'&~. E.A.-26c RESTRICTED This report i. rest~.J~ted<·,ta··use within the Bank. INTERNATIONAL BA1~K FOR RECONSTRUCTION AND DEVELOPMENT SECOND LOAN ADMINISTRATION REPOR.T on THE LOAN TO THE GRA~TD DUCHY OF LUXEMBOURG of August Z8. 1953 October 13. 1953 uept\.:rtrnellt of Operations Europe, Africa and Australasia Conversion Rates for Luxembourg Currency U. S. $1 • 50 francs 1 franc • 2 U. S. cants 1,000,000 francs • U. S. $20,000 'I SEcam UlAN ADlrJl~I3l'RATlrn REroRr ON THE LOA.N TOT HE GRAI,m DUCHY OF LUXEMBOURG cmJERA.L 1. This report follows the first loan administration report an the Bank's loan to Luxembourg (No. Loan 97a dated J'Wle :30" 19.50)" and covers the past three years. . Because or its membership :ii\~ the Belgo-Lu.xembourg. E.conomic Union, the external financial position of Luxembourg can only be analyzed in conjunctia'l wtththat of Belgium. A paper anaqzing economic developments in the Belgo-Luxembourg Economic Union is being prepared b~ the International Monetary Fund in connection with its 1953 consultations with the- BIEU. As soon as it becomes available" it will be circulated to the Executive Directors to supplement this report. - 2e The $l2 million 4-1/4% loan of August 28" 1947 to the (lrand Duchy of Luxembourg (later reduce(i to $11,761,98) financed imports of steel mill and railway equipment. The domestic currency equivalent of the loan" result- ing from the sale of its proceeds to the Arbedsteel works and the Luxembourg Railways, cQVered part of government expenditure en postwar reconstruction. :3 • The Bank has sold $1,,877,000 or bonds evidencing the loan to invest~s :in the United states and other countri,s jot this $1,678,,000 was sold without recourse and $199,000 with the :a~'s guarantee. Some of the bonds were purchased by the Luxembourg Savings Bank. 4. All payments on the loan have been mad~ as due. AJJlortizaticm began on July lS" 1949 and an amount of $1,038,9831 has been repaid to date to the Bank and the bond holders. The final mat urity is July 15, 1972. RElATIONS WrrH LUXEMBOURG S. The Ban.k has maintained regular contact with the Luxembourg Mlnistry of Finance, which has ahlays readil¥ supplied information about. the loan. - 6. The political leadership has remained unchang~ during the period under r~vievr. Follovling the Parliamentary election of J\llle 1951, M. Dupong" the outgo:iJlg Prime Minister, formed a new Cab:inet composed of the Christian Social and Socialist Parties. 7. Q.1 May 13" 19$2, Luxembourg. ratified the European Coal and steel ComJlUllity Treaty ~ld on May 27, signed the Ew.'ope~ Defence C9IIl1JIUllity Treaty. The city or Lu.~embourg became the provisiooal seat of the High Authority of the Coal and Steel Community. DJTERNAL ECONOMIC S!rUATlotl 8. The irm and steel industry dominates the economic life of Luxembourg. It account~ for 80% of the value of the country-'s industrial production and employs about 60%. of the indQ.strial workers. Since the steel mdust,ry produces mainly for export" the econOJl\V of Luxembpurg is highly sensitive to foreign demand for steel. -2- 9. Production of steel rose from 2.S million tons to J.l million tons between 1950 and 1951, and declined slightly in 19,2. The downward trend continued in the first half of 1953 as keenercornpetition developed in the export markets • Total output ot goods and services expanded markedly in 1951 and remained fairly stable in 19S2. Full emnloyment continued and the industrial labor torce increased .from 35,000 to )8,000 during the period under revie". 10. In Luxembourg, which has no central bank of its ovm, the Government relie~ heavily on ~vings to finance any excess of budget expenditure over revenue. Time deposits continued to grovi between 1950 and earl.'V 1953, and the Gover~nt experienced no difficulty in l.ts finan- cial operations, despite 1a.rger ,expenditure on defense. An overall budget surplus was achieved in 1951, and in 1952 the deficit in the extraoI·dinary budget was covered 'P!i thout any increase in t.m national debt. In the light of budget estimates for 1953" hO\7ever, the deficit in the extraordlnary budget might nece~sitate substantial borrovring by the Government. 11. Because of the particula1 i'inancial position of the Luxembourrt 4 Goverlll'OOnt, a debt limitation clause, incorporated in the Loan Agreement, .. resLricted annual payments on outstanding lndebtedness to 2:;% of the ordinary budget revenue in the preceding £i seal ~Tear" In the years 1948-52 J the ratic) of debt service to ordip.ary revenue has remained at the level of 10-12%. Although this rq.tio has risen to 19% in 1953, owing t.o large debt repayments, it is still 'rrell be10",; the contractual ceiling. THE PROJECTS 12. By helpint!, to modernize Luxembourg's iron and steel industry, the Bank's loan clearly benefited t~ country as a whole. Purchases of locomotives and flat cars, made under the loan, increased the railvrays' capaci ty to exoort steel at a time of heavy demand. 13. The hot and cold rolling mills of the Acie~~es Reunies de Burbach-Eich-Dudela.nge (Arbed) at Dudelange, for whiCh the Bank has financed ~7.5 million Yforth of equipment, have been in operation sinoe Jan Ar;T 1951 and are at present process~Lng the entire production of the Dudela!itY:3 steel works.. The performance of ~chanical and electrical inst~llations gives full satisfaction. The output "If the m:tl1s is shcnm in the follm~r:tng table (in thous(.1nd tons): '\ hot rolled products cold rolled ~roducts --- " JE 1951 123 8l~ 1952 121 111 1953 1st 4 months - annual rate 117 126 14. The lpcomotives, auto rails , and freight cars, on ~::hich about $h.3 million was spentJ have rendered satisfactory service. Their acqui- si tion ena.bled the L~embourg Rail'Tfrays to replace a quantity of obsolete rolling stock, whose repair would have been too eXgensive, and to return a number of locomotives leased from the French National Railways. eWing to reequipment, to which the Bank's loan has contributed, the finareial position of the Luxembourg Rail,;rays has greatly improved since 1947 • • '1, i . "