growing real sector. Until fairly recently the financial sector consisted only of four specialized banks (the Agricultural Bank, the Bank of China, the Industry and Commercial Bank, and the People's Construction Bank). Today a vast network of rural and urban cooperatives and several hundred nonbank financial intermediaries—trust and investment companies, finance companies, leasing companies, and security corporations—compete with these state banks. Shanghai and Shenzhen have had stock exchanges since 1990, and stock markets are now flourishing in scores of Chinese cities.

Low inflation throughout the 1980s and moderate interest rates (which on average provided savers with zero or positive real returns) stimulated resource mobilization. But with increasing inflation during the past few years, real interest rates on deposits and loans from state banks have turned negative. This has contributed to the rise of smaller, unregulated intermediaries, which are less subject to control and are sometimes owned by the larger banks, to service the township and village enterprises and private companies. In many cases, collective and private enterprises are paying relatively high rates of interest to offset the low rates paid by the state enterprises. Large deposits now flow between the formal and informal system depending on the changing relationship between savings and credit interest rates.

Despite efforts to strengthen the central bank—the People's Bank of China (PBC)—prudential regulation and supervision is still embryonic, particularly for specialized banks and small intermediaries that finance collective and private enterprises alike. The decentralization of government under way in China means that control of many state-owned enterprises, which account for 45 percent of China's output, has been transferred to local governments, which influence provincial branches of the PBC. Although one-third to one-half of all large and medium-size state-owned enterprises run at a loss, provincial branches of the PBC have enabled them to fund large investments, which accounts for the fact that large nonperforming loans are now estimated to account for 15-20 percent of China's bank assets.

To strengthen the country's segmented financial system, the government is considering a new central banking law under which the PBC would be charged with carrying out an independent monetary policy to maintain a stable value of the currency. replacing direct instruments (such as credit plans) by indirect ones (such as interest rates and openmarket operations), transforming the four big specialized banks obligated to finance state-owned enterprises into commercial banks, and setting up three additional banks for infrastructure, agriculture, and international trade to take over the responsibility for policy lending. The PBC would be overseen by the proposed state monetary policy committee, which would be chaired by the PBC governor and include several cabinet ministers.

The World Bank has supported China's efforts to develop its financial sector since the late 1 980s. Specialized institutions were equipped to appraise borrowers and manage international loans (such as projects sponsored by the Bank together with the China Investment Bank). Major programs currently being implemented or designed include components to:

· Advise on major policy issues (interest rate policies, directed credit, financial sector legislation, and prudential regulations).

· Help develop monetary policy instruments and practices.

· Design and automate a nationwide payment system.

· Develop supervisory, regulatory, research, and fiscal agent skills within the central bank.

· Train bank staff in accounting and audit standards and functions.

· Develop rules needed to regulate capital markets.

TABLE 4.1 BANK REFORMERS IN SUB-SAHARAN AFRICA

Liberalization and/or rationalization of interest rates	Restructuring of banks	Privatization of banks	Liquidation of banks
Benin	Cameroon	Cameroon	Benin
Burundi	Cd'Ivoire	Cd'lvoire	Cd'lvoire
Congo	Ghana	Guinea-Bissau	Guinea
Cd'Ivoire	Guinea	Madagascar	Niger
The Gambia	Kenya	Mauritania	Rwanda
Ghana	Madagascar	Senegal	Senegal
Kenya	Mali
Madagascar	Mauritania
Malawi	Rwanda
Mauritania	Senegal
Mozambique	Tanzania
Rwanda	Uganda

Note: This table does not comprehensively list all the financial sector reforms undertaken.
Source: World sank 1994.

Liquidated, or privatized in about 25 countries (table 4.2). The number of government owned and controlled banks was reduced from 140 in the late 1980s to about 115 in 1993. During the same period, the number of private banks rose from 80 to 115, and their share in the assets of the banking system increased from 30 percent to more than 40 percent.

Despite these major improvements, important structural weaknesses remain in lowincome countries. Banks continue to finance central government deficits and overextended and uneconomical public enterprises. Typically, about 40 percent of domestic credit (and sometimes as much as 80 percent) goes to the public sector. Credit in the private sector—when it is not crowded out— is garnered by large and politically well-connected firms and traders. Most farmers and small and medium-size indigenous firms have little access to credit, and their growth is limited to what they can finance from retained earnings.

Government-owned or controlled banks still dominate in many lowincome countries. In Sub-Saharan countries, they account for more than half the banking system. In most cases, they have weak management, limited bank ing skills, and ineffective internal controls, and their balance sheets do not reflect their precarious financial position. Credit evaluation of state enterprises is virtually nonexistent because the public banks generally allocate credit following directives from the government—despite the official elimination of directed credit. These loans have the explicit or implicit backing of the government, so banks seldom evaluate the creditworthiness of public sector borrowers.

TABLE 4.2 PROGRESS IN THE FINANCIAL SECTOR IN SUB-SAHARAN AFRICA

Notable progress	Progress	Slight progress	Regressing or repressed financial system
Botswana	Benin	Burkina Faso	Burundi
The Gambia	Cd'lvoire	Gabon	Cameroon
Lesotho	Eritrea	Guinea	Central African Republic
Mauritius	Ghana	Guinea-Bissau	Chad
Uganda	Madagascar	Kenya	Congo
	Malawi	Mali	Ethiopia
	Mauritania	Sierra Leone	Mozambique
	Namibia	Swaziland	Niger
	Senegal	Zambia	Nigeria
		Zimbabwe	Tanzania
			Togo

Influential private firms often continue to borrow without adequate scrutiny from either affiliated private banks or public banks. Prudential regulation and supervision remain inadequate, and bank insolvency is not quickly detected. Even when it is detected, governments often are reluctant to close banks because of the adverse impact on economic activity and because they are financially unable to meet calls on explicitly or implicitly insured deposits.

Governments in many countries continue to restructure problem banks by periodically swapping nonperforming loans with government and central bank obligations. But bank recapitalization alone is ineffective because it has to be repeated if the underlying causes are not addressed. The costs have been enormous: typically 7-10 percent of GDP spread over four to ten years. With the government absorbing these losses, there naturally is the expectation that it will do so again, leading to continued losses by poorly supervised banks. So crises recur, as in Mauritania and particularly Tanzania, where public sector bank recapitalization in 1991 is estimated to have cost about 20 percent of GDP. Despite this costly recapitalization, 70 percent of the assets of the National Bank of Commerce, the main public sector bank with 82 percent of the system's assets, are nonperforming; and a serious collection effort has yet to start.

Governments typically finance these large losses by issuing bonds, and interest on the bonds affects the budget for years to come, at an annual cost often equal to total government spending on health. Add to these interest costs direct government expenditures on public enterprises (5-7 percent of GDP) and treasury obligations to service public enterprise debts, and the burden of public enterprises (as noted in chapter 3) rockets to a staggering 8-12 percent of GDP.

The point is that a large part of these losses is hidden in the banking system—exposed only periodically when a banking crisis threatens. Then, governments often resort to a bout of inflation, possibly adding to economic uncertainty and dampening savings, private investment, and growth. The burden is particularly harsh for small-scale farmers and entrepreneurs denied credit. Unless the dominant position of public enterprises is reduced and their privileged access to bank credit is stopped, economic stability is threatened— and the banking system faces ruin.

What remains to be done?

The development of a robust banking system in low-income countries will require that countries address the underlying weakness of the system—not the symptoms. This is a long and arduous process that requires consistent actions on many fronts to complement the effort on the fiscal front. For Sub-Saharan countries that means building a sound and efficient payment system (in many countries, it still takes two to three weeks to clear a check). It also means restoring the safety and soundness of the financial system (banking and nonbanking), which at a minimum provides basic banking services, particularly trade finance, to a broad segment of the population and firms. And it means introducing better accounting, legal, and supervisory systems and a major effort to upgrade skills at all levels. In Asian economies, it means continuing to restructure and privatize public banks, opening them to competition from the private sector, strengthening prudential regulation and supervision, and developing capital and money markets.

