FOR OFFICIAL USE ONLY Report No: PAD00030 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 13.5 MILLION (US$18 MILLION EQUIVALENT) TO THE REPUBLIC OF SOUTH SUDAN FOR A STRENGTHENING SOUTH SUDAN’S FINANCIAL SECTOR PROJECT (P179278) SEPTEMBER 6, 2023 Finance, Competitiveness and Innovation Eastern and Southern Africa This 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. CURRENCY EQUIVALENTS (Exchange Rate Effective July 31, 2023) Currency Unit = South Sudanese Pound (SSP) US$1 = SSP 989.38 US$1 = SDR 0.74463491 FISCAL YEAR January 1 - December 31 Regional Vice President: Victoria Kwakwa Regional Director: Hassan Zaman Country Director: Ousmane Dione Practice Manager: Alwaleed Fareed Alatabani Task Team Leader(s): Uloaku Oyewole, Ahmed Mohamed Tawfick Rostom ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism ATS+ Automated Transfer System BCP Basel Core Principles BoSS Bank of South Sudan CBS Core Banking System CEN Country Engagement Note DA Designated Account ESS Environmental and Social Standards FATF Financial Action Task Force FCV Fragility, Conflict, and Violence FIU Financial Intelligence Unit FM Financial Management GDP Gross Domestic Product GHG Greenhouse Gas GoSS Government of South Sudan GRM Grievance Redress Mechanism GRS Grievance Redress Service HR Human Resources HRD Human Resources Development IFRS International Financial Reporting Standards IMF International Monetary Fund ISR Implementation Status and Results Report M&E Monitoring and Evaluation MoFP Ministry of Finance and Planning NDC Nationally Defined Contribution PIM Project Implementation Manual PIU Project Implementation Unit PMB Program Monitoring with Board PPA Project Preparation Advance PPSD Project Procurement Strategy for Development PSC Project Steering Committee R-ARCSS Revitalized Agreement on the Resolution of the Conflict in the Republic of South Sudan RBS Risk-Based Supervision R-NDS Revised National Development Strategy SESA Strategic Environmental and Social Assessment SMP Staff Monitored Program SSIBF South Sudan Institute of Banking and Finance STEP Systematic Tracking of Exchanges in Procurement STR Suspicious Transactions Report SWIFT Society for Worldwide Interbank Financial Telecommunications TA Technical Assistance ToR Terms of Reference TTL Task Team Leader TWG Technical Working Group UNECA United Nations Economic Commission for Africa TABLE OF CONTENTS DATASHEET ...........................................................................................................................1 I. STRATEGIC CONTEXT....................................................................................................... 7 A. Country Context................................................................................................................................ 7 B. Sectoral and Institutional Context .................................................................................................... 9 C. Relevance to Higher Level Objectives ............................................................................................. 12 II. PROJECT DESCRIPTION .................................................................................................. 14 A. Project Development Objective...................................................................................................... 14 B. Project Components ....................................................................................................................... 14 C. Project Beneficiaries ....................................................................................................................... 18 D. Results Chain .................................................................................................................................. 19 E. Rationale for Bank Involvement and Role of Partners.................................................................... 19 F. Lessons Learned and Reflected in the Project Design .................................................................... 20 III. IMPLEMENTATION ARRANGEMENTS............................................................................. 20 A. Institutional and Implementation Arrangements........................................................................... 20 B. Results Monitoring and Evaluation Arrangements......................................................................... 21 C. Sustainability ................................................................................................................................... 21 IV. PROJECT APPRAISAL SUMMARY .................................................................................... 22 A. Technical, Economic and Financial Analysis ................................................................................... 22 B. Fiduciary .......................................................................................................................................... 24 C. Legal Operational Policies ............................................................................................................... 25 V. GRIEVANCE REDRESS SERVICES ..................................................................................... 27 VI. KEY RISKS ...................................................................................................................... 27 VII. RESULTS FRAMEWORK AND MONITORING.................................................................... 29 ANNEX 1: Implementation Arrangements and Support Plan ................................................. 33 ANNEX 2: Gender Analysis and Actions ................................................................................ 35 The World Bank Strengthening South Sudan’s Financial Sector (P179278) @#&OPS~Doctype~OPS^dynamics@padbasicinformation#doctemplate DATASHEET BASIC INFORMATION Project Operation Name Beneficiary(ies) South Sudan Strengthening South Sudan’s Financial Sector Environmental and Social Risk Operation ID Financing Instrument Classification Investment Project P179278 Low Financing (IPF) @#&OPS~Doctype~OPS^dynamics@padprocessing#doctemplate Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [✓] Fragile State(s) [ ] Performance-Based Conditions (PBCs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [✓] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternative Procurement Arrangements (APA) [ ] Hands-on Expanded Implementation Support (HEIS) Expected Approval Date Expected Closing Date 28-Sep-2023 27-Sep-2028 Bank/IFC Collaboration No Proposed Development Objective(s) The objective of the project is to strengthen the institutional and supervisory capacity of the central bank and improve the efficiency of core financial sector infrastructure. Components Sep 06, 2023 Page 1 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) Component Name Cost (US$) Formulating Financial Sector Policies 3,000,000.00 Institutional Strengthening of the Central Bank 6,700,000.00 Supporting the Development and Modernization of Key Infrastructure for 5,300,000.00 the Financial Sector Project Management and Coordination 3,000,000.00 @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate Organizations Borrower: The Republic of South Sudan Implementing Agency: Bank of South Sudan @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Is this project Private Capital Enabling (PCE)? SUMMARY Total Operation Cost 18.00 Total Financing 18.00 of which IBRD/IDA 18.00 Financing Gap 0.00 DETAILS World Bank Group Financing International Development Association (IDA) 18.00 of which IDA Recommitted 18.00 IDA Grant 18.00 IDA Resources (US$, Millions) Sep 06, 2023 Page 2 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) Guarantee Credit Amount Grant Amount SML Amount Total Amount Amount National Performance-Based 0.00 18.00 0.00 0.00 18.00 Allocations (PBA) Total 0.00 18.00 0.00 0.00 18.00 @#&OPS~Doctype~OPS^dynamics@paddisbursementprojection#doctemplate Expected Disbursements (US$, Millions) WB Fiscal Year 2024 2025 2026 2027 2028 2029 2030 2031 Annual 0.77 1.93 3.90 6.97 4.43 0.00 0.00 0.00 Cumulativ e 0.77 2.70 6.59 13.57 18.00 18.00 18.00 18.00 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Finance, Competitiveness and Innovation CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate SYSTEMATIC OPERATIONS RISK- RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  High Sep 06, 2023 Page 3 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) 2. Macroeconomic  High 3. Sector Strategies and Policies  Substantial 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  Substantial 6. Fiduciary  High 7. Environment and Social  Low 8. Stakeholders  Low 9. Other  10. Overall  High @#&OPS~Doctype~OPS^dynamics@padcompliance#doctemplate POLICY COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No ENVIRONMENTAL AND SOCIAL Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance ESS 1: Assessment and Management of Environmental and Social Risks and Relevant Impacts ESS 10: Stakeholder Engagement and Information Disclosure Relevant ESS 2: Labor and Working Conditions Relevant ESS 3: Resource Efficiency and Pollution Prevention and Management Relevant ESS 4: Community Health and Safety Not Currently Relevant ESS 5: Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant ESS 6: Biodiversity Conservation and Sustainable Management of Living Natural Not Currently Relevant Resources Sep 06, 2023 Page 4 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) ESS 7: Indigenous Peoples/Sub-Saharan African Historically Underserved Relevant Traditional Local Communities ESS 8: Cultural Heritage Not Currently Relevant ESS 9: Financial Intermediaries Not Currently Relevant NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). @#&OPS~Doctype~OPS^dynamics@padlegalcovenants#doctemplate LEGAL Legal Covenants Sections and Description @#&OPS~Doctype~OPS^dynamics@padconditions#doctemplate Conditions Type Citation Description Financing Source The Recipient, through the Project Implementing Entity, has installed and Financing Agreement: thereafter maintained an Effectiveness IBRD/IDA Article IV, 4.01 (a) accounting software for the Project, in a manner acceptable to the Association. Notwithstanding the provisions of Part A of the Section III of Financing Agreement, no withdrawal shall be made (b) for payments under Category (2), unless and until the Financing Agreement: Recipient has (i) submitted Disbursement IBRD/IDA Schedule II, Section III B: 1 SSIBF’s operational and financial plan in form and substance satisfactory to the Association, (ii) the Recipient has submitted evidence verifying the lawful establishment and official registration of the Sep 06, 2023 Page 5 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) SSIBF within the jurisdiction of the Recipient. (iii) has submitted a decree or analogous legal instruments which serve to formally establish the inaugural Board of the SSIBF. The aforementioned Board shall be comprised of individuals possessing pertinent proficiencies and qualifications, as determined by the Association, and such composition is deemed acceptable by the Association. The Recipient has established the Project Financing Agreement: Implementation Unit in Effectiveness IBRD/IDA Article IV, 4.01 (b) accordance with Section I. A. 2 of Schedule 2 of the Financing Agreement. The Recipient has recruited or appointed a Project coordinator, a financial management specialist and Financing Agreement: a procurement specialist to Effectiveness IBRD/IDA Article IV, 4.01 (c) the Project Implementation Unit, in accordance with Section I. A. 2. (a) of Schedule 2 of the Financing Agreement. Sep 06, 2023 Page 6 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) I. STRATEGIC CONTEXT A. Country Context 1. The Republic of South Sudan emerged as the world’s youngest country in 2011 after experiencing decades of armed conflict. The civil war from 2013 to 2018 eroded its development potential, worsened the humanitarian situation, and deepened vulnerabilities. The sustained instability resulted in an accumulated loss in aggregate gross domestic product (GDP), equivalent to US$81.1 billion. With approximately 80 percent of the 13.3 million population living in extreme poverty, South Sudan remains one of the poorest countries in the world. 2. Although conflict formally ended in September 2018 with the signing of the Revitalized Agreement on the Resolution of the Conflict in the Republic of South Sudan (R-ARCSS), the country remains fragile and beset by development challenges. While a series of encouraging reforms have been undertaken to support longer-term stability and development outcomes, the country continues to struggle with the lingering impact of prolonged conflict including widespread levels of poverty, elevated violence in several areas, weakened institutions, untapped human capital, lack of access to basic services, food insecurity and a non-diversified economy. It is estimated that about 2.2 million people remain internally displaced and 2.2 million South Sudanese refugees are still residing in neighboring countries. 3. Fragile peace has enabled some gains, but South Sudan continues to experience fragility, conflict, and violence (FCV)-related challenges that illustrate the need for sustained development engagement across a range of sectors. Sluggish progress in implementing the R-ARCSS prompted a third extension of the transitional period by 24 months to February 2025, further delaying elections. While violence has declined from the peaks reached during the war, it remains elevated, hindering development progress. Despite these challenges, the R-ARCSS has achieved its key objective of avoiding a return to national conflict and opened avenues to support the economic aspects of the peace agreement. Other gains include formation of the Transitional National Legislative Assembly in August 2021, graduation of the first batch of the National Unified Forces in August 2022, and passing of the Constitution-making Process Bill and Political Parties Act in December 2022. 