Sever the link between banks and loss-makers

In most countries, the most difficult challenge is to sever the link between nonperforming public enterprises and state banks by cutting the enterprises off from new credit and collecting outstanding loans. It has proved difficult, if not impossible, for state banks to enforce a hard budget constraint on these enterprises. State banks not only roll over loans to public enterprises as they come due, they even increase their exposure—often through the capitalization of unpaid interest. When central banks attempt to enforce credit ceilings, enterprises often build up large intercompany arrears, including those to private firms. As these arrears accumulate and threaten the solvency of banks and enterprises, the central bank is forced to relax credit again.

These failings are especially severe for large public utilities and heavy industries. Although among the most inefficient and financially strapped enterprises (often because they sell their products or services at subsidized prices, and often to public entities that do not pay their bills), they are not allowed to close because they provide essential or strategic services. At best, hard budget constraints can be effectively imposed only on private firms or small public enterprises—and these are already starved for capital and prime candidates for liquidation or privatization. The result is that state banks continue to accumulate large losses and require frequent recapitalization. The drain of big enterprises is likely to worsen as they face increased competition from imports and domestic private producers. That is why it is so urgent to privatize these enterprises and to use the proceeds to reduce high-cost government debt that crowds out the private sector and increases real interest rates. The proceeds could also be used to restore the integrity of the contractual savings systems that governments have often used to finance their deficits. But governments will be persuaded to act on these difficult issues only when the true costs of recapitalization and inaction—in terms of money and lost job opportunities— are made transparent.

Go beyond recapitalization

One of the main reasons restructuring of banking systems has often failed is that governments normally have borne the entire cost and have not changed the incentives facing the banks and their managers. Restructuring has not extended to banks' incentives system or the structure of the banking sector. Losses have seldom been shared with other stakeholders (borrowers, depositors, shareholders, and managers) or accompanied by vigorous loan recovery efforts. In most cases, restructuring has merely transferred nonperforming

One of the main reasons restructuring of banking systems has often failed is than governments normally have borne the entire cost and not changed the incentives facing the banks and their managers loans to loan recovery agencies, where they languish uncollected. Loans went from being undermanaged in the banks to unmanaged in these agencies. In Ghana, less than 20 percent of debt was recovered, and in Cameroon and Tanzania, less than 5 percent. In Kenya, the new bank established to take over the bad loan portfolio of commercial banks has itself become financially distressed—because it was forced to lend to troubled state enterprises rather than pursue delinquent borrowers. In contrast, Chile's successful bank restructuring of 1986 required the banks, under new ownership and management, to use a large share of their profits to repurchase nonperforming assets from the central bank, where they had been placed in special accounts. This gave the banks the incentive and the breathing space to work with their clients to maximize loan recovery.

In general, bank restructuring is extremely difficult and demanding, especially in countries where legal and management skills are in short supply and where the private sector lacks the means to buy the companies or their assets. This is particularly the case in Eastern Europe, where cutting off credits to public enterprises imposes, at least in the short run, unacceptably high costs on the economy through the loss of productive capacity and sharp rises in unemployment. In this case, what is needed is Chapter I type bankruptcy proceedings, which allow for a temporary moratorium on enforcement of creditors' claims, to permit an examination of the feasibility of a reorganization, and during which banks continue to lend to the enterprise so it can function during the reorganization. The challenge, of course, is to prevent the moratorium from delaying the reform process. One such approach is being implemented by the Kyrgyz Republic. It has established a solvency resolution scheme where the government budget, and not commercial banks, will provide, in a transparent manner, the financial resources required by public enterprises to support the cost of care and maintenance, orderly liquidation (in particular, funding of severance payments), or passive restructuring. At the end of the process, nonviable enterprises will have been liquidated, and successfully restructured enterprises will resume normal relations with the banking system on commercial terms and be offered up for sale immediately (box 4.4).

Reduce the role of state banks

The lesson for low-income countries is that incentives must change alongside restructuring efforts. And this involves bank privatization and changes in management—since it is much easier to establish an arm's length relationship between properly regulated and supervised private banks and their private clients. In Africa, Guinea-Bissau, Madagascar, Mauritania, and most CFAzone countries have privatized or liquidated banks as part of bank restructuring, but this has yet to happen in a large number of countries.

In general, liquidation and privatization has proved easier for the small and medium size banks, particularly when it is part of an overall reform program that allows new entry in the banking system. Pakistan and some CFA countries are examples. In 1990, Pakistan successfully privatized two of the smallest public sector banks—the Muslim Commercial Bank and Allied Bank Limited. Within three years, the banks tripled their deposits and doubled their profits, largely through improved services, cost cutting, and a vigorous collection effort. In 1991, the government allowed private banks to compete with public banks, which were still reeling under the pressure of $2.4 billion in nonperforming loans. Nine new local banks were licensed that year. Foreign banks also have expanded their business: with only 75 of 7,740 branches nationwide they have captured more than a quarter of banking system deposits. The interest rate spread of public sector banks dropped by 33 percent in less than two years because of increased competition.

It should also be stressed that the success of banking reform in Pakistan owes much to general economic policy, which has liberalized the foreign exchange market and trade, privatized large public enterprises, and attracted foreign investment. These measures in turn increased the demand for financial services by a vibrant and increasingly sophisticated and discriminating private sector.

Some countries are adopting a more measured approach in restructuring their banking system. In addition to allowing new entry, they are partially privatizing state banks. India's largest state-owned bank raised $700 million through a public equity issue to 2.3 million investors, augmenting paid-in capital and reducing the central bank's share from 98 percent to 68 percent (expect ed to fall to 55 percent after a second public offering). This approach will be replicated in other state-owned banks, which are expected to raise private equity capital up to 49 percent of their share capital, with corresponding representation of private shareholders on their boards. The banks are undertaking a major effort to collect on some $12 billion in nonperforrning loans (6 percent of GDP and 12 percent of the assets of the banking system), and intend to sell their urban real estate holdings. These measures are intended to reduce government funds needed for recapitalization.

But liquidating or privatizing the state banks that account for the bulk of banking system assets is difficult—both economically and politically. Yet maintaining their dominant position, even while allowing new entry, does little to change their performance, as Tanzania shows. An alternative is to downsize banks as a way of reducing the cost of restructuring and to seek management contracts with reputable domestic and foreign banks, preferably with a preferred equity position, to run the downsized public banks until improvements attract suitable buyers. Furthermore, as is being contemplated in Macedonia and proposed in Tanzania, the government could break the larger state banks into competing networks that service both urban and rural areas—as they were prior to their nationalization in the 1960s and 1970s— and then sell them to reputable private domestic and foreign banks.

BOX 4.4 INSOLVENCY RESOLUTION SCHEME IN THE KYRGYZ REPUBLIC: A DIFFICULT AND DEMANDING TASK

The Kyrgyz Republic's Enterprise Reform and Resolution Agency (ERRA) manages the restructuring or liquidation of large insolvent state owned industrial enterprises that cannot be easily privatized, but whose continuing operation compromises the survival of other enterprises and the banks. A list of twenty-nine large enterprises has been drawn up by the government, based on their level of indebtedness to the budget, to the banks, and to other enterprises or creditors, including their own personnel.

ERRA is semiautonomous agency whose primary goal is the closure of unviable entities. Its board of directors is responsible to the government and has sole power and authority to decide on the future of all selected enterprises. ERRA will focus on liquidating unviable business units and disposing of excess or unproductive assets; separating and disposing of peripheral activities, including social assets; eliminating overstaffing; and balance sheet restructuring, including purchase of nonperforming loans from commercial banks against an equivalent reduction of the banks' liabilities to the central bank. All ERRA restructuring programs are clearly time-bound. If, at the expiration of an agreed period (12-18 months), a financial turnaround is not evident, the enterprise will be liquidated. The recently approved Bankruptcy Law gives ERRA wide and sufficient powers to liquidate or restructure enterprises under its responsibility.