4. South Sudan’s real GDP contracted by 2.3 percent in FY2021/22, weighed down by a fourth consecutive year of flooding, lingering impacts of the COVID-19 pandemic, violence flareups, and higher food inflation due to global crises. The floods in the summer of 2022, the worst the country has seen, has caused acute food insecurity for 60 percent of the population. Real GDP is projected to stagnate with a growth rate of -0.4 percent in FY2022/23 as a result of the continued impact of floods on agricultural output and reduction of oil production (projected to drop by 3.8 percent) due to limited new investment, highlighting the need to diversify the economy. 5. The Government of South Sudan (GoSS) embarked on a reform program in 2020 that prioritized the modernization of the country’s public financial and economic management systems. It focused on macroeconomic and fiscal reform programs that are intended to facilitate macroeconomic stabilization and improve public financial management. In support of this effort, the International Monetary Fund (IMF) approved a Staff Monitored Program (SMP) in March 31 to December 31, 2021, and later extended it to November 30, 2022. To further guide the reform agenda, a new nine-month Program Monitoring with Board (PMB) and disbursement of SDR 86.1 million (about US$115.7 million) under the Food Shock Window of the Rapid Credit Facility was approved (March 2023). The PMB will guide policies that safeguard macroeconomic stability, ensure debt sustainability, and provide a framework for the authorities to deepen and broaden public financial management and governance reforms. Sep 06, 2023 Page 7 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) 6. Following the exchange rate policy reform initiated in April 2021, the exchange rate unified and stabilized, dropping inflation into negative territory. The premium between the official rate and the parallel rate declined sharply, from 250 percent in March 2021 to about 1–2 percent by the end of 2022. 1 As per official Consumer Price Index data, inflation successively dropped since November 2021, barring a brief uptick in June–August 2022, to −11.6 percent in December 2022. This reflected the Government’s commitment to a reform program whose targets included a cessation to the practice of monetization of the fiscal deficit and a gradual movement toward a market-determined exchange rate. 7. South Sudan’s fiscal policy is procyclical with expenditures in the national budget almost entirely funded by oil revenue receipts. The budget processes, including planning and implementation, lack transparency, with the Government believed to maintain off-budget accounts for which oversight and scrutiny are limited. More than 44 percent of the total FY 2022/23 budget was allocated to public administration, security, and rule of law. This concentration leaves few resources for service delivery and building human capital through effective interventions in health, nutrition, agriculture services, and education—or for investing in the institutional strengthening and local-level capacity building on which sustainable development and durable peace depend. 8. South Sudan is at high risk of debt distress, with total public debt estimated at US$3,457 million (67 percent of GDP) as of December 2021 2. The risk of debt distress has increased despite the new SDR allocation partly used for debt management, and debt-carrying capacity remains rated ‘weak’. A few counterparts account for most of South Sudan’s gross external debt; around 51 percent of total loans were highly non-concessional as of December 2021, which is largely collateralized against oil revenue receipts. Despite the reform program, macroeconomic risks remain high. Significant risks include slow implementation of reforms, limited access to concessional financing, oil price volatility, slowdown in global growth, and lack of budget and debt transparency. 9. Inequalities and gender imbalances are widespread in South Sudan. On the Human Development Index, the nation has a ‘life-course gender gap’ score that places it in the lowest third of all nations globally. 3 Women and girls have fewer opportunities and less agency and options for self-determination. Girls make up the largest proportion of out-of- school children, numbering over 2.2 million (more than 70 percent). 4 This is due to gender traditions that place an emphasis on early marriage, domestic work, and caregiving responsibilities. Economic empowerment also remains a challenge for women, even though 50 percent of the population are women. Men outnumber women by four to one among both business owners and workers – more than 82 percent of enterprises are owned by males 5, including at the micro level. The situation is even more dire when looking at access to finance (one of the major constraints to doing business in South Sudan). Only 5.8 percent of the adult population (aged 15 years and older) had an account in a financial services institution in 2021, with only 4 percent of women owning an account 6. Women remain unbanked and underserved in the financial sector and the lack of sufficient gender-disaggregated financial data is a constraint to accelerating women’s financial inclusion. 1 The premium between the parallel and official rate narrowed to below 1% in July 2023 (from 2.5% in June 2023) indicating improved open market operations under a newly introduced Term Deposit facility by the central bank and regulatory tightening on parallel market operators. 2 IMF 2023 3 United Nations Development Programme Human Development Index: https://www.hdr.undp.org/en/countries/profiles/SSD. The life-course gender gap of the Human Development Index compiles 13 indicators that analyze gender gaps in choices and opportunities across the life course (childhood and youth, adulthood, and older age), including education, labor and work, political representation, time use, and social protection. 4 United Nations Children’s Fund (UNICEF), South Sudan - Getting girls back to the classroom after COVID-19 school closures, March 11, 2021. https://www.unicef.org/media/94931/file/Getting%20girls%20back%20to%20the%20classroom%20after%20COVID- 19%20school%20closures%20(South%20Sudan).pdf. 5 2019 Integrated Business Establishment Survey (IBES) 6 FinDex 2021 Sep 06, 2023 Page 8 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) 10. South Sudan’s vulnerability to climate change and natural disasters compounds the country’s humanitarian crisis, jeopardizes post-civil war recovery, and undermines development efforts. Since its independence in 2011, the country suffered severe droughts (2011, 2015) and floods 7 (2014, 2017, 2019, 2020, 2021, and 2022), resulting in high numbers of casualties, displacements, and the loss of livestock—severely affecting people’s livelihoods. The Global Climate Risk Index ranked the country among the 10 most affected countries in 2019 due to the severe flooding and heavy rainfall that year, as well as the intense bush fires. With a strong reliance on subsistence farming and pastoralism, rural communities are particularly affected by extreme weather events and natural disasters. Climate-related hazards are seen to intensify conflict over natural resources, thereby driving population displacement and worsening food insecurity. Furthermore, critical government information and systems (such as records, archives, budget and payroll systems) are lost or damaged in the event of a climate-related disaster, which disrupts business continuity and, in turn, the ability to deliver public services. Climate mitigation is also crucial for oil-producing states such as South Sudan. Fossil fuels are a major contributor to greenhouse gas emissions and climate change. 8 Reducing these emissions can help reduce the vulnerability of the economy to climate impacts, which have taken a significant toll on South Sudan. However, the starting point would be to address the severe lack of institutional capacity across most government agencies, which further affects the country’s ability to address climate change challenges. B. Sectoral and Institutional Context 11. The Bank of South Sudan (BoSS) is the central bank of the Republic of South Sudan. After the country gained independence in 2011, BoSS was established by an Act of Parliament called ‘The Bank of South Sudan Act 2011’ and in accordance with the provisions of Article 53 (3)(b) and Article 85(1) of the Transitional Constitution of the Republic of South Sudan 2011. BoSS was established as an autonomous body with a primary objective to maintain monetary and domestic price stability and a secondary objective of fostering liquidity, solvency, and effective functioning of a stable market-based financial system, and promoting a safe, sound, and efficient national payment system to maintain the stability of the financial sector. BoSS currently regulates the banking sector and foreign exchange bureaus; however, plans are under way to include the regulation of non-bank financial institutions within its mandate via an amendment to the Act. 12. The South Sudanese financial sector is small and dominated by banks. Per BoSS, the sector comprises 32 licensed banks (December 2022) with total assets of approximately SSP 1.3 trillion (approximately 25 percent of GDP), customer deposits of approximately SSP 520 billion, and a gross loan portfolio of approximately SSP 600 billion. The sector consists of 7 foreign banks (holding more than 80 percent of total assets), 13 domestic/national banks, and 12 joint venture banks. 9 The GoSS is a shareholder in four banks, including a majority shareholder in the system’s largest national bank. 13. The mutual trust between the financial institutions and private sector in South Sudan remains weak and is hampering any progress toward financial deepening and private sector-led growth. Given the widespread poverty and vulnerabilities, limited financial literacy, and the lack of trust, most business activities of firms and individuals are conducted outside the formal financial system. Legacy issues flagged by the industry include the banking sector’s high 7 The World Bank (2022) estimated that flooding events across the country in 2021 resulted in total losses of US$671 million (13 percent of GDP), of which US$125.4 million (19 percent of the total) was estimated infrastructure losses, US$233.5 million (35 percent of the total) was agricultural losses, and US$312 million (46 percent of the total) was estimated losses due to damaged buildings. The oil sector was also affected, with flooding leading to a 7.4 percent contraction in oil production. 8 In 2018, fuel combustion accounted for the majority of South Sudan’s greenhouse gas (GHG) emissions (~1.9 MTCO eq) 2 https://www.iea.org/data-and-statistics/data-tools/greenhouse-gas-emissions-from-energy-data-explorer. 9 It is understood that BoSS has not reviewed the accuracy of banks’ prudential reports since 2018, so banking sector data should be considered best estimates. Sep 06, 2023 Page 9 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) exposure to foreign exchange loans to the Government 10—loans which do not appear to be serviced for long—and BoSS’s lack of capacity and inconsistent enforcement of policies and regulations. This lack of trust between the financial industry and the central bank and between the industry and clients is detrimental to the growth of the sector and the economy. 14. Financial stability is a concern, given weaknesses and vulnerabilities in the banking sector, but authorities are committed to reform. The COVID-19 crisis, depreciation of the national currency, high inflation, and the overall macroeconomic instability have significantly affected the financial stability of the banking sector. Currently, the system is showing signs of distress with 13 of the 32 banks being critically undercapitalized, many of which have been undercapitalized for many years. 11 The situation necessitates an orderly withdrawal from the market via liquidations and/or application of different recovery and resolution instruments to restore trust in the system. 12 There are also concerns about the quality of assets, structure of liabilities, and composition as well as profiles of shareholders of the banks, in addition to significant deficiencies at the level of prudential reporting that affects the capacity of BoSS to effectively identify and assess the system’s underlying risks and vulnerabilities. Trust in the financial sector and long-term financial stability will be difficult to restore unless there is a determined restructuring effort with bold measures taken by national authorities. Lack of supervisory skills and effective governance frameworks have also affected the growth of the sector. 15. BoSS is implementing measures to enhance financial sector stability and reduce vulnerabilities. BoSS is working to develop its capacity to supervise problem banks effectively and address the long-standing issues of undercapitalization. With technical assistance (TA) from the IMF, BoSS has prioritized its operational preparedness to clean up and reform the banking sector. It has begun to put together an action plan along these lines, in close collaboration with the Ministry of Finance and Planning (MoFP) and the Ministry of Justice. 16. It is critical to enhance the capacity and resources of BoSS to increase the effectiveness of prudential requirements. BoSS has a total of 535 employees, of which 236 are classified as ‘casual employees’ 13 and 261 are classified as ‘officials’. There are five senior management positions, 17 directors, and 16 deputy directors. There are only 162 female staff in BoSS - with only 18 percent representation across senior and middle management roles. A total of 179 employees hold bachelor’s degrees and 45 hold master’s degrees. Although most employees have degrees, BoSS leadership recognizes the need to strengthen and enhance its supervision and oversight capacity. There is a high demand for capacity building in almost all areas of banking supervision (on-site, off-site, and financial stability 14), as well as a need for reengineering the supervisory procedures to ensure that these are risk oriented and effective. In addition, a balanced human resources (HR) policy related to rotation of staff 15 to ensure that knowledge and expertise are utilized for maximum productivity is equally critical, as is the need to ensure that women are better represented in middle management and senior leadership roles. 