All selected enterprises have been cut off from the banking sector to stem the flow of bad loans. Each enterprise has been placed under "care and maintenance" to prevent further buildup of inventories and payables, and to minimize costs. Pending completion of a viability study and a decision regarding the enterprise's closure or restructuring, only a core team of personnel is kept at work to ensure that buildings and equipment are kept in good condition. In some instances, a small team of salesmen is organized to sell existing inventory and raise revenues. All other employees are put on administrative leave. Essential social services—chiefly health care, winter heating, and schooling—continue to be provided to all employees and their families during the review period.

The budget, and not commercial banks, will provide financial resources transparently to support the cost of care and maintenance, orderly liquidation (in particular, funding of severance payments), or passive restructuring.

No new capital investments will be funded from government sources. Working capital and financing for maintenance or repair of essential equipment may also be provided to maintain those components of an enterprise with good prospects of viability. At the end of the process, nonviable enterprises will have been liquidated and successfully restructured enterprises will be cut off from further direct or indirect government financial resources. They will resume relations with the banking sector on commercial terms and be offered up for sale immediately.

Performance will be measured by the declining amount of financial transfers from ERRA to the enterprises, either because the enterprise is liquidated and redundancy payments stop after a period of time, or because the company is starting to generate positive cash flows.

But even attracting serious and reputable private banks will be difficult unless the government reduces the dominant position of public enterprises and develops an attractive environment to stimulate the private sector. Indeed, a good part of the development of the banking system in China, India, Pakistan, and Sri Lanka was stimulated by the growth of a competitive private sector that demanded a wider range of services, delivered in an efficient and cost effective way. In other words, the privatization of banks has a much better chance of success when it is part of an overall effort to develop competitive markets in which the private sector is given the opportunity to grow. The development of a competitive banking system in turn helps the development of a competitive private sector since borrowers will not be limited to a few banks that service only selected and wellconnected clients. The presence of foreign banks has often promoted and facilitated foreign investment from their countries.

In many low-income countries, the difficulty of restructuring and privatizing banks and banking systems is often compounded by ethnic considerations, and privatization methods should include ways to broaden ownership structures.

Privatization has its risks. In some cases, banks have been sold in a nontransparent manner and in an unregulated environment to privileged buyers who used them to finance their own activities. In other cases banks were sold with little information about the quality of the portfolio (box 4.5). Privatization, if it is to succeed, must be done transparently. Banks should be sold only to qualified, reputable buyers who have access to information about the finances of the banks (based on portfolio audits by reputable independent accounting firms). Privatized banks have to be properly regulated and supervised, and should not be bailed out if they fail.

Box 4.5 HOW NOT TO PRIVATIZE A BANK

Banks in Bangladesh were nationalized at independence from Pakistan, but in the early 1980s two banks were denationalized both in poor financial condition and overburdened with bad debt from parastatals.

Because financial information was not readily available, potential buyers were provided with little information about portfolio quality. Many investors, however, saw the opportunity to buy a bank as the chance of a lifetime. The value of the bank was therefore fixed by the government, and when portfolio problems were later uncovered, the government refused to adjust the price. It also refused to honor its loan guarantees to these banks, although guarantees to nationalized banks were honored. New owners were not allowed to shut loss-making branches and were required to abide by service and employment rules established in 1982.

As a result, the new owners were not able to recapitalize their banks sufficiently, and both continued to lose money. Worse yet, the public came to mistrust privatization, hampering efforts to privatize other banks.

Balance competition with solvency

Competition and privatization are not an end in themselves. They are a means to improve the quality and reduce the cost of financial services to a broad segment of the population. But a warning is in order: experiments with liberal entry without adequate supervision have failed in Africa. In Nigeria, several poorly managed, undercapitalized banks speculated in the foreign exchange market, and their losses now threaten the deposit insurance institution's solvency.

The challenge is to balance the goal of increasing competition and the need to ensure the solvency of financial institutions. Many low-income countries lack the resources to regulate their banking system. Given the high risks in the economic environment and the weak management and information systems, a system that offers extra cushions against risk is desirable. Governments might consider requiring capital adequacy ratios well above the recommended 8 percent risk-weighted capital regarded as sound by international standards (or raising liability limits for bank owners) and providing some co-insurance from depositors. Low-income countries could encourage reputable foreign or jointventure banks to help diversify and deepen their financial systems. Reputable banks, seeking to preserve their reputation, are less likely to operate objectionably even if they cannot be consistently well supervised.

A market-determined interest rate is an integral part of a competitive banking system. But to avoid the detrimental effect of high real interest rates, interest rate liberalization has to be phased in with a macroeconomic stabilization program that reduces fiscal deficits. Also essential is a prudential regulation and supervision system that requires banks to enforce hard budget constraints on their borrowers, improve the quality of their portfolio, and improve their capital structure.

Better supervision and prudential regulations. Most countries have strengthened laws and regulations, and some have improved their supervisory and enforcement powers. Indeed, IDA has been particularly active in training. But the information and skills needed to apply these standards remain limited. There are few trained banking supervisors, accountants, and auditors—and offsite and on-site inspection is ineffective. Many countries lack basic accounting and auditing standards, and even where they exist auditors are too pliable. In some West African countries, the banking sector was not covered by a standardized system of accounting and auditing rules until recently. In such cases, neither banking supervisors nor depositors and creditors can detect incipient financial distress.

Because building these skills will be slow, low-income countries should consider twinning or subcontracting arrangements with established foreign institutions such as central banks and qualified accounting firms. A few countries (Bolivia, India, and even Switzerland) are successfully using major accounting firms to supplement their own supervisory authority.

Clear exit procedures, implemented quickly at the point of insolvency. Ultimately, discipline in a competitive banking system comes from the threat of failure. Designing appropriate mechanisms for handling bank crises remains a difficult task, because it requires balancing the objectives of preservation of overall banking stability and the possibility of individual bank failure. Frequently, governments step in to prop up insolvent banks because of the possibility of contagion to other institutions, the potential disruption of the payment system, and the state's fiduciary responsibility to depositors as nominal bank supervisor. Bank supervisors become discouraged because of weak political support for their technical recommendations, and a culture of passivity and unprofessionalism seeps into regulatory agencies.

The principal lesson from many countries is that strong professional standards for bank supervision are no substitute for effective political action. Bank closure invariably escalates to the highest political level, particularly in underdeveloped financial systems with a high degree of concentration. Governments that have succeeded in dealing with this difficult problem have typically established, ahead of time, detailed mechanisms and procedures for quickly intervening in insolvent banks in a way that depoliticizes, to the extent possible, the exit process. These measures include replacement of bank management, a vigorous collection effort, sale and disposal of assets, prosecution of fraud, and allocation of losses to shareholders, depositors, and taxpayers—in that order. Quick application of these procedures minimizes chances of contagion to other parts of the financial system and reduces the cost to the government and the risk of recurrence.

Serve small borrowers

Even after the banking system is substantially restructured, small and medium-size enterprises (10-200 employees), microentrepreneurs (fewer than ten employees and including large numbers of the self-employed), and the rural poor are likely to be underserved because of high risk and transaction costs.

Many low-income countries have instituted special programs to provide financial services, particularly credit, to farmers at subsidized rates—often with the support of donor agencies, including IDA. But default rates have been high. Credit intended for the poor often has been preempted by wealthy farmers and well-connected entrepreneurs. Savings mobilization has been poor and transaction costs high. And commercial banks have been reluctant to undertake voluntary lending, while specialized rural financial institutions have not become financially self-sufficient and often have collapsed.

There has been a general failure to establish viable financial intermediaries that can mobilize resources and channel them into productive agricultural and rural enterprises. The same goes for microenterprise programs instituted and managed by government in urban areas. A recent Bank review of lending of $3.7 billion to small and microenterprises in thirty countries found that performance was best in Latin America, where loans to the individual borrower averaged $22,600 and repayment rates were 92 percent. The worst performance was in Africa, where the average loan was $143,400 and only 62 percent was repaid. Latin America had more competent banks and a more dynamic small business sector—and better program designs.

Small borrowers value safe, reliable, and convenient savings and banking services. Postal savings have been used effectively in many East Asian countries to nurture a savings culture and mobilize rural savings, particularly following reforms that changed the terms of trade in favor of farmers. These systems offer deposit instruments to help with savings and liquidity management, and payments instruments to facilitate small transactions. Similarly, small borrowers value easy access to short-term loans. Such loans and services have been successfully provided by organizations that provide savings and credit at market prices on a permanent basis—instead of short-lived subsidized credit programs, which often fail to reach the intended target group.

Many non governmental financial intermediaries and non governmental organizations—relying on local savings, careful credit screening, and lending at market rates—have reached a large number of borrowers, particularly women. These organizations reduce default risks significantly through careful selection of borrowers, provision of technical assistance, and prudent use of collateral and joint liability systems. Borrowers open savings accounts, and only those that have repaid earlier small loans are lent larger sums. Such organizations include credit and loan associations, mutual banks in Guinea, Mali, Nigeria, Rwanda, and Zimbabwe, the Grameen Bank in Bangladesh (1.5 million borrowers), Banco Sol in Bolivia (40,000 borrowers), BRI Kupides in Indonesia (1.9 million borrowers and 10 million savers), the Kenya Rural Enterprise program (5,000 borrowers), ACCION in Latin America, Women's World Banking in Africa, Asia, and Latin America, and the Fundes Foundation of Switzerland in Latin America.

These institutions have good track records in outreach and enterprise sustainability, two of the most important criteria in microfinance. But their lending is hampered by small capitalization and the high transaction costs associated with providing technical assistance to numerous small borrowers. These organizations need help in the form of seed capital and technical assistance to grow enough to exploit scale economies, evolve into licensed financial institutions (as Banco Sol in Bolivia and Corpo Sol in Colombia), or have refinancing facilities with banks. Seed capital and technical assistance should, however, be temporary and conditional—first on operational self-sufficiency (revenues covering all nonfinancial costs) and later on full self-sufficiency (no subsidies). Within five to seven years, the better institutions should be able to access capital markets and attract private investors, as some of them are successfully starting to do (box 4.6).

Improve collateral and debt recovery laws

The laws for collateral hamper sound lending and reduce access to credit for many groups. Simple changes in these laws would enable the use of collateral in obtaining credits, a boon to small borrowers (see chapter 2, box 2.4). A related issue is the functioning of the land markets, where better titling registries could improve access to loans. More attention also needs to be paid to expediting debt recovery procedures, which are now slow and cumbersome. Defaulters exploit the protection that laws afford them and creditors are unfairly penalized by the slowness of the court system. As a result, many loans are not forthcoming.

BOX 4.6 SUCCESSFUL MICROFINANCE INSTITUTIONS: EMPOWERING THE POOR AND WOMEN

Recent evaluations of microenterprise programs point to characteristics shared by successful programs and institutions that have reached a large number of poor and female entrepreneurs.

· Financial services are tailored to the needs of poor entrepreneurs.

· Operations are streamlined to reduce unit costs.

· Clients are strongly motivated to repay their loans through the use of group guarantees and other social structures as well as incentives—such as guaranteeing access to repeat loans, increasing loan sizes over time, and offering preferential pricing for those who pay on time.

· Interest rates and fees reflect the full cost of service delivery.

Some important new smallenterprise initiatives are being developed within the World Bank Group.

IDA has started to work with institutions that have a track record in lending to rural and urban poor microenterprises and operations that are sustainable, replicable, and based on strong savings mobilization. Partnership programs with three nongovernmental organizations (NGOs) were launched to learn more about technical assistance for small and medium-size enterprises and microenterprises. These NGOs are Women's World Banking, Tools for Development of Care (Canada), and Fundes Foundations (Switzerland).

The Bank has allocated $2 million to the Grameen Bank of Bangladesh—a highly successful program that lends primarily to poor women—to assist similar credit programs in other countries. The Bank and a number of donors have launched a Microfinance Program under which the Bank will contribute $30 million over the next three years. Other donors have pledged an additional $170 million through their own programs. The program will provide grants or loans to finance seed capital and technical assistance to institutions devoted to increasing the productive capacity of the very poor. A major purpose is to learn and disseminate the best practices for delivering sustained financial services to the very poor.

The IFC is exploring ways it can assist certain financial intermediaries with access to capital markets and appeal to private investors through its investment in an equity fund that will invest in profitable microfinance institutions in Latin America and in Africa.

Develop nonbank financial institutions and money and capital markets

Alongside the improvement and eventual privatization of banks, the development of nonbank financial institutions and money and capital markets helps deepen financial systems. Pension funds and insurance companies, when properly regulated and managed, could play an increasingly important role in mobilizing savings and financing long-term investment, particularly in infrastructure where earnings are in local currency. Nonbank financial systems have also cropped up in rural areas in many African countries to serve small savers and the informal sector.

Money and capital markets also could get a boost from government obligations. Governments in many low-income countries borrow mostly through the banking system. This makes little sense, for a bank's expertise lies—or should lie—in evaluating credit risk, not simply in investing in government paper, as many banks do. Money and capital markets could help finance the needs of government and those of major infrastructure projects. But developing such markets (and their role in trading securities, enhancing liquidity, and improving firm governance) requires the development of institutions—exchanges, brokers, accountants, rating agencies—and a pool of investors who understand risks and rewards.

Privatization programs that include a large public offer component can help strengthen the banking system by creating a primary and secondary market for corporate securities. The privatization of state-owned enterprises could revive dormant capital markets, as in Argentina, Chile, Malaysia, and Mexico, and more recently in Egypt, Jordan, and Pakistan, and build new ones such as in Mongolia, a small economy in transition (box 4.7). In Ghana, the recent divestiture of minority holdings in several companies more than doubled the market capitalization of the country's stock exchange.

Developing capital markets, instruments, and institutions takes time, but the foundations for this can be laid early. Egypt, Pakistan, and Tanzania have made initial policy reforms to foster capital market development while continuing to place most emphasis on banking reform. This involves technical assistance for legal and regulatory reforms and policy decisions concerning market structure. It is the approach most widely applicable to low-income countries. The IFC has been particularly active in this area (box 4.8) and the Bank has complemented the IFC's work, especially in policy, institution, and skills development.

BOX 4.7 MONGOLIA: USING PRIVATIZATION TO CREATE CAPITAL MARKETS

In 1991, Mongolia decided to privatize 344 large enterprises and 1,601 small businesses through a voucher distribution program. Two types of vouchers were issued: red vouchers for small enterprises and blue vouchers for large firms. Red vouchers were freely tradable, while blue vouchers bought equity shares in large enterprises, which were then freely tradable. A secondary market in red vouchers developed rapidly. In February 1992, the Mongolian stock exchange was opened with an initial offering of large enterprises for vouchers. Within four months, 34 companies were listed on the exchange and 21 companies were fully privatized.

BOX 4.8 IFC AN INCREASING ROLE IN THE FINANCIAL SECTOR

The IFC has supported financial sector reform in many developing countries. In Africa, it has provided technical assistance, invested in equity, lent money to support operations, promoted the creation of investment funds, helped countries improve their financial sector regulations, and brought much-needed competition and diversity to financial systems dominated by state-owned commercial banks. IFC technical assistance has focused primarily on developing securities markets, building financial institutions, and advising countries about the leasing and regulation of insurance.