17. BoSS needs a more holistic approach to training and capacity building. Currently, BoSS conducts training needs assessments at the departmental level, which are then submitted to HR. The existing training opportunities available to 10 As of CY Q3 2021, the share of FX assets in total assets was above 77 percent and FX loans to total loans is over 97 percent. Loans represent about 50 percent of total assets, out of which more than 93 percent are loans to the Government. 11 According to the Banking Act, a bank is considered ‘critically undercapitalized’ if its regulatory capital is below 4 percent of risk-weighted assets and instructs BoSS to revoke the bank’s license and appoint a receiver (but there is a lack of enforcement). 12 The authorities have requested for the IMF’s TA in dealing with problem banks. 13 According to the Labour Act of 2017, casual employee means a person who works on a daily or hourly basis where payment of wages is due at the completion of each day's work. 14 The Banking Supervision and Regulation department currently has 28 employees, who have the capacity to complete only four to five bank examinations per year in an economic context that requires better and more frequent risk management and internal controls. 15 Regular two-year rotation of staff across departments and competencies dilutes expertise by preventing retention of requisite knowledge within the required department (a problem that has been raised by other development partners). Sep 06, 2023 Page 10 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) staff are short term (usually less than one to two weeks) and on specific topics, and often held outside the country. However, utilization of these opportunities is largely dependent on funding availability, and the fact that these are out-of- country opportunities makes it expensive and only available to limited staff. While BoSS has a training facility, it is underutilized and only used for internal trainings, as well as onboarding of new staff. 18. Lack of properly implemented Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) controls also pose a significant risk to the integrity and stability of the financial sector. Restoring the credibility and stability of the banking sector will not be possible without compliance with the international standards related to AML/CFT. Currently, South Sudan is in the Financial Action Task Force (FATF) list of jurisdictions with strategic deficiencies (grey list), which significantly limits the capacity of banks to participate in cross-border correspondent banking relationships. To exit this list, the authorities made a high-level political commitment (in 2021) to work with the FATF to strengthen the effectiveness of its AML/CFT regime and implement the agreed action plan, which includes operationalizing a fully functional and independent Financial Intelligence Unit (FIU). 19. The level of financial intermediation is marginal and is affected by a significant trust deficit among the key stakeholders. The private sector credit to GDP ratio was only 2.8 percent in 2021, compared to 36.7 percent average for Sub-Saharan Africa (excluding high income). Although many banks report a high level of liquidity, 16 lending activity is at a very low level and even nonexistent for some banks. 20. Outside of the banking sector, the non-banking financial sector is negligible and lacks a minimum licensing and enabling legal and regulatory framework. 17 The insurance and microfinance sectors operate in a regulatory vacuum or only under some state-level legal requirements 18 and subsequently sector data is limited/nonexistent. 19 A draft National Insurance Law and a Microfinance Bill were submitted to Parliament many years ago but are yet to be enacted. There is a need to revisit and revise these to the current context. As a result, there is no proper gatekeeping function that ensures that only viable financial service providers operate in the financial market. Additionally, in the absence of a minimum regulatory framework, it is difficult to ensure an appropriate consumer protection regime which adds to the trust deficit among consumers. 21. Lack of an effective supervisory regime for the banking sector, coupled with the lack of a minimum regulatory framework for the non-banking financial sector, has a direct negative impact on financial inclusion. South Sudan has one of the lowest levels of financial inclusion in Sub-Saharan Africa. In 2021, only 5.8 percent of the adult population (ages 15 years and older) had an account in a financial services institution, down from 8.6 percent in 2017. 20 Commercial bank penetration rates stood at 1.4 commercial bank branches per 100,000 adults in 2021, lower than the 1.65 rate in 2017, and less than 10 percent of the population had access to formal financial services, with cash being the most predominant mode of payment. 21 16 As of Q3 2021, banks were reporting a comfortable level of liquid assets (approximately 40 percent of total assets) in nominal terms, even though 50 percent of liquid assets are represented by balances at BoSS, mainly in foreign exchange. 17 Efforts are underway to include the non-bank financial sector under the supervisory mandate of BoSS in an amendment to the BoSS Act, 2011. 18 The Central Equatoria State Insurance Regulatory Authority is responsible for the administration and supervision of insurance companies within the state as there is no national regulatory authority and no national insurance laws. This is the single state regulatory authority in the country. 19 According to the state insurance regulator, there are 101 insurance companies in Central Equatoria State, but only 39 are operational, registered, and complying with the Central Equatoria State Insurance Regulatory Authority. There is even less information available on the microfinance sector aside from the names and location of the 10 microfinance institutions (MFIs) currently in operation, mostly in the capital city, Juba. 20 Findex Report 2017. 21 IMF Country Report No. 22/266. Sep 06, 2023 Page 11 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) C. Relevance to Higher Level Objectives 22. The project is closely aligned with the South Sudan Country Engagement Note (CEN, Report No. 158008-SS) for FY2021–2023. The overall focus of the CEN is on institution building and supporting South Sudan’s transition from emergency and humanitarian response toward development. The CEN notes the vulnerabilities in the financial sector and the institutional capacity constraints that limit BoSS from implementing sound and strategic interventions. It is built upon three focus areas—(a) lay groundwork for institution building, (b) continue support for basic public service delivery, and (c) promote resilience and livelihood opportunities—with a cross-cutting principle of social inclusion, particularly youth and gender. The project components align with Objective 1.1 of the first focus area—Building core institutional administrative capacity and transparency—which clearly mentions providing support to BoSS in terms of institutional delivery capacity, technical and operational capacity, and accountability to address the weaknesses in the financial sector. 23. The project builds upon South Sudan’s priorities articulated under the R-ARCSS. As part of the institutional reforms (specifically chapter (IV) Article 4.2), the Government’s focus is on reviewing and strengthening legislations governing BoSS to improve its functional and operational efficiency; prioritize its supervisory and statutory independence; and enable it to regulate the financial sector, promote stability, and perform its various functions effectively. A key element of this is to ensure adoption of comprehensive reforms to improve its supervisory and regulatory functions and its prudential regulatory roles. While the Government has taken strategic and determined steps to strengthen the stability of the financial sector, weak economic management and institutions have limited the impact of these efforts. In this context, the proposed project takes a two-pronged approach to address financial sector constraints from a policy and regulatory framework approach, as well as tackle the challenges around institutional capacity. 24. The project is equally aligned with the higher-level objectives of South Sudan’s Revised National Development Strategy (R-NDS) 2021–2024 whose main goal is to foster macroeconomic stability and lay the foundation for diversification of the economy by undertaking and finalizing legal and institutional frameworks. The strategy underscores the importance of strengthened institutions to achieve the country’s development agenda and recognizes the catalytic role of the financial sector for equitable development of the economy, specifically the importance of a stable banking sector (which is impossible without a capacitated central bank). 25. The project is fully aligned with BoSS’ strategic plan (2023–2027). 22 Launched in July 2023, the BoSS five-year strategic plan lays out 10 strategic objectives aimed at achieving the bank’s vision to ensure price stability and a sound financial system to support sustainable economic growth. While BoSS has shown initiative to address these sectoral challenges through the launch of its strategic plan, it lacks the financial and institutional capacity to implement the necessary interventions or a clear plan of action in terms of resources, responsibilities, and timelines. Successful implementation of the plan is not possible without sourcing additional financial resources and technical support from development partners and other stakeholders whose interests converge around the identified issues, and the formation of strong partnerships for greater impact and reach. Based on this premise, the project’s interventions support the strategic objectives across the four perspectives identified in the plan (stakeholder, finance, internal processes, and institutional capacity). 26. The project is well aligned with the World Bank’s regional priorities across various strategies. The World Bank’s’ Africa Strategy 2019–2023’ and the ‘Regional Integration and Cooperation Assistance Strategy 2018–2023’ both emphasize addressing weaknesses in the financial sector, strengthening institutions, expanding financial infrastructure, fostering financial intermediation and access to finance especially through digitalization. The project also aligns with the Fragility, Conflict, and Violence Strategy (2020) that highlights the need for the World Bank Group’s engagement with core 22 https://boss.gov.ss/strategic-plan/. Sep 06, 2023 Page 12 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) institutions of a country—central banks—critical to tackle crises, preserve developmental gains and support recovery. The project’s components lay critical focus on strengthening BoSS, to enable it to address distortions and challenges within the financial sector and thereby promote greater efficiency and market discipline. 27. The activities under this project are closely aligned with the World Bank’s twin goals of eliminating poverty and boosting shared prosperity. The banking sector plays a key role in ensuring the efficient allocation of financial resources in the economy. Financial systems that work efficiently encourage economic activity, promote productivity, and accelerate the fight against poverty. Contrarily, weak and unstable financial systems can create the conditions for financial crises, which can be extremely expensive for the economy, disproportionately affect the poor and smaller firms, and eventually stifle growth 23. To support economic growth, financial systems must be stable, resilient, transparent, inclusive, and operating with integrity. 28. The proposed project is also well aligned with the IDA 20 policy commitments. Special themes of FCV and cross- cutting issues of governance and institutions are fully reflected in the proposed project, given its focus on developing capable, inclusive, and accountable government institutions. 29. The project also complements interventions by other development partners and the GoSS. The IMF is providing support on strengthening the legal and regulatory framework as well as specific technical support on banking resolution, some of which will feed into the development of the financial sector strategy. The East Africa Regional Technical Assistance Center has provided basic training on risk-based supervision and sponsored an exposure visit to a neighboring central bank, upon which the project is building. The African Development Bank (AfDB) is providing support toward modernizing the country’s payments system, particularly implementing the Automated Transfer System (ATS+), which will need to be integrated with the Core Banking System. The United Nations Economic Commission for Africa (UNECA) is also providing TA to the FIU in South Sudan to conduct a National Risk Assessment, and the project will be supplementing with broader capacity building for the FIU. Finally, BoSS has received capacity-building support on specific topics from central banks from the East African Community member states (Kenya, Uganda, Tanzania, Rwanda, Burundi, and the Democratic Republic of Congo). 30. The project aims to help South Sudan achieve its second Nationally Defined Contribution (NDC) goals. In its second NDC, South Sudan reiterates its commitment to the Paris Agreement goal of limiting global temperature rise to well below 2°C above pre-industrial levels while making efforts to limit the increase to 1.5°C. It details how South Sudan has significantly increased its climate ambition of reducing GHG emissions across its sectors by 109.87 MTCO2eq by 2030. Preliminary estimates show that South Sudan will require a total of US$100 billion for the implementation of all NDC interventions and strategies over a period of 10 years. Of this, international investments of US$93–93.5 billion will be required, while US$6.5–7 billion will be financed domestically by the GoSS. The project will support achievement of these goals by enabling the establishment of a capable and trusted financial sector that can effectively mobilize external and internal financial resources to close the financing gaps required to reach South Sudan’s NDC goals. It also aligns with and builds upon the approach of the National Adaptation Plan to reduce South Sudan’s vulnerability by building BoSS’s adaptive capacity and resilience and facilitating integration of climate change adaptation into relevant planning frameworks, policies, and initiatives at all levels of the institution. 