In Zambia, the IFC—in collaboration with IDA—spearheaded the creation of the country's first stock exchange, which took just ten months. The IFC has provided advice to The Gambia, Ghana, Kenya, Nigeria, Uganda, and Zimbabwe on development and regulation of money markets, capital markets, and modernization of stock exchange operations. Countries in the CFA zone and Benin and Nigeria have all been assisted in the development of leasing laws. In Kenya, Tanzania, and Uganda, feasibility studies on venture capital funds are being conducted. IFC also has assisted in the review of capital market operations in India, and in China has helped the regulatory commission review new securities regulations.

In most instances, IFC financial loans are African countries' first-ever equity and loan investments. IFC has invested in two money market institutions and a leasing company in Ghana, and has helped the Industrial Bank of Malawi become one of the most successful development institutions in Africa. In Tanzania, IFC investments in a trade finance institution and a leasing company have provided viable alternatives to private borrowers for the first time. In Kenya, the IFC has provided financial assistance to the first private reinsurance company. In Benin and Senegal, the first leasing companies were backed by IFC financial investments. In Asia, where the IFC has been supporting financial intermediaries for a long while, it is now promoting venture capital companies and portfolio investment and management companies.

To facilitate portfolio investments in Africa, the IFC launched the Africa Emerging Markets Fund (AEMF) in 1993, a $30 million, open-ended fund (currently 80 percent invested in 32 stocks in 7 African countries). This fund altered government attitudes toward foreign portfolio investments. As a result of the AEMF example, a number of countries have now liberalized their exchange control regulations to allow freer repatriation of investment earnings and instituted reform measures to reverse past repressive financial sector policies.

The IFC also uses its Emerging Markets Data Base (EMDB) to publicize information on capital markets in developing countries. The EMDB is increasingly used as a benchmark for portfolio managers to gauge performance. Coverage of stocks and countries is constantly increasing: China and Sri Lanka were added in 1993.

The path for reform

Building a robust and competitive financial system is difficult under the best of circumstances. It is particularly difficult and time-consuming when reforming public enterprises and building institutional and regulatory capacity is required not only in the banking system, but also in the legal system. Successful financial reform requires measures on the following fronts:

· Stopping the hemorrhaging of nonperforming enterprises, a major cause of the fiscal deficit and a good part of the assets of the banking system. To the extent possible, these enterprises must be privatized or liquidated (see chapter 3).
· Privatizing the banks themselves and allowing new entry to create a competitive banking system. This is best done as part of an overall program to liberalize the economy.
· Building the financial infrastructure, notably a well-functioning payment and settlement system, prudential regulations and supervision, and the legal infrastructure that allows both borrowers and lenders to enter into flexible and secure transactions that are quickly and efficiently enforced.
· Undertaking a major training program to upgrade skills at all levels in all areas (managers, loan officers, accountants, financial specialists, economists, lawyers, management information specialists, and so on).

The path for reform will vary from country to country, depending on the condition of the banks and the overall market structure, the development of the private sector, the legal framework and institutional capabilities, and the political environment.

Often the most difficult aspect is to cut credit to unviable enterprises and to restructure, liquidate' or privatize the banks. The underlying problem is partly technical but mainly political. The commitment must come from within the country itself.

Until governments generate the consensus for the reform, donors should play a supporting role, not by funding cosmetic balance-sheet restructuring that removes the incentive for reform and aggravates the problem, but by concentrating on laying the groundwork for future reform. This includes backing small, well-designed technical assistance projects that strengthen the legal, accounting, and supervisory frameworks—and providing advice to the government and to key financial institutions.

TABLE A1.1 REAL GDP AND PER CAPITA REAL GDP GROWTH (average annual rates, in percent)

	Real GDP growth		GDP growth		Per capita real
	1981-93	1981-86	1987-93	1981-93	1981-86	1987-93
Low-income countries	5.2	5.4	5.1	3.1	3.3	3.1
Sub-Saharan Africa	1.8	1.6	2.2	-1.3	-1.5	-0.9
Reforming countries	2.5	0.1	4.5	-0.7	-2.9	1.3
Burundi	4.0	5.0	3.2	1.1	2.1	0.3
Gambia, The	3.8	4.6	3.1	0.1	0.7	-.5
Ghana	2.8	0.9	4.5	-0.4	-2.4	1.3
Guinea	3.8	..	3.8	0.8	..	0.8
Guinea-Bissau	4.5	4.7	4.4	2.4	3.0	2.0
Kenya	3.3	3.4	3.3	0.0	-0.3	0.2
Madagascar	0.2	-1.0	1.2	-2.7	-3.7	-1.8
Malawi	2.5	1.8	3.1	0.7	-1.4	-0.2
Mauritania	2.0	1.6	2.2	-0.5	-.6	-0.5
Mozambique	2.1	4.4	7.6	-0.5	- .8	4.9
Nigeria	2.0	-1.7	5.7	-1.2	-4.7	2.2
Sierra Leone	1.3	0.5	2.0	-1.1	-1.8	-0.6
Tanzania	3.5	1.6	5.5	0.5	-1.5	2.5
Uganda	3.5	-1.1	5.5	0.6	-3.1	2.2
Zambia	1.1	0.4	1.7	-2.1	-2.9	-1.4
Zimbabwe	2.7	3.9	1.7	-0.5	0.4	-1.3
Other African countries	1.1	3.0	-0.2	-1.9	-0.1	-3.2
Angola	-0.5	..	-1 .0	-3.3	..	-3.8
Benin	3.2	4.3	2.2	0.0	1.1	-0.9
Burkina Faso	3.5	4.8	2.4	0.8	2.2	-0.4
Cameroon	0.8	7.5	-5.0	-2.1	4.6	-7.7
Cape Verde	5.3	6.3	4.4	2.7	3.8	1.8
Central African Republic	0.8	2.2	-0.5	-1.8	-0.4	-3.1
Chad	5.0	7.0	3.4	2.5	4.5	0.8
Comoros	2.5	4.0	1.1	-1.1	0.4	-2.4
Congoa	4.2	7 8	1.2	1.0	4.6	-2.0
Cd'lvoire	0.2	1.0	-1.2	-3.9	-2.8	4.8
Djibouti	0.7	1.8	-0.2	4.7	-4.5	-4.9
Equatorial Guinea	4.5	..	4.5	2.1	..	2.1
Ethiopia	1.3	1.1	1.6	-1.3	-1.7	-0.9
Lesotho	4.3	1.6	6.7	1.5	-1.3	4.0
Liberia	-1.5	-1.6	..	4.2	4.5	..
Mali	2.9	2.7	3.0	0.3	0.4	0.2
Niger	-0.5	-1.4	0.2	-3.7	-4.7	-2.9
Rwanda	1.9	3.4	0.7	-1.0	0.4	-2 1
Sao Tome and Principe	0.1	-1.5	1.5	-2.0	-3.3	-1.0
Senegala	2.6	3.3	2.0	-0.3	0.4	-1.0
Somalia	2.0	2.9	0.7	-1.1	0.2	-2.4
Sudan	2.1	1.6	2.6	-0.6	-1. 1	-0.2
Togo	-0.8	0.2	-1.7	4.1	-2.8	-5.1
Zaire	-0 4	2.3	-2 7	-3.3	0.9	-5.4
East Asia and the Pacific	8.0	8.1	7.9	6.6	6.7	6.5
China	9.5	9 8	9.3	8.0	8.2	7.8
Other East Asia and the Pacific	4.1	1.8	6.2	2.2	0.7	3.7
Cambodia	6.4 .	6.4	3.0	..	3.0
Kiribati	0.7	0.7	0.7	-1.4	-1.5	-1.4
Lao PDR	4.9	5.0	4.9	2.0	2.1	2.0
Mongolia
Myanmar	2.2	3.9	0 7	0.0	1.7	-1.4
Solomon Islands	6.6	8.7	4.6	3.4	5.3	1.6
Tonga	1.9	3.7	1.0	2.3	3.7	1.5
Vanuatu	3.1	4.4	1.9	0.7	1.9	-0.4
Viet Nam	4.5	1.0	7.5	2.8	0.3	5.0
Western Samoa	-0.3	0.2	-0.8	-0.7	-0.02	-1.2
South Asia	5.2	5.4	5.0	2.9	3.1	2.8
India	5.1	5.3	5.0	3.0	3.1	2.9
Other South Asia	5.4	5.9	4.9	2.6	3.1	2.2
Afghanistan
Bangladesh	4.5	5.2	4.0	2.2	2.6	1.8
Bhutan	7.4	7.4	7.4	4.4	5.2	3.5
Maldives	7.8	..	8.8	4.7	..	5.4
Nepal	4.8	4.9	4.8	2.2	2.2	2.1
Pakistan	6.0	6.6	5.5	2.8	3.4	2.3
Sri Lanka	4.6	5.4	4.0	3.2	3.8	2.6
Latin America and the Caribbean	0.7	-0.3	1.6	-1.8	-2.8	-0.9
Bolivia	1.0	-1.8	3.5	-1.1	-3.7	1.1
Guyana	-0.8	-2.7	0.8	-1.3	-3.3	0.5
Haiti	-1.5	-0.7	-2.2	-3.3	-2.5	-4.1
Honduras	2.8	1.6	3.9	-0.4	-1.9	0.8
Nicaragua	-0.8	0.2	-1.5	-3.4	-2.6	-4.1
Middle East and North Africa
Egypt. Arab Rep.	4.1	6.3	2.1	1.6	3.6	-0.1
Yemen, Rep.
Eastern and Central Europe	-4.5	3.3	-10.7	-5.7	1.8	-11.8
Albania	-1.0	2.7	-4.1	-2.9	0.6	-5.8
Armenia	-3.4	5.2	-10.8	-4.8	3.6	-12.0
Georgia	-8.2	2.3	-17.3	-8.8	1.5	-17.6
Kyrgyz Republica	0.7	4.0	-2.2	-1.0	2.0	-3.7
Macedonia, FYRa
Tajikistan	-2.0	3.6	-6.9	-4.7	0.7	-9.4

a. Lower-middle-income economy but eligible for access to IDA resources.
Source. World Bank data.

TABLE A1.2 SECTORAL GROWTH RATES
(average annual rates, in percent)

		Agriculture
	1981-93	1981-86	1987-93
Low-income countries	3.9	4.5	3.3
Sub-Saharan Africa	1.9	1.7	1.8
Reforming countries	2.5	1.5	3.2
Burundi	2.7	4.1	1.5
Gambia, The	4.5	7.4	1.0
Ghana	0.9	-0.2	1.8
Guinea			3.1
Guinea-Bissau	6.9	8.3	5.8
Kenya	2.2	3.4	1.2
Madagascar	2.1	1.6	2.5
Malawi	3.8	1.6	5.8
Mauritania	2.6	3.0	2.3
Mozambique	2.6	1.8	3.4
Nigeria	2.5	1.2	3.9
Sierra Leone	2.6	1.9	3.4
Tanzania	4.1	3.5	4.8
Uganda	2.8	-1.3	4.5
Zambia	4.0	3.8	4.2
Zimbabwe	0.9	5.3	-3.6
Other African countries	1.3	2.1	0.3
Angola	-0.7	-0.4	-1.2
Benin	4.3	4.7	4.0
Burkina Faso	3.1	5.0	1.4
Cameroona	-0.8	3.6	-4.5
Cape Verde	5.5	4.3	6.6
Central African Republic	1.7	3.0	0.6
Chad	5.1	2.0	8.9
Comoros	2.9	4.1	1.9
Congoa	1.8	2.3	1.4
Cd'lvoire	0.0	-2.0	1.7
Djibouti		-3.4	-1.2
Equatorial Guinea			-0.7
Ethiopia	1.1	-1.8	3.5
Lesotho	0.3	0.03	-0.6
Liberia
Mali	3.4	3.0	3.8
Niger		3.4
Rwanda	0.2	0.2	0.1
Sao Tome and Principe	-0.2	-0.7	0.5
Senegala	2.1	4.1	0.4
Somalia	3.6	4.4	2.6
Sudan	1.2	4.7	-3.0
Togo	4.8	5.2	4.5
Zaire	2.3	2.5	2.0
East Asia and the Pacific	5.3	6.9	3.9
Cambodia			5.0
China	5.6	7.5	4.0
Kiribati
Lao PDR
Mongolia	1.0	3.8	-0.3
Myanmar	2.1	4.2	0.3
Solomon Islands
Tonga
Vanuatu	5.5	7.5	2.6
Viet Nam	4.4	3.1	4.7
Western Samoa
South Asia	3.3	2.8	3.6
Afghanistan
Bangladesh	2.9	3.9	2.0
Bhutan	4.2	6.0	2.7
India	3.2	2.3	3.9
Maldives
Nepal	4.3	5.2	3.6
Pakistan	4.4	5.3	3.6
Sri Lanka	2.6	4.2	1.3
Latin America and the Caribbean	1.4	1.1	1.6
Boliviaa	2.0	2.0	2.0
Guyana	1.3	0.7	1.9
Haiti
Honduras	3.0	1.5	4.2
Nicaragua	-0.4	-0.2	-0.6
Middle East and North Africa
Egypt, Arab Rep.	1.9	2.7	1.2
Yemen, Rep.
Eastern and Central Europe	0.8	1.5	0.0
Albania	0.3	2.7	-2.1
Armenia	-3.9	2.2	-11
Georgia	2.8	2.2	3.6
Kyrgyz Republica	2.4	0.6	5.1
Macedonia, FYR^a
Tajikistan	-2.3	0.4	-5.2

a. Lower-middle-income economy but eligible for access to IDA resources.
Source. World Bank data.