23 https://www.imf.org/en/About/Factsheets/Financial-System-Soundness Sep 06, 2023 Page 13 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 31. The objective of the project is to strengthen the institutional and supervisory capacity of the central bank and improve the efficiency of core financial sector infrastructure. 32. The objective will be achieved by investing in strengthening the regulatory and supervisory functions within BoSS, implementing a sustainable capacity-building and training program, and modernizing critical IT infrastructure central to BoSS-mandated functions. For this project, core financial sector infrastructure refers to the core banking system used by BoSS. PDO Level Indicators 33. Three key indicators will be used to track progress toward achievement of the PDO. (a) Risk-Based Supervision (RBS) implemented (measured by compliance with at least 2 predefined Basel Core Principles [BCP] previously determined to be noncompliant) (b) BoSS staff benefiting from direct interventions to enhance learning and improve job performance (Percentage) (c) Average days to complete business processes in the Core Banking System (Number). B. Project Components 34. This is a five-year, US$18 million project primarily aimed at supporting the institutional strengthening of BoSS. The project is premised on the notion that a strengthened central bank is key for the development of a holistic approach to addressing financial sector challenges, transforming the banking sector, and spurring private sector-led growth. The project comprises four components: (i) formulating financial sector policies; (ii) institutional strengthening of the central bank; (iii) development and modernization of key infrastructure; and (iv) project management and coordination. Component 1: Formulating Financial Sector Policies (US$3 million equivalent) 37. The objective of this component is to articulate a financial sector development strategy and roadmap and support overall capacity development on financial sector issues. Subcomponent 1.1. Financial Sector Development Strategy and Roadmap (US$1.5 million) 38. This subcomponent will enable the GoSS to take a holistic approach for financial sector reform; build consensus around key priorities with all relevant stakeholders; and outline strategic directions, priorities, and sequence for reform. Currently, no strategy exists and given the significant development needs, it is imperative to have a strategic and sequenced approach to strengthening the sector. Ensuring endorsement of the strategy at the highest decision-making level and conducting adequate consultations among key stakeholders and counterparts will be critical to create ownership and strengthen the prospects for successful implementation. 39. The strategy intends to focus on the development of a sound, stable, resilient, and inclusive sector that acts as a key driver for private sector-led growth. The strategy will identify key priority areas for development and articulate Sep 06, 2023 Page 14 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) ownership and accountability of interventions among key stakeholders, with a clear timeline. It will adopt gender-inclusive approaches and have well-defined gender-sensitive key performance indicators in the monitoring and evaluation (M&E) framework. It will also highlight approaches to addressing climate-related financial risks. Specifically, the project will finance the following: (a) TA for sector diagnostic studies to provide the evidence base for the strategy; (b) Advisory services for the development of a Financial Sector Development Strategy (medium term) aimed at building stability, efficacy, and inclusiveness (including gender and climate considerations) and a Reform Roadmap which will act as a detailed action plan for implementation; (c) TA to develop a clear monitoring framework to assess implementation and impact on the ground; (d) Cost of consultation and sensitization workshops with sector stakeholders; (e) TA for the development and implementation of a dissemination plan for the new strategy. Subcomponent 1.2. Building the capacity of BoSS staff to formulate and implement financial sector policies (US$ 1.5 million) 40. This subcomponent will support the training and exposure of BoSS staff on financial sector development issues, including on strategy development and implementation. BoSS staff would benefit from training on financial development issues, including financial regulation, monitoring of market developments, financial inclusion, strategy development and implementation, tracking of financial targets, and so on. BoSS will develop a detailed training/capacity building plan, ensuring that all training activities are relevant to its mandate and are linked with the objectives of the project. The plan will demonstrate equal opportunities for all staff and lead to tangible improvements in capacity, for instance, production of regular technical briefs to support decision-making. Component 2: Institutional Strengthening of the Central Bank (US$6.7 million equivalent) 41. The objective of this component is institutional modernization of BoSS and building the structures and skills necessary to effectively execute its mandate. Subcomponent 2.1. Enhancing the Supervisory and Regulatory Oversight of BoSS (US$2.7 million) 42. This subcomponent will support the adoption of an effective supervisory framework to strengthen the regulation, supervision, and risk management of banks. It will focus on strengthening the supervisory and regulatory oversight capacities of BoSS through inter alia: development and implementation of a work plan for transition from a compliance-based to a risk-based supervisory framework; development and implementation of a timebound corrective and remedial action policy to address identified sector vulnerabilities (based on the results of a BCP assessment 24); provision of technical assistance to implement International Financial Reporting Standards (IFRS) 25 and enhance the prudential and financial reporting framework. Subcomponent 2.2. Supporting the Establishment of the South Sudan Institute of Banking and Finance (SSIBF) (US$4 million) 26 43. This subcomponent will support the establishment of the SSIBF. The SSIBF will be managed as an independent and autonomous professional body under the oversight of BoSS. Its primary objective will be to facilitate continuous 24 The assessment is funded via World Bank’s executed resources; however, the follow-up activities will be implemented via BoSS-managed TA supported by the project. 25 IFRS are a set of accounting standards that govern how particular types of transactions and events should be reported in financial statements, which were developed and are maintained by the International Accounting Standards Board (https://www.cfainstitute.org/) 26 Under Strategic Objectives 8 and 10 of its five-year strategic plan (2023–2027) which focuses mainly on “Improving the Conduciveness of the Work Environment and enhancing employee competence,” BoSS intends to develop an Institute of Monetary/Banking Studies, build a New Training Center Design, and implement an employee capacity-building program. Sep 06, 2023 Page 15 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) learning, develop professional competencies of BoSS staff and expand its support to the finance and banking industry. SSIBF will act as a hub for training finance industry professionals through professional fee-based development programs/certifications. To be successful, the SSIBF will have to conform to international best practices, including on governance, structure, and quality of programs. 44. This subcomponent will follow a phased approach, which will be critical to ensure the project’s success. It will start with an institutional assessment of BoSS that captures gaps in skills and training practices; assesses policies on recruitment, placement and mobility, training, and career development; and provides recommendations for new trainings via the SSIBF. A gender lens will be applied when adopting these policies to ensure that women are well-represented at various levels within the institution, resulting in the development of a gender strategy for BoSS. The short-term focus of the SSIBF will be on capacity building for BoSS staff (based on institutional skills assessment and ensuring equitable access to training opportunities for female staff) but as the SSIBF develops, the curriculum will be expanded to accommodate demand from the wider financial services industry. To ensure the successful operation of the SSIBF, the project will assist it in developing a collaboration framework with a reputable banker’s training institute to support operationalization. 27 The SSIBF will initially be located in the existing BoSS Training Center, which is functional and has basic furniture and IT equipment but will require some upgrading. 45. More specifically, this subcomponent will finance the following: (a) Consultancy to conduct an independent Human Resources Development (HRD) institutional assessment; (b) Long-term TA through an HR adviser to advise on and develop a set of new HR policies (including the development of a Gender Strategy for BoSS) based on the assessment and provide related capacity-building support; (c) Consultancy to conduct a broader market skills assessment to inform the medium-term curriculum of the SSIBF and outreach to other financial sector professionals; (d) TA to conduct preparatory activities for the establishment of the SSIBF (including the development of the charter, business plan, and implementation timeline etc.); (e) TA and capacity building from a reputable regional banker’s training institute to support the operationalization of the SSIBF; (f) Capacity-building for BoSS staff (exposure visits to regional banking institutes); (g) The costs of upgrading the BoSS Training Center (facilities’ upgrade including furniture and IT infrastructure); (h) Conducting of sensitization workshops for the financial services industry to ensure their active participation in the SSIBF; (i) Financing of specific elements of the startup operational costs of the SSIBF as deemed necessary and in line with the relevant eligibility criteria of the World Bank’s financial management (FM) guidelines and subject to the SSIBF developing an operational and financial plan that is acceptable to the World Bank. 46. This subcomponent will be subject to disbursement conditions wherein part of the related disbursement is conditional on the completion of certain milestones. To earn market trust and ensure its long‐term viability, the SSIBF should operate in an objective and independent manner. This implies that (a) the SSIBF must be duly registered/chartered, as required in South Sudan, and (b) a majority independent board should be appointed 28. These two requirements will apply as disbursement conditions, meaning that they will have to be met before the following activities related to this component can be financed under the project, including, but not limited to, TA and capacity building for the SSIBF from a reputable regional banker’s training institute, costs of upgrading the BoSS Training Center, and the sensitization 27There are lessons to be learned from many banking institutes in the region (Egypt, Kenya, Uganda, and so on) and beyond, including the need for central banks to play a crucial role in establishing and overseeing these institutes. 28 Implies a board of directors with majority private sector/independent members, including market representatives; and any government-appointed directors must be administratively and financially independent. Sep 06, 2023 Page 16 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) workshops. The required technical preparatory work for satisfying these disbursement conditions will be supported under this subcomponent. Component 3: Supporting the Development and Modernization of Key Infrastructure for the Financial Sector (US$5.3 million equivalent) 47. Component 3 will support the upgrading of critical IT infrastructure and provision of related TA in BoSS and the FIU. Subcomponent 3.1. Upgrade and Customization of the Core Banking System (CBS) (US$ 2.3 million) 29 48. BoSS’s CBS is its backbone and is essential for optimizing critical banking and financial processes. BoSS wants to update its current version CBS 8.3 to version 9 of the Silverlake Symmetri CBS (CBS9), 30 given various inefficiencies with the current system, including the lack of storage to back up or archive the system’s data; its inability to handle the reconciliation of clients’ accounts; and its inability to integrate with Society for Worldwide Interbank Financial Telecommunications (SWIFT) and new payment system infrastructure that is being implemented. 31 CBS9 is a significant improvement over the current version; however, given that some modules and functionalities of the current CBS 8.3 are not used by business users due to insufficient consultation, customization, and user training, it is expected that the newer version, CBS9, will require proper support and customization to be fully utilized and directly respond to business needs. 