	Industry		Services		Population
1981-93	1981-86	1987-93	1981-93	1981-86	1987-93	1981-93
7.6	7.3	7.8	6.7	8.0	5.6	2.0
2.4	2.3	2.8	2.5	2.6	5.0	3.0
0.7	-3.0	4.3	3.4	1.7	5.0	3.0
4.4	5.7	3.3	5.4	7.0	4.0	2.9
4.2	5.2	2.8	4.1	4.1	4.2	3.8
2.4	-1.8	6.0	5.8	3.4	7.8	3.3
		4.4			4.4	2.8
1.3	5.1	-2.0	3.1	0.9	5.0	2.0
3.3	3.0	3.5	4.0	3.8	4.1	3.3
- .6	-2.8	1.2	-0.2	-1.9	1.2	3.0
2.8	1.0	4.3	2.7	2.5	2.8	3.3
3.5	6.1	1.3	1.1	-1 .6	3.5	2.5
-3.6	-17.1	8.1	6.8	1.5	11.3	2.6
-0.2	-5.0	4.6	3.4	0.4	6.3	3.0
-1.6	4.5	1.9	3.1	2.9	3.3	2.5
1.8	-3.3	6.9	1.7	0.6	2.9	3.0
6.1	-3.8	10.3	4.3	0.4	6.0	2.7
1.6	0.0	2.9	0.4	0.3	0.4	3.2
0.8	-0.2	1.8	3.7	4.2	3.2	3.3
4.0	7.1	1.5	1.8	3.5	0.5	3.0
10.7	8.7	14.9	1.0	-0. 1	3.2	2.8
4.5	7.6	1.9	2.6	2.1	3.0	3.2
3.7	2.4	4.7	4.7	5.9	3.6	2.7
2.5	12.5	6.1	2.2	8.2	-2.9	2.9
6.0	7.1	4.9	6.1	7.2	5.0	2.6
1.4	0.5	2.2	-0.3	1.3	-1.7	2.7
8.7	16.0	'-0.1	8.3	10.9	5.0	2.5
2.0	2.9	1.2	2.4	4.1	1.0	3.7
6.1	8.3	4.2	5.3	10.8	0.6	3.2
2.3	6.6	-1.5	-0.4	1.7	-2.1	3.8
	0.1	0.5		-2.5	-1.3	5.4
		10.4			7.3	2.2
1.2	3.8	-1.0	2.0	3.6	0.6	3.0
9.9	3.8	15.2	3.5	2.3	4.5	2.7
						1.7
4.6	7.2	2.3	0.3	-1.1	1.5	2.7
	-3.0			-4.2		3.3
1.2	2.7	-0.2	4.7	13.0	-3.6	3.0
-0.5	-0.7	-0.2	-0.4	-0.7	0.2	2.2
2.8	2.1	3.5	2.9	3.8	2.0	3.0
0.0	2.7	-4. 1	0.0	-0.4	0.4	3.1
4.2	5.6	2.6	2.0	0.1	4.2	2.7
-2.5	-2.6	-2.4	-4.2	-1.0	-7.0	3.5
1.2	3.1	-1.6	1.3	1.8	0.6	3.3
11.5	10.1	12.8	10.1	12.2	8.3	1.5
		8.2			7.0	3.1
1 1.6	10.2	12.8	10.4	12.5	8.5	1.4
						2.1
						2.8
0.4	5.4	-1.7	2.9	8.6	0.4	2.8
3.4	3.7	3.1	2.0	3.4	0.8	2.2
						3.0
-0.4

12.6	9.9	14.7	3.6	5.5	0.9	2.6
						2.2
						0.4
5.9	6.4	5.5	6.1	6.6	5.8	2.2
						2.5
5.1	3.9	6.2	6.1	7.5	5.0	2.3
14.2	15.3	13.4	7.0	6.7	7.4	2.1
5.9	6.6	5.3	6.1	6.3	6.0	2.1
	3.3

						2.6
6.8	6.4	7.1	6.4	7.7	5.4	3.1
5.1	3.9	6.1	5.0	5.8	4.3	1.4
0.4	-1.8	3.1	1.0	0.6	1.4	2.3
-0 . 1	-5.9	6.9	0.6	-0. .5	2.0	2.2
-1.5	-6.5	2.7	-0.9	-1.8	-0.2	0.4
						1.9
3.5	1.9	4.9	2.5	1.8	3.2	3.2
-1.7	1.1	-4.2	-0.4	0.3	-1.0	2.7
						2.7
3.2	5.3	1.4	5.2	9.0	1.9	2.4
						3.8
0.0	4.1	-4.8	0.3	3.6	-3.7	1.7
-6.1	3.0	-15.1	-0.5	2.5	-3.5	1.9
2.2	5.7	-2. 1	2.7	4.7	0.4	1.4
-3.0	3.3	-10.6	-3.5	1.5	-9.4	0.6
5.4	4.1	7.3	7.2	8.3	5.4	1.8

3.2	3.8	2.4	5.5	6.9	3.4	2.9

TABLE A1.3 SELECTED SOCIAL INDICATORS IN LOW-INCOME COUNTRIES

	Percentage of age group enrolled in education
	Primary		Secondary
	1970	1990	1970	1990
Sub-Saharan Africa	46	60^a	6	18
Angola	75	91	8	12
Benin	36	53^a	5	11
Burkina Faso	13	29^a	1	8
Burundi	30	50^a	2	6
Cameroonb	89	76^a	7	28
Cape Verde	66	95^a	16
Central African Republic	64	56^a	4	12
Chad	35	38^a	2	7
Comoros	34	75	3	18
Congob
Cote d'Ivoire	58	52^a	9	22
Djibouti		37^a	12
Equatorial Guinea	76		16
Ethiopia	16	28^a	4	12
Gambia, The	24	54^a	7	18
Ghana	64	77	14	38
Guinea	33	26^a	13	9
Guinea-Bissau	39	45^a	8	7
Kenya	58	95	9	29
Lesotho	87	70^a	7	26
Liberia	56		10
Madagascar	90	64^a	12	18
Malawi	50^a	4
Mali	22	19^a	5	7
Mauritania	14	51	2	16
Mozambique	47	45^a	5	8
Niger	14	25^a	1	7
Nigeria	37	72	4	20
Rwanda	68	67^a	2	8
Sao Tome and Principe
Senegalb	41	48^a	10	16
Sierra Leone	34	48	8	16
Somalia	11		5
Sudan	38	50	7	22
Tanzania	34	51^a	3	5
Togo	71	75^a	7	23
Uganda	38	80	4	14
Zaire	88	58^a	9	24
Zambia	90	82^a	13	20
Zimbabwe	74	116	7	50
East Asia and the Pacific	88	97	24	47
Cambodia	30		8
China	89	98^a	24	48
Kiribati
Lao PDR	53	59^a	3	22
Mongolia	113	98	87	86
Myanmar	83	97	21	24
Solomon Islands
Tonga
Vanuatu
Viet Nam		103		33
Western Samoa
South Asia	67	88	25	39
Afghanistan	28	24	7	9
Bangladesh	54	69a		19
Bhutan	6	25	1	5
India	73	99	26	44
Maldives
Nepal	26	61	10	30
Pakistan	40	42	13	21
Sri Lanka	99	107	47	74
Latin America and the Caribbean	81	69	22	32
Boliviaa	76	82a	24	34
Guyana	98	112	55	58
Haiti		26^a		22
Honduras	87	93^a	14	31
Nicaragua	80	76^a	18	40
Middle East and
North Africa	64	97	30	71
Egypt, Arab Rep.	72	101	35	81
Yemen, Rep.	22	79	3	23
Middle-income
Sub-Saharan Africa	83	70	17	36
Botswana	65	96^a	7	43
Gabon	85		8
Mauritius	94	92^a	30	53
Namibia		81^a		41
Seychelles
Swaziland	87	85^a	18	47
Middle-income East Asia and Pacific (high performing)	85	98	21	49
Indonesia	80	98^a	16	45
Korea, Rep.	103	100^a	42	87
Malaysia	87	93	34	56
Thailand	83	99	17	33

a. Net enrollment ratio.
b. Lower-middle-income economy but eligible for access to IDA resources.
Source: World Bank data.