49. This subcomponent will adopt a strategic approach to fully leverage the capabilities of CBS9 and drive additional business value. It will focus on upgrading and customizing CBS9 to align with BoSS’ specific business needs and processes. Specifically, support will be provided through, inter alia: carrying out a comprehensive review of business requirements and mapping of CBS9 functionalities to BoSS departments; carrying out gap analysis and development of business/technical specifications to support customization of CBS functionalities; upgrading and customizing CBS9 based on identified business needs (including requisite hardware and software); conducting capacity building and training for BoSS staff on CBS 9 functionalities. Subcomponent 3.2. Enhancing the Effectiveness of the Financial Intelligence Unit (US$3.0 million) 50. The role of the FIU is critical for combating crimes of money laundering and financing terrorism and therefore key to maintaining the integrity of the financial system. Although the FIU was established in 2011 32, steps toward setting up its structure and operationalizing its activities only commenced in 2019 with the appointment of a commissioner to lead the institution. In May 2023, BoSS instructed all commercial banks to send reports on suspicious transactions to the FIU, including all transactions above US$10,000; however, the banks’ compliance with the circular is delayed and there is a lack of a fully integrated reporting solution, with banks sending their reports manually, via email to the FIU (copying BoSS). So far, the FIU has received a total of 10 suspicious transactions reports (STRs), with two under prosecution. As these numbers increase, there is a need for the FIU to acquire a software application with the functionality to record, manage, analyze (including identifying links across records), and report on STRs. More generally, there is a need to enhance public awareness of AML/CFT issues and the value of financial intelligence, as well as the need to train relevant stakeholders on the detection of potential instances of money laundering and terrorist financing. 29 Objective 6 of the BoSS strategic plan (2023–2027), focuses on “Enhancing the Efficiency and Reliability of Core processes by activating all modules of the Core Banking System (with staff training) or introducing a new system.” 30 BoSS has only paid the costs of the license extension; however, the license order does not include any implementation services. 31 For BoSS needs to use a CBS version that is still maintained by the vendor. Since a licensing order was signed for version 9, CBS 8.3 is no longer maintained by the vendor. No customizations and further development can be done to CBS 8.3, particularly in the context of integrations. 32 Established following the promulgation of the 2011 Transitional Constitution of the Republic of South Sudan (Article 86(2)(3)(b), as amended and the subsequent enactment of the FIU Act in 2012. Sep 06, 2023 Page 17 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) 51. This subcomponent will provide TA to build the FIU’s capacity to receive and store information and build foundations for deeper analysis of information received from reporting entities. Specifically, the project will support the provision of technical advisory services for identification of business process requirements and customization of applications for strengthening financial analysis and data collection mechanisms within the FIU; customization of applications to enhance fitness of purpose; provision of training and capacity building to FIU staff and AML/CFT stakeholders; provision of operating costs for the purpose; and provision of training to build the capacity of selected AML/CFT stakeholders. Component 4: Project Management and Coordination (US$3 million) 52. Project implementation will be mainstreamed into the institutional architecture of BoSS; however, BoSS will require additional implementation capacity to ensure successful implementation of the project. The project will provide additional capacity through hiring of a full-time project coordinator, a senior procurement specialist, an FM specialist, and an environmental and social specialist. This component will cover the costs of project management, implementation, and supervision including procurement and FM activities and audits; preparation of annual work plans; implementation of environmental and social monitoring; grievance redress mechanism (GRM); M&E and reporting; and communications requirements. It will also support the operational costs of other implementation structures, such as the Project Steering Committee (PSC), and other coordination structures, as needed. C. Project Beneficiaries 53. The primary beneficiary of the project will be BoSS and the FIU, and secondary beneficiaries would be financial institutions and users of formal financial services. BoSS will benefit from strengthened institutional capacity, through enhanced regulatory and supervisory capacity, improvement in IT infrastructure, and overall technical capacity building. Similarly, the FIU will benefit from automation of processes and capacity building. Capacity building of BoSS is estimated to directly benefit up to 48 percent of staff (approx. 260 staff), and 68 percent (approx. 28 staff) of FIU staff. 33 In addition, the project is expected to indirectly benefit all financial institutions, particularly in the banking sector, and existing users of formal financial services 34 in the country who will benefit from having a more competent regulator that can bring efficiency, stability, and transparency to the financial system. 33 Currently, the total number of staff of FIU of South Sudan is 41, which includes 13 unclassified staff (“casual employees”) and 28 classified staff (officials). 34 Estimated as 5.8 percent of the adult population (age 15 years and older), who have an account in a financial services institution (Findex 2021). Sep 06, 2023 Page 18 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) D. Results Chain E. Rationale for Bank Involvement and Role of Partners 54. There is a strong rationale for the World Bank’s engagement in the financial sector in South Sudan, given its breadth of global, regional, and FCV specific technical experience. The World Bank will leverage its experience in all areas of financial sector reform and capacity building proposed under this project. The World Bank has a history of working in many other FCV countries (including prior financial sector analytical and advisory projects in South Sudan) and can draw on its diverse regional and global knowledge of designing financial sector development, leverage its comparative advantage, and bring technical expertise and lessons gained from similar interventions. 55. The project design also reflects discussions and collaboration with development partners that are deeply engaged in strengthening the financial sector in South Sudan. Multiple consultations and dialogues with development partners have been conducted to clearly map out the project’s focus areas and ensure that the interventions complement the existing efforts and overlap/fragmentation is prevented. As a result, the project complements the IMF’s support to BoSS on dealing with problem banks and AML/CFT regulation35 as well as AfDB’s efforts to modernize South Sudan’s payments system. Close coordination and dialogue with development partners will continue during project implementation, once the Financial Sector Coordination Group has been established by BoSS for this purpose. 35All project activities related to reforms in support of financial stability will be closely coordinated with the IMF; AML/CFT will be coordinated with the IMF (legal and regulatory framework) and the UNECA, which is supporting the National Risk Assessment. Sep 06, 2023 Page 19 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) F. Lessons Learned and Reflected in the Project Design 56. Fragile and complex environments require flexibility in project design and alignment to the political economy. This ensures that the project activities and implementation plan can adapt to the volatile and constantly changing environment of the country—whether economic or political. Building consensus and ensuring cohesion between the Government’s priorities and the project’s components becomes critical in this context. Currently, South Sudan is bound by the R-ARCSS and is implementing a roadmap agreement that will ensure elections are conducted in 2024. Such factors may have a direct impact on the implementation of the project and therefore tailored yet adaptable interventions are preferable. 57. Limited institutional capacity calls for simpler project designs that have specific yet achievable interventions. Given BoSS’s limited capacity and that this is the first project of its kind that BoSS is going to implement, the project design incorporates a phased approach. The core activities have been designed to focus on immediate priorities of the Government which can form the foundation for longer-term objectives. Further, it is important to design realistic and achievable PDOs in such environments. The World Bank team will work closely with BoSS and provide the necessary advice and capacity building at each stage of the project. 58. Strong commitment by the Government to the financial sector agenda, engagement with all donors, coordination and synergies with various counterparts as well as strong communication campaigns are critical to project success. Financial sector stability has been a core priority of the Government and despite the economic challenges, it continues to demonstrate a firm commitment to the financial sector development agenda. The World Bank recognizes the long-term efforts required to witness impact and therefore partners with relevant stakeholders to leverage each other’s comparative advantages. Similar projects also reflect the need for effective communication with all stakeholders to ensure consensus building and mitigate the risk of conflicting priorities. The project has been developed in close coordination with these stakeholders and the design incorporates a coordination mechanism to strengthen and maintain effective relationships at during implementation. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 59. BoSS will be the key implementing agency for this project. BoSS will be responsible for coordinating and managing the project, including procurement of consultants, services, and goods; providing FM; M&E, and reporting the overall progress of the project in line with the stated objectives and expected results. 60. To supplement BoSS’s capacity, a Project Implementation Unit (PIU) will be established, which will be led by a full-time project coordinator under the direct supervision of the First Deputy Governor of BoSS. The project coordinator will be responsible for the implementation of the day-to-day activities. The PIU will also consist of other dedicated staff— a financial management specialist, senior procurement specialist, an environmental specialist, a social specialist, M&E specialist, and a communications specialist. The PIU will develop annual performance targets, in consultation with the project coordinator, First Deputy Governor of BoSS, and the World Bank. The PIU functions will also be supported by assigned staff from BoSS to enable knowledge transfer during project implementation. 61. The Project Implementation Manual (PIM) will be the key document based on which the project will be implemented. The PIM provides: (a) detailed description of the project activities, the sequence of implementation, and the workplan defining the target dates; (b) institutional structure along with the decision-making protocols and role and Sep 06, 2023 Page 20 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) responsibilities of designated staff; (c) the administrative structure, procurement, FM, and disbursement processes; (d) the monitoring, evaluation, and supervision plan; and (e) the communication and gender mainstreaming plans. 62. To support project implementation, a two-tier governance structure will be set up including a Project Steering Committee (PSC) and Technical Working Group (TWG) supported by the PIU. The PSC will be chaired by the Governor of BoSS and will include members from the MoFP, financial sector stakeholders, and private sector players, among others. The PSC will meet quarterly to: (a) oversee overall project implementation, (b) provide policy guidance, (c) ensure interagency coordination, and (d) review and approve annual work plans and budgets. The TWG will report to the PSC and will be chaired by the First Deputy Governor of BoSS. The TWG will provide technical oversight for implementation of the project, including discussing technical and operational aspects of the project, reviewing progress reports, address any key implementation-related challenges, and suggesting course correction strategies. It will include representatives from relevant government departments/partner agencies and will meet quarterly. 63. Based on a request submitted, the MoFP received a Project Preparation Advance (PPA) of US$1.1 million for a period of one year. The PPA was initiated to conduct preparatory activities to ensure timely implementation of the project’s activities. The PPA is financing financial sector diagnostic studies and assessments and the establishment of the PIU with recruitment of key personnel such as the project coordinator and fiduciary specialists. The PPA is also helping build capacity to assist BoSS to implement the project. B. Results Monitoring and Evaluation Arrangements 64. Project M&E will be the responsibility of BoSS. The M&E will be conducted using the project’s Results Framework (Section VII), which outlines the PDO and intermediate indicators. Project progress will be disclosed to the public. The indicators will be reviewed and verified within six months of implementation and updated if required, in consultation with BoSS. The diagnostics conducted under the PPA will be leveraged to accurately set baselines and targets and ensure continued relevance and achievement of desired outcomes. Training will be provided to BoSS’s M&E specialist to support this function. 65. Results indicators will be tracked throughout project implementation. Periodic World Bank implementation support missions will review the Results Framework with BoSS, taking stock of progress and the adequacy of indicators. The PIU will report—on a quarterly basis—on implementation progress, results achieved, issues that hamper progress and results to BoSS and the World Bank. The progress assessed during these missions will be reported by the World Bank team to its management through Implementation Status and Results Reports (ISRs), which will include a review of key implementation issues and performance indicators. The results will be disclosed through the ISR on the World Bank’s external website for the project. A Midterm Review will take place approximately 30 months into the project to further assess progress and incorporate lessons learned. An Implementation Completion and Results Review will be carried out upon completion of the project. C. Sustainability 66. The project benefits from strong ownership and commitment from BoSS and the MoFP. The project supports the Government’s agenda of financial sector development and reform and institutional strengthening as articulated in the R-ARCSS and R-NDS (2021–2024), as well as BoSS’s Strategic Plan. There is a strong commitment to implement financial sector reforms, as demonstrated in various recent initiatives taken by BoSS, including efforts to amend key financial sector laws in line with best practice, as well as ongoing efforts to clean up the banking sector. All project activities are aligned with the Government’s priorities and therefore their commitment will help drive the initiatives as well as sustain reforms supported by the project. Sep 06, 2023 Page 21 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) 67. The proposed institutional reforms are critical for sustainable operations of the financial sector, which is essential for the functioning of the economy. Strengthening the capacity of BoSS will help it deliver its core mandate in the long term. The project-envisaged training via the SSIBF will facilitate better technical capacity and oversight and will therefore help in mitigating financial sector risks. Critical upgrades in IT infrastructure will increase BoSS’s operational and oversight efficiency. Additional capacity and automation in the FIU will ultimately help in building a stronger AML/CFT regime in South Sudan. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis Technical 68. A Financial Sector Development Strategy is an essential tool to guide and accelerate the development of a country's financial sector. Building a strategic direction and vision for the sector helps identify, prioritize, and sequence critical sector reforms, which is particularly important for South Sudan where there are challenges of capacity. The strategy is also an important tool for accelerating reforms and mobilizing additional support from public and private stakeholders in implementing these reforms. 69. The strengthening and modernization of BoSS is critical for financial stability. The central bank needs to have the capacity to fulfil its enforcement and supervisory mandates. Threats to financial stability require a strong regulator that has the right combination of policies, structures, skills, and technology solutions necessary to effectively execute the complex array of policy, oversight, and executive functions to support a well-functioning financial sector. There is ample evidence to support the hypothesis that a well-functioning financial sector drives real economic activity and thereby accelerates the growth trajectory of an economy by facilitating the flow of capital to individuals and entrepreneurs by creating access to reliable modes of financing—the distributional effects are conclusive. 70. A strengthened central bank is key for transforming the banking sector and spurring private sector-led growth. Several banks are already in distress and tagged as problem banks, and deterioration of the health of the sector creates a fiscal liability for the Government and poses the risk that scarce public funds will be required to restore solvency. A weak banking sector represents a lost opportunity to intermediate deposits and resources to finance the real economy and support economic development. Restructuring the banking sector will require tighter and more effective supervisory and regulatory capacity of a credible central bank. It is therefore critical to build BoSS’s capacity to manage these risks and prevent economy-wide distress. 71. The operation is aligned with the goals of the Paris Agreement on both mitigation and adaptation. Climate mitigation and adaptation risks for the project are low, given that this is mostly a TA project aiming to build capacity of the central bank. Given the lack of institutional capacity to address climate change, the support that the project is providing in developing a Financial Sector Development Strategy will specifically integrate a discussion on climate adaptation and mitigation while aligning it with long-term financial stability and sustainability goals. It will also look at the role BoSS and other financial institutions can play in building awareness, transparency, and developing climate mitigation tools. 72. All project components are consistent with the mitigation, adaptation, and resilience goals of the Paris Agreement. All components are expected to do no harm to the climate agenda and aim to create an overall well- performing financial sector. Central banks and financial regulators globally are increasingly acknowledging the financial stability implications of climate change. Given this context, climate risks will be integrated into the analytical work and TA Sep 06, 2023 Page 22 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) activities provided under Components 1 and 2 to enhance BoSS’ and other financial institutions’ awareness, transparency, and readiness to respond to climate risks. This is especially important for BoSS, as Component 2 will also be reviewing compliance of all 29 ‘Basel Core Principles for effective banking supervision’, one of which is related to the effective management and supervision of climate-related financial risks. Economic and Financial 73. South Sudan is classified as a country in high risk of external debt distress, making short-term improvements in economic and financial management extremely important. Given negative GDP growth in four of the last six years, the country needs to modernize and stabilize its banking system and financial sector to identify both weaknesses and new opportunities. South Sudan has underperformed its neighbors due to the lack of a sound, supervised banking system—in measurements such as bank branches per 100,000 people, deposits as a share of GDP, and remittances, given the relatively large diaspora. Investment has also lagged in key sectors. Savers are reluctant to deposit in commercial banks, since the lack of effective oversight could result in a banking crisis. Such a crisis could be triggered by speculative investments by banks, rumors of liquidity shortages, and the lack of an early warning system for quick corrective actions for banks in crisis. There is also a crowding out effect, with 89 percent of loans absorbed by the central government 36. One of the project’s objectives is to strengthen the foundational systems of BoSS, so that it can manage the financial sector and track economic progress and risks in a timely and accurate manner. 74. Project capacity-building efforts, through systems development, targeted TA and staff training, will not produce revenues in the standard way. There will be opportunity costs if these actions are not taken. If there is a liquidity crisis or a commercial bank faces insolvency due to financial issues, BoSS will be able to respond rapidly and professionally, maintaining confidence in the financial sector. Therefore, a least cost economic analysis has been adopted, along with recognition of quantifiable financial benefits which can be expected. To promote a least cost approach, competitive international bidding will be used for large systems investments; available software packages will be used with only necessary customization; and the use of Basel standards will focus the system investments and TA in the most efficient way in this early stage, allowing for benchmarking and future steps required. 75. In terms of estimated quantifiable gains, the project makes the following interim projections: a. Baseline remittances 37: US$1.20 billion inflows (2022); with 5 percent annual growth, the 2026 remittances estimate is US$1.39 billion; while without the project, remittances will likely be stable. b. Lending portfolio of commercial banks to private firms 38: SSP 24.8 billion (US$190 million) which is 4.25 percent of SSP 583.5 billion in total lending. c. Total estimated quantifiable benefits will be US$190 million in remittances and US$19 million in increased private sector lending, amounting to total financial gains of US$209 million. These increases will be caused by market forces and pent-up demand for lending by the productive sector but will also reflect newfound confidence in the Government’s ability to manage the financial sector through a modernized BoSS that meets international standards. In sensitivity analysis terms, if only 25 percent of such gains are realized over a five- 36 BoSS statistics, November 2022 37 Assumption: Supervised, regulated banks meeting Basel requirements will attract more remittances from the large South Sudanese diaspora of workers). 38 Assumption: Commercial bank lending to the private sector will increase by 10 percent to SSP 27.4 billion by 2026 [US$209 million] – currently, over 90 percent of lending is to the Government. Improved supervision will encourage sound banks to expand loan portfolios and diversify to productive lending instead of financing state institutions. Sep 06, 2023 Page 23 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) year period, due to longstanding doubts about private sector lending by the commercial banks, benefits would still amount to US$52.5 million. B. Fiduciary (i) Financial Management 76. Overall assessment of BoSS’s FM arrangements highlights significant capacity gaps which could potentially have a negative impact on implementation of the proposed project; FM residual risk rating is assessed and rated as Substantial. This is mainly due to the lack of an adequate budget monitoring system, lack of adequate accounting capacity and system, and weak internal control arrangements, including internal audit function, in addition to delays in external audit by the Auditor General. As a result, FM arrangements for the proposed project will be discharged from the PIU set up within BoSS. FM capacity at the PIU will be headed by an FM specialist (consultant), supported by a project accountant assigned by BoSS. 77. Disbursement of the grant will use advances, reimbursement, direct payments, and payments under Special Commitments including full documentation or against statements of expenditure, as appropriate. BoSS will be required to open a segregated US dollar disbursement account, also referred as Designated Account (DA), with a commercial bank of its choice. DA signatories will be drawn from both administration and the proposed project. BoSS will prepare quarterly unaudited interim financial reports through the PIU, submitted to the World Bank within 45 days after the end of a quarter, which will be used to account for expenditures in the World Bank’s records. The project will also maintain a Special Account (local currency subproject account) for making payments denominated in local currency (South Sudanese pounds). Funds will only be transferred from the main DA to the local currency subaccount to meet immediate payment obligations. No significant cash balances will be maintained in local currency to reduce the foreign exchange exposure risk. BoSS will be responsible for initiating, incurring, and authorizing expenditures under the project in accordance with the specified procedures and initiating the payment process with all the required supporting documentation. (ii) Procurement 78. Procurement capacity assessments. A procurement assessment was completed for the implementing agency (BoSS) in accordance with the World Bank Procurement Risk Assessment and Management System. 79. The procurement risk is assessed as High. Risks include: (a) the absence of staff with adequate procurement experience and familiarity with World Bank procurement procedures; (b) the absence of a procurement committee trained in World Bank procurement procedures; and (c) an inadequate procurement filing system. These are expected to be mitigated through: (a) establishment of a PIU in BoSS; (b) adoption of a Procurement Manual satisfactory to the World Bank before the start of implementation with acceptable procurement procedures; (c) recruitment of qualified procurement and other experts to support the PIU; (d) setup of an acceptable filing system for procurement; (e) training for BoSS procurement staff and the procurement committee in the application of the World Bank’s Procurement Regulations, use of the Systematic Tracking of Exchanges in Procurement (STEP) tool, and record keeping; (f) recruitment of consultants to assist the PIU in preparing ToRs and technical specifications for key technical activities as needed; and (g) certain procurement activities regardless of value, nature, categories, or packages to be treated as prior review and reviewed by the World Bank as needed. 80. Procurement rules and procedures. Procurement will be carried out in accordance with: (a) the World Bank’s Procurement Regulations, dated November 2020; (b) Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, revised July 1, 2016 (referred to as World Bank Anti- Corruption Guidelines); and (c) any provisions stipulated in the Financing Agreements. See annex 1 for further details. The Sep 06, 2023 Page 24 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) recipient will use the World Bank’s online procurement planning and tracking tool, STEP, to prepare, clear, and update its procurement plans and conduct all procurement transactions. 