Adult literacy (percent)		Life expectancy at birth (years)		Infant mortality rate (per 1,000 live births)		Percentage of population with access to sanitation
Female	Male
1992	1992	1970	1992	1970	1992	1985-9
40	63	43	51	144	100	31
29	57	37	46	178	124	18
17	35	44	51	155	110	42
10	31	40	48	178	132	12
42	63	44	48	138	106	48
45	70	45	56	126	61	78
		57	68	86	40	17
26	55	42	47	139	105	21
20	46	38	47	171	122
		47	56	140	89	83
45	72	46	51	126	114
41	69	44	56	135	91	35
		40	49	159	115	59
38	66	40	48	165	117	37
		43	49	158	122	16
18	43	36	45	185	132	44
54	74	49	56	111	81	42
15	39	37	44	181	133	24
25	53	35	39	185	140	25
60	82	50	59	102	66	43
		50	60	134	46	25
31	53	46	53	178	142	15
74	90	45	51	181	93	5
		40	44	193	134
27	46	38	48	204	130	23
22	48	39	48	165	117	23
21	46	39	44	156	162	24
18	44	38	46	170	123	10
41	63	41	52	139	84	15
39	67	44	46	142	117	58
			68		65
26	55	43	49	135	68	54
12	35	34	43	197	143	62
16	41	40	49	158	132	17
13	45	42	52	149	99	70
		46	51	132	92	66
33	59	44	55	134	85	21
37	65	50	43	109	122	31
63	86	45	52	128	91	25
67	83	46	48	106	107	43
61	76	51	60	96	47	42
69	92	61	69	72	33	90
24	52		58	105	60	15
68	92	62	69	69	31	97
		42	51	161	116
		40	51	146	97	24
		51	60	121	72	73
72	90	53	64	102	60	36
			62		44
			68		21
			63		45	46
84	93	55	67	104	36	18
			66		25
33	61	49	60	138	83	18
15	48	37	43	198	162
23	49	45	55	140	91	32
26	55	40	48	182	129	9
35	64	49	61	137	79	15
		51	62	119	55	28
14	39	42	54	157	99	8
22	49	48	59	142	95	24
85	94	65	72	53	18	60
65	76	50	61	131	72	45
72	86	46	60	153	82	35
96	99	60	65	80	48	90
49	61	48	55	141	93	27
73	78	53	66	110	49	67
54	67	106	56	52
34	64	50	60	161	66	54
35	66	51	62	158	57	51
28	56	42	53	175	106	68
38	49	51	62	106	59	37
66	85	50	68	101	35	42
50	76	44	54	138	94
75	85	62	70	60	18	98
		48	59	118	57	15
			71		16	65
		46	57	145	108	40
82	93	52	64	95	48	61
77	91	47	60	118	66	44
95	99	60	71	51	13	100
72	89	62	71	45	14	94
92	96	58	69	73	26	74

TABLE A1.4 GROSS DOMESTIC INVESTMENT AND GROSS DOMESTIC SAVINGS
(percentage of GDP)

	Gross domestic investment			Crossdomestic savings
	1981-93	1981-86	1987-93	1981-93	1981-86	1987-93
Low-income countries	25.9	24.1	27.3	21.2	20.5	23.2
Sub-Saharan Africa	16.3	16.6	16.5	12.1	11.5	12.5
Reforming countries	16.8	15.6	17.9	13.4	11.8	14.9
Burundi	15.9	16.4	15.5	0.8	4.1	-2.0
Gambia, The	18.9	19.0	18.8	6.4	6.2	6.7
Ghana	10.7	6.3	14.4	5.5	5.5	5.4
Guinea	16.0		16.3	13.9		13.4
Guinea-Bissau	28.5	27.2	29.6	-7.3	4.7	-9.6
Kenya	22.5	23.1	21.9	19.9	20.7	19.1
Madagascar	10.7	9.1	12.1	3.5	2.0	4.9
Malawi	17.7	17.6	17.9	10.1	13.3	7.3
Mauritania	27.1	31.9	23.0	7.4	3.0	11.2
Mozambique	27.1	16.6	36.1	-9.0	-4.2	-13.1
Nigeria	15.2	15.3	15.1	17.4	13.3	21.6
Sierra Leone	12.3	13.5	11.2	7.9	7.0	8.7
Tanzania	27.7	18.3	37.1	7.3	9.7	5.0
Uganda	10.4	7.3	13.0	1.7	2.9	0.6
Zambia	15.1	17.2	13.3	13.9	14.1	13.8
Zimbabwe	20.6	19.6	21.6	19.6	17.9	21.1
Other African countries	15.9	17.4	15.0	10.9	11.3	10.1
Angola	15.5		14.2	22.3		24.1
Benin	14.7	16.0	13.6	2.4	0.8	3.8
Burkina Faso	20.5	20.0	21.0	-0.8	-4 .9	2.6
Cameroona	20.8	24.8	17.4	21.5	29.1	15.0
Cape Verde	43.8	54.0	33.6	-3.9	-5.4	-2.4
Central African Republic	11.4	11.0	11.7	-0.8	-2.0	0.2
Chad	7.7	5.9	8.9	-13.3	-11.6	-14.5
Comoros	25.0	31.7	19.2	-3.3	4.1	-2.7
Congoa	27.3	39.4	17.0	26.5	35.7	18.5
Cd'lvoire	13.6	17.1	10.6	18.1	21.7	15.1
Djibouti	18.3	22.4	16.5	-7.0	-3.5	-8.5
Equatorial Guinea	22.0		25.6	-8.7		-9.5
Ethiopia	12.8	12.4	13.2	3.1	3.0	3.2
Lesotho	54.7	43.9	63.9	-64.7	-80.9	-50.7
Liberia	11.8	11.8		14.7	14.7
Mali	19.8	17.2	22.0	1.2	-3.5	5.2
Niger	11.9	13.9	10.1	6.7	6.1	7.2
Rwanda	15.1	15.6	14.7	4.7	6.1	3.4
Sao Tome and Principe	41.2	37.6	44.4	-18.8	-17.6	-19.9
Senegal.	12.2	11.3	12.9	3.5	0.4	6.9
Somalia	26.2	26.4	25.8	-6.2	-9.7	-1.0
Sudan	14.1	14.1	14.1	4.8	3.6	6.2
Togo	23.5	25.3	21.9	15.5	18.8	12.7
Zaire	11.9	10.7	14.4	10.7	10.2	11.9
East Asia and the Pacific	34.0	31.4	36.4	29.2	31.0	32.7
China	35.1	32.4	37.5	35.9	32.2	39.0
Other East Asia and the Pacific	16.2	17.1	15.9	10.2	11.5	10.6
Cambodia
Kiribati	35.8	35.8		-48.9	-48.9
Lao PDR	10.2	6.7	12.3	-0.3	2.3	-1.9
Mongolia	45.2	58.8	33.6	19.5	26.9	13.1
Myanmar	15.3	17.8	12.8	12.1	12.9	11.2
Solomon Islands	30.2	29.5	31.0	8.9	9.8	7.8
Tonga		25.3			-9.4
Vanuatu	32.4	18.7	36.7	9.4	6.7	8.6
Viet Nam	16.4		16.5	10.1		10.8
Western Samoa	32.1	30.0	34.1	-8.3	-8.4	-8.2
South Asia	23.0	22.1	23.7	19.4	17.8	20.8
India	. 24.1	23.0	25.1	21.8	20.3	23.1
Other South Asia	18.1	18.2	17.9	9.0	7.0	10.8
Afghanistan
Bangladesh	13.1	13.7	12.6	3.2	2.0	4.3
Bhutan	37.2	40.2	34.3	12.5	9.9	15.0
Maldives
Nepal	20.4	19.5	21.2	11.7	11.8	11.6
Pakistan	19.0	18.7	19.2	10.9	8.0	13.4
Sri Lanka	24.6	26.5	23.0	13.4	13.4	13.5
Latin America and the Caribbean	16.6	16.1	18.1	8.0	10.1	7.3
Boliviaa	11.9	10.3	13.2	8.7	10.8	6.9
Guyana	33.3	30.2	36.0	21.1	15.6	25.8
Haiti	14.2	15.5	12.2	4.9	5.7	3.8
Honduras	17.8	16.3	22.6	13.1	11.6	17.2
Nicaragua	20.9	21.2	20.7	1.8	9.8	-5.0
Middle East and North Africa
Egypt, Arab Republic	24.0	27.7	20.8	10.4	14.9	6.5
Yemen, Republic	19.0		19.3	-4.0		-1.0
Eastern and Central Europe	26.4	27.3	25.3	21.6	27.0	16.0
Albania	28.3	34.1	22.4	17.8	32.4	3.3
Armenia	26.3	26.6	26.0	20.1	32.5	9.5
Georgia	24.0	24.8	22.9	25.4	27.6	22.2
Kyrgyz Republica	30.8	30.9	30.6	18.2	19.3	16.9
Macedonia, FYRa
Tajikistan	27.7	29.3	25.8	17.7	20.2	14.7

a. Lower-middle-income economy but eligible for access to IDA resources.
Source: World Bank data.