81. Project procurement strategies. In accordance with World Bank regulations, BoSS has drafted a Project Procurement Strategy for Development (PPSD). The PPSD provides the basis and justification for the procurement approaches and selection methods to be applied and include market analysis and a capacity assessment of key parties who will be involved in procurement under the project. Procurement Plans for the first 18 months of implementation have been prepared and approved. The Procurement Plan will be updated at least annually or as required to reflect changes in the procurement arrangement that may arise due to changes in requirements, market conditions, procurement environment, and so forth, with World Bank approval. C. Legal Operational Policies @#&OPS~Doctype~OPS^dynamics@padlegalpolicy#doctemplate Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No D. Environmental and Social (i) Environmental Standards 82. The project will support BoSS in developing a Financial Sector Development Strategy and Roadmap, the establishment of the SSIBF, upgrading of critical IT infrastructure and provision of related TA in BoSS and the FIU. In addition, the project will support the implementation of environmental and social monitoring and GRM during project implementation. No rehabilitation or construction of new infrastructure or TA-type activities that result in negative environmental impacts will be financed under the project. However, the TA activities 39 of the project may have downstream environmental and social impact/risk. The TA activities (Type 2: Supporting the formulation of policies, programs, plans, strategies or legal frameworks and Type 3: Strengthening borrower capacity) will be undertaken in compliance with the World Bank’s Advisory Note on Technical Assistance and the Environmental and Social Framework. For the impacts and risks associated with the project activities, a systematic examination of environmental and social risks and impacts, that is, Strategic Environmental and Social Assessment (SESA) will be prepared. Thus, considering the limited footprint of all the referenced activities, the expected environmental, health, and safety risks of the project are limited and small, which would be mitigated through proper consideration of environmental and social objectives into the planning process and strategically addressing environmental and social issues as per the guidance of the SESA. Thus, the environmental risk rating of the project is rated low. (ii) Social Standards 83. The social risk rating for the project is Low. The project will not support any civil works. The potential social risks emanate from inadequate transparency and stakeholder communication and consultation. The project activities will be communicated using appropriate language, media, and content to garner feedback from stakeholders. The Stakeholder Engagement Plan includes stakeholder feedback mechanisms that are culturally appropriate and accessible to all 39 Financial Sector Development Strategy and Roadmap development, establishment of the SSIBF, and some support around the upgrading of critical IT infrastructure Sep 06, 2023 Page 25 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) stakeholders. In addition, the design of the proposed project does not involve potential sexual exploitation and abuse/sexual harrasment risk. Hence, the overall environmental and social risk of the project is rated Low. E. Gender 84. To build the foundation for gender-inclusive growth, the project will apply an intentional approach to narrow gender gaps to all its activities (see Annex 2). The Financial Sector Development Strategy will adopt gender-inclusive approaches and have well-defined key performance indicators in the M&E framework. To design the strategy, sex- disaggregated data will be collected, and findings will be integrated that aim to bridge the gender gaps through institutional policies. Specifically, the institutional assessment in subcomponent 2.2. will include a gender analysis, with the results of this assessment not only guiding the development of a targeted curriculum but also supporting the development of gender-sensitive learning methods. BoSS will aim to develop a targeted Gender Strategy, based on the results of the institutional assessment, to yield tangible benefits in the form of an improved gender balance and work satisfaction across the institution. 85. The Results Framework includes indicators to capture the project’s contribution in closing gender gaps in in the financial sector. For instance, an intermediate indicator will capture the establishment of a monitoring and collection system to capture gender-disaggregated data in the sector. F. Citizen Engagement 86. The project will prioritize meaningful engagement of all direct and indirect stakeholders in the articulation of a Financial Sector Development Strategy. This will be done through widescale consultative process and will engage all relevant public and private sector stakeholders, including financial institutions, business associations, corporates, development partners, and various sector experts/specialists. It will be equally important to ensure smooth dissemination of the strategy through communication, awareness, and literacy materials to stakeholders to ensure ownership and effective implementation. In addition, the M&E system of the project will facilitate strong citizen engagement and beneficiary feedback throughout project implementation 40. The project will ensure proactive feedback processes including a feedback mechanism for all trainings conducted jointly with partner training institutes/universities/academies involved in the development of training content and the implementation of the capacity-building program under Component 2. Beneficiary feedback will also be gathered through feedback questionnaires to assess the level of satisfaction with the quality of training received and to provide participants the opportunity to suggest improvements. G. Climate 87. Globally, climate change has become a key concern of financial regulators given the financial risks that can emanate from physical climate shocks. This is especially important for South Sudan, given its significant exposure to climate-related shocks, which is expected to increase with climate change. BoSS is in the early stages of considering how to integrate climate considerations into risk management and supervision. For this reason, the Financial Sector Development Strategy will include a chapter on climate adaptation, which will look at developing guidance/policies on integrating climate-related risks into monetary policy operations. 40 The project will measure citizen engagement-specific results through the Results Framework. The indicators will assess feedback received from a beneficiary satisfaction survey addressed and used to improve project interventions. Sep 06, 2023 Page 26 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) V. GRIEVANCE REDRESS SERVICES 88. Grievance redress mechanism. Communities and individuals who believe that they are adversely affected by a project supported by the World Bank may submit complaints to existing project-level grievance mechanisms or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted to the AM at any time after concerns have been brought directly to the attention of Bank Management and after Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s GRS, visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, visit https://accountability.worldbank.org. VI. KEY RISKS 89. The overall risk rating of this operation is High. The main risks that might affect the achievement of the PDO relate to (a) political and governance; (b) macroeconomic; (c) sector strategies and policies; (d) institutional capacity for implementation and sustainability; and (e) fiduciary, as explained below. This is due to a myriad of factors, including South Sudan’s volatile political and economic situation, the country’s history of weak governance, transparency, and accountability; weak fiduciary and HR capacity; and BoSS’ lack of experience in implementing World Bank projects. 90. Political and governance risk: High. The highly fragile context and political economy dynamics pose risks. The country’s security situation remains volatile and intercommunal conflicts persist, which fuels further political uncertainty. There is also a significant risk that frequent changes in political leadership and appointees may undermine Government ownership and cause project delays. To mitigate this risk, the team will continue to engage with multiple levels within BoSS and with key financial sector stakeholders to ensure broad buy-in and ownership. The project will also support regular coordination meetings and ensure flexibility so that adjustments can be made during implementation. 91. Macroeconomic risk: High. Even though inflation has seen a dramatic reduction 41 since the implementation of the government’s reform program, the current commodity price shock and the depreciation of the South Sudanese pound are expected to drive a rise in inflation in the short term. 42 The country depends on oil revenues for most of the central government budget and given the high risk of debt distress, 43 weak domestic revenue mobilization, and shrinking humanitarian aid budgets, the country remains highly vulnerable to external shocks. Should these risks materialize, there would be implications for macroeconomic stability, which would affect project implementation. To mitigate this risk, the World Bank will continue to work with the IMF and other development partners to help the Government improve in economic management during these challenging times. 92. Sector policies and strategies risk: Substantial. The project intends to support the adoption of a Financial Sector Development Strategy, which currently does not exist. The project is fully aligned with the BoSS Strategic Plan (2023– 2027), as well as the overall objectives of the R-NDS. The risk, as noted under the political and governance risk, is that the 41 While the average annual rate of inflation declined from 2.5 in the first half of FY2021/22 to −6.2 percent in the first half of FY2022/23, it is expected to rise to 16.5 percent in FY2022/23 mainly due to the recent SSP depreciation, and gradually decline to single digits on the assumption that the restoration of prudent money growth proves lasting. (IMF Country Report, March 2023) 42 IMF Country Report No. 22/266, 2022 Article IV Consultation and Second Review under the Staff-Monitored Program, July 2022. 43 Joint World Bank-IMF Debt Sustainability Analysis, Republic of South Sudan, March 2021. Sep 06, 2023 Page 27 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) strategy may be knocked off course by the wider political climate or special interest groups. The World Bank and the BoSS team will work closely together to ensure that the project is aligned with broader reforms, as well as seek high-level political endorsement for any proposed financial sector reforms. 93. Institutional capacity for implementation and sustainability: Substantial. This will be the first time BoSS will implement a World Bank-financed project; however, BoSS is currently implementing an AfDB-funded project, which provides an opportunity to draw lessons. Mitigation measures that reduce this level of risk are the project’s own additional capacity-building efforts, which include significant resources that will be dedicated for institutional strengthening. A PIU will also be established to provide additional implementation capacity. Sustainability risk arises from the potential staff turnover that comes from investments in training. Particularly in a low-capacity context such as South Sudan, trained staff will become more competitive and could be courted away by other opportunities. To mitigate this risk of loss of expertise, the project also aims to address HR policies around BoSS’s staff recruitment, retention, and rotation and will implement a train-the-trainer approach to ensure the delivery of learning opportunities to more staff. 94. Fiduciary risks (Financial Management and Procurement): High. The project fiduciary risk is rated High given that BoSS has no experience with World Bank-financed projects and the overall institutional weakness across ministries, departments, and agencies. However, given BoSS’ experience in implementing the AfDB-funded project, this project will leverage the experience gained from AfDB’s Procurement and Financial Management Procedures, guidelines, and reporting requirements. To mitigate this risk, the project will be implemented through the PIU to be established in BoSS. The PIU will be equipped with necessary capacity for implementation, coordination, and monitoring of World Bank projects. On-the-job fiduciary training and the World Bank’s periodic reviews and implementation support will also help in mitigating the fiduciary risk. Sep 06, 2023 Page 28 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) VII. RESULTS FRAMEWORK AND MONITORING @#&OPS~Doctype~OPS^dynamics@padannexresultframework#doctemplate PDO Indicators by PDO Outcomes Baseline Closing Period To strengthen the institutional and supervisory capacity of the central bank and improve the efficie Risk-Based Supervision (RBS) implemented (Yes/No) Aug/2023 Aug/2027 No Yes BoSS staff benefiting from direct interventions to enhance learning and improve job performance (Percentage) Aug/2023 May/2028 0 75 Average days to complete business processes in the Core Banking System (Number) Aug/2023 May/2028 9 2 Intermediate Indicators by Components Baseline Closing Period Formulating Financial Sector Policies Financial sector development strategy and roadmap developed (Yes/No) Aug/2023 Sep/2024 No Yes Monitoring and data collection system established to collect sex-disaggregated financial sector data (Yes/No) Aug/2023 Sep/2028 No Yes Institutional Strengthening of the Central Bank BoSS banking supervision officers trained on risk-based supervision. (Number) Aug/2023 Dec/2026 0 48 Framework developed for better quality financial reporting by financial sector entities (Yes/No) Sep 06, 2023 Page 29 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) Aug/2023 Sep/2027 No Yes SSIBF operational (Yes/No) Aug/2023 Aug/2025 No Yes BoSS staff trained in SSIBF (Number) Aug/2023 Jun/2027 0 200 …of which women (Number) 0 64 Supporting the Development and Modernization of Key Infrastructure for the Financial Sector BoSS employees trained on CBS9 (Number) Aug/2023 Mar/2027 0 150 Software solution for FIU acquired (Yes/No) Aug/2023 Jun/2025 No Yes Increase in the suspicious transactions reports (STRs) received, analyzed, and disseminated by the FIU (Number) Aug/2023 Jun/2027 10 200 Project Management and Coordination Feedback received from a beneficiary satisfaction survey addressed and used to improve project interventions (Text) Aug/2023 Jun/2027 No survey Feedback addressed and used to improve project interventions Monitoring and Evaluation Plan: PDO Indicators by PDO Outcomes Indicator Name Definition/Description Frequency Data Methodology for Responsibility for Source Data Collection Data Collection Risk-Based Supervision (RBS) This indicator will monitor alignment of regulatory and Quarterly BoSS Regular Reporting BoSS implemented supervisory frameworks with the Basel Core Principles (BCP) for Banking Supervision. Sep 06, 2023 Page 30 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) BoSS staff benefiting from This indicator will monitor how recipients of the training Semiannually BoSS Results of third-party BoSS direct interventions to have integrated the knowledge gained into their core assessments enhance learning and functions and day-to-day operations. It will be monitored improve job performance via pre- and post- training assessments conducted by an independent third-party. Average days to complete This indicator will monitor the time it takes to complete key Semiannually BoSS Regular Reporting BoSS business processes in the operations/transactions of the core banking system Core Banking System (specifically the number of days it takes to process incoming international transfers via SWIFT and crediting it to the receiving bank’s account with BoSS) aiming to record time savings gained by implementing the upgraded CBS and replacing custom/manual, solutions. Monitoring and Evaluation Plan: Intermediate Results Indicators by Components Indicator Name Definition/Description Frequency Data Methodology for Responsibility for Source Data Collection Data Collection New financial sector This indicator captures the strategy endorsement and Quarterly BoSS Reporting by BoSS BoSS development strategy and adoption by a high-level Government body (cabinet level) roadmap developed Monitoring and data This indicator will monitor the progress in the development Quarterly BoSS Reporting by BoSS BoSS collection system established of a system to collect sex-disaggregated data across the to collect sex-disaggregated financial sector. financial sector data BoSS banking supervision This indicator will monitor the number of BoSS supervisory Semiannually BoSS The training BoSS officers trained on risk-based staff trained (including as trainers of trainers) on RBS. providers will keep supervision records of the staff that participate in and complete training courses and provide the records to BoSS. Framework developed for IFRS-based financial reporting framework developed Semiannually BoSS Reporting from BoSS BoSS better quality financial reporting by financial sector institutions Sep 06, 2023 Page 31 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) Indicator Name Definition/Description Frequency Data Methodology for Responsibility for Source Data Collection Data Collection SSIBF operational Charter and business plan delivered; management, staff, Semiannually BoSS Reporting from SSIBF BoSS and systems in place BoSS staff trained in SSIBF This indicator will monitor the total number of BoSS staff Continuous Records of The training BoSS that are trained under the established SSIBF. training providers will keep providers records of the staff that participate in and complete training courses and provide the records to BoSS. …of which women This indicator will monitor the total number of female BoSS Continuous Records of The training BoSS staff that are trained under the established SSIBF. training providers will keep providers records of the staff that participate in and complete training courses and provide to BoSS. BoSS employees trained on This indicator will monitor the number of BoSS staff that Semiannually BoSS Reporting from BoSS BoSS CBS9 have participated in both introductory and advanced user trainings on the CBS. Software solution for FIU This indicator will monitor progress in the acquisition and Annual FIU Reporting from FIU FIU acquired deployment of a software solution to collect and analyze financial information. Increase in the suspicious This indicator will monitor the cumulative increase in the Quarterly FIU Reporting from FIU FIU transactions reports (STRs) number of STRs received, analyzed, and disseminated by received, analyzed, and the FIU. disseminated by the FIU Sep 06, 2023 Page 32 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) ANNEX 1: Implementation Arrangements and Support Plan COUNTRY: Republic of South Sudan Strengthening South Sudan’s Financial Sector Strategy and Approach for Implementation Support 1. Implementation support will aim at ensuring the achievement of the project’s objectives. It will focus on the mitigation of technical, institutional, and fiduciary risks identified during project design. The implementation plan is tailored to the needs of the project and identifies resources to be deployed by the World Bank to meet its fiduciary obligation and help BoSS achieve the project objectives. 2. The implementation support team will include a task team leader (TTL), co-TTL, and relevant specialists. The TTLs and specialists responsible for each component are based at World Bank Group headquarters and in the Juba Office and the region (fiduciary, environmental, and social specialists). The team will conduct at least two implementation support missions per year, but mission frequency may be higher during the first year of the project, depending on the needs of the implementing agency. A field-based consultant will supplement headquarters’ missions by providing more regular support and follow-up. Technology (including videoconferences and e‐mail) will be used to provide advice and address implementation challenges between missions. 3. Project implementation missions by the World Bank team will cover the following aspects: • Management of client relationship. The World Bank team will coordinate and conduct project implementation support, ensuring regular communication with BoSS, deploying resources to address project implementation challenges, and monitoring the project’s progress toward the PDO. • Technical. Focusing on specific project components, technical experts will oversee the implementation of various activities, ensuring that these are aligned with the PDO and agreed annual work plans. Where applicable, technical experts will also provide inputs in the development of ToRs and technical specification for various activities, review outputs, and support BoSS in ensuring that M&E framework continuously meets the needs of the project. • Financial management. Implementation support will be anchored primarily on assisting the client in maintaining an efficient and reliable FM system capable of reporting on the uses of project funds. This objective will be achieved by offering the client a series of fiduciary training sessions; conducting periodic on-site visits to sample transactions aimed at ascertaining compliance and review audit reports; and, more importantly, following up on audit recommendations to ensure its implementation by management of the project. • Procurement. Implementation support will include: (a) providing continuous training and organization of procurement clinics to support the senior procurement specialist who will oversee procurement; (b) organizing and delivering a training session on the New Procurement Framework immediately after effectiveness, including hands‐on sessions to ensure the proper use of the borrower regulations; (c) intensifying training in contract management; and (d) ensuring that negative findings during post‐ procurement reviews are consolidated and appropriate support provided to ensure quality procurement in general. Sep 06, 2023 Page 33 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) Implementation Support Plan and Resource Requirements 4. Table 1.1 outlines the details of the implementation support, including timeline, focus, skills and resources needed, and the role of the partners. The costs of the implementation support will be covered through the annual World Bank supervision budget. Table 1.1. Implementation Support Plan Time Focus Skills Needed Resource Estimate First 12 months • Support initiation and implementation of See table 1.2 US$150,000 activities • Technical support for the launch of key activities, design of an M&E framework, and completion of baseline surveys/assessments and mappings • Initial support missions conducted (year 1 might require intensive supervision by the task team) • Review of progress made in year 1 13–48 months Support implementation of activities See table 1.2 US$150,000/ year Table 1.2. Skills Mix Required (per year) Skills Needed Number of Minimum Number Responsibility Staff Weeks of Trips per Year TTL 10 3–4 Overall supervision and implementation Co-TTL 10 3–4 support Banking Supervision 6 2 To support implementation of Specialist Subcomponent 2.1 Education Specialist 3 1 To support implementation of (Curriculum development) Subcomponent 2.2 CBS Specialist 3 1 To support implementation of Subcomponent 3.1 Financial Integrity Specialist 3 1 To support implementation of Subcomponent 3.2 M&E Specialist 2 0 To provide initial support/training to the M&E consultant hired by the project Fiduciary Specialists (FM and 6 Field based To support supervision focusing on FM Procurement and procurement aspects Environmental and Social 3 Field based To support supervision focusing on ESS Specialist(s) Operations Support 3 0 To provide overall operations support Sep 06, 2023 Page 34 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) ANNEX 2: Gender Analysis and Actions Gender Analysis Gender Action Gender Indicator Despite the provisions of South Given the low levels of employment in the Monitoring and data Sudan Transitional Constitution, financial sector, this project provides an collection system 2011 that accords women the opportunity for BoSS to create a pipeline of established to collect sex- right to participate equally with trained and confident female professionals disaggregated financial men in public life 44, there are still in the financial sector. It will focus on female sector data (Y/N) huge Gender Disparities in South staff that are ready for middle management Sudan, which are also reflected in roles (currently, out of 38 senior female employment in the formal management and Director/Deputy Director sector: Women and girls in South roles, only 7 are occupied by female staff), Sudan have fewer choices and as well as women that are currently in part opportunities over the course of of the sector workforce and are keen to their life compared to men and grow their technical knowledge. boys. Only 4 percent of girls (compared to 6 percent of boys) The project will achieve this Under sub- complete secondary school but component 1.1. Developing a Financial due to insecurity, risks of GBV and Sector Strategy and Roadmap and the conflict, many girls are forced subcomponent 2.2 Supporting the to abandon their schooling even Establishment of the South Sudan Institute earlier 45. This has direct impacts of Banking and Finance (SSIBF) through: on South Sudanese women’s ability to work. Although almost Given the paucity of sex-disaggregated data 75 percent of women in South in the financial sector, the project will Sudan are employed, almost 55 develop a framework for the collection and percent of women work in low- monitoring of sex-disaggregated data in the skill elementary level jobs financial sector by regulated financial compared to 24 percent of men. institutions, which will enable the design of Women are also less likely than any evidence-based policy interventions to men to be employed as waged close the gender gap. These interventions and salaried workers (38 percent will be reflected in the Financial Sector vs. 46 percent). 46 These challenges Development strategy and will include well- in employment are magnified by defined key performance indicators in the rigid and patriarchal norms that M&E framework to guide implementation. dictate women’s role in unpaid domestic duties further exclude Ensuring women’s participation in and disempower women. Such customized modular courses and training entrenched attitudes can be programs using gender-responsive training tackled by awareness and male methods and an additional focus on the allyship within formal sectors such development of “soft skills’ such as as the finance and banking confidence, personal development, and sectors. While specific information leadership skills. on women’s employment in the 44 Republic of South Sudan Transitional Constitution, 2011, Part two, (Bill of Rights) Section 16 (Rights of Women) 45 May 10, 2022. World Bank Project Appraisal Document: South Sudan Women’s Social and Economic Empowerment 46 July 2020. Getting it Right: Strengthening Gender Outcomes in South Sudan. World Bank Discussion Paper. Issue no. 2002. Sep 06, 2023 Page 35 of 36 The World Bank Strengthening South Sudan’s Financial Sector (P179278) financial sector is limited, BoSS The creation of a ‘Talent Pool’ where can play a role in establishing women who complete the package of some of these standards to trainings can be linked to encourage women to be hired, employment/mentorship opportunities in retained and to grow in leadership the financial sector. in the sector. There is currently no data on the size of the female A gender bias workshop to be developed workforce in the financial sector; and administered to all employees of BoSS however, the project intends to to enable the shift of norms and attitudes support a market assessment that and make the business case for hiring and can capture this baseline data. retaining women. Some of the lessons and findings of these activities as well as focus groups discussions with women professional groups will be incorporated into a Gender Strategy for BoSS that can serve to improve the work environment and hold the institution accountable for results. Sep 06, 2023 Page 36 of 36