RESTRICTED Report No. P-943 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PR ESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANQUE NATIONALE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA AND A PROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR AN AGRICULTURAL CREDIT PROJECT . May 18, 1971 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF T1lE PRESIDENT TO 1Tll EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANQUE NATIONALE DE TUNISIE WIT1I I1E GUARANTEE OF TH1E REPUBLIC OF TUNISIA AND A PROPOSED CREDIT TO TIIE REPUBLIC OF TUNISIA FOR AN AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan and a proposed credit totalling an amount in varlous currencies equivalent to $8.0 million for an agricultural credit project. The loan of $5.0 million would be made to Banque Nationale de Tunisie (BNT) withl the guarantee of the Republic of Tunisia. The credit of $3.0 million would be made to the Republic of Tunisia and its proceeds relent to BNT. PART I - HISTORICAL 2. The proposed loan and credit would be the Bank Group's second operation in Tunisia's agricultural sector. In 1967, the Bank and IDA financed the Cooperative Farm Project (Loan No. 484-TUN; Credit No. 99-TUN) wliiclh, after changes in Tunisia's agricultural policies affecting the character of the project, had to be revised. In late 1969, the Government asked for Bank Croup assistance in the private agricultural sector. This project was prepared with help from tlhe FAO/IBRD Cooperative Program and appraised in June/July 1970. 3. Negotiations for the proposed loan and credit were held in Washington from March 25 to 31, 1971. The Tunisian delegation was headed by Mr. Ghenima, President and Managing Director of BNT, and included Mr. M'rad, Ministry of Planning, Mr. Ben Khedlher, Ministry of Agriculture, Mr. Chatti, President and Managing Director of Societe Tunisienne d'Industrie Laitiere (STIL), Mr. Hamrda, BNT, and Mr. Badra from the Tunisian Embassy in Wasliington. 4. My Report and Recommendation dated May 17, 1971 on a proposed loan to Tunisia for a highway project (P-942) includes a summary state- ment of loans and credits to Tunisia at April 30, 1971 and conments on certain problems encountered on projects prcviously financed. - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN AND CREDIT BANK LOAN Borrower: Banque Nationale de Tunisie (BNT) Guarantor: Republic of Tunisia Purpose: To be used by BNT for making loans to help finance development of cereal and dairy farming, and of date-palm plantations. Amount: The equivalent in various currencies of $5.0 million. Amortization: In 15 years including a 5-year period of grace, through semi-annual installments beginning September 15, 1976 and ending March 15, 1986. Interest Rate: 7-1/4 percent per annum. Commitment Charge 3/4 of 1 percent per annum. Estimated Economic Return on the Project: 22 percent IDA CREDIT Borrower: Republic of Tunisia Beneficiary: Banque Nationale de Tunisie (BNT) Purpose: The same as for the Bank loan. Amount: The equivalent in various currencies of $3.0 million. Amortization: In 50 years including a 10-year period of grace, through semi-annual installments of 1/2 of 1 percent from September 15, 1981 through March 15, 1991 and 1-1/2 percent from September 15, 1991 through March 15, 2021. Service charge: 3/4 of 1 percent per annum. Relending terms: 15 years including a 5-year grace period, at an interest rate of 1 percent per annum. - 3 - PART III - TliE PROJECT 6. An appraisal report entitled "Agricultural Credit Project - Tunisia' (No. PA-79a) is attaclhed. 7. Measured in constant 1966 prices, the contrIhution of Tunisia's agricultural production to GDP has, despite a higli level of investmuent, dropped froîn a one-time hlglh in 1965 of almost $200 -million to some $150 million In 1970, or little more tlian tlie 1960 production level. lhis disappointing performance can be explained by a nuinber of reasons. Bad weather and the heavy floods in fall 1969 depressed production. Tihe pro- gram of organizing agricultural cooperatives incressingly led to inisalloc,i- tion of resources and reduced productivity. Private farmers benefitted little from public Investment programs, and when finally threatened wittl loss of their land to cooperatives, liquidated a large part of their live- stock and equipment. 8. Tlle Covernment is beginniiig to redefine agricultural policies. While this will take somie time, inuiiediate measures arc reqtiired to increase productivLty in order to contaili rising food imports. The Government lias decided to give inmmediate assistance to the modern agricultural sector wlîiclh would be most responsive, by introducing a program wbiclî is expected to lead to considerable import savings on cereal and dairy products and to yicld valuable foreign exchange from date exports. The project whose total cost amount to $15 million would be part of this prograni. 9. The major part of the project (61 percent) will be for the mecha- nization of grain farming in northern Tunisia. Credit facilities would be opened to farmers for purchasing wheel and crawler tractors, combines and related agricultural machincry. BNT would, simultaneously, provide from its owll sources short-term credit for financing inputs like high yielding seeds and fertilizers. 10. Fourteen percent of the funds available under the project would go into development of dairy farming in northern Tunisia and would help rebuild livestock herds wliicl farmers liquildatecd in 1969 after the transfor- inatiori of all arable land into cooperatives had been announced. Investment for thlis subproject would comprise the purchase of livestock, instal]ation of groundwater pumps for small-scale irrlgated fodder production, improvement and modernization of barns and mechanical equipnment. 11. About 22 percent of project funds would be earmarkedl for date plantations in southern Tunisia. New oases would be created in the desert on water fronm artesian aquifers. Tlhis would require drilling of bore-holes up to 600 meters deep, installation of pumps where underground pressure would not be sufficient, irrigation and drainage equipment, land and soil prepa- ration, planting of (late palms and wind breaks, and ancillary installations. This suh-project would be carried out by Societe Tunisienne de l'Industrie Laiticre (STIL), a company witlh no direct State participation which has already gained considerable experience in oasis development. - 4 - 12. The remainiing 3 percent of project funds would finance support- ing services to improve BNT's project appraisal section, the techulical staff of STIL's plantation) management and thie public dairy farnm extension service. 13. Banque Nationale de Tunisie (1NT) would be the Borrower of the $5 million Bank loan. The IDA credit of $3.0 million would be niade to tie Republic of Tunisia and re-lent to BNT oni the terms and conditions of the Bank loan except thal the interest rate would be 1 percent. 14. BNT is the second largest Tunisian commercial bank, and engages mainly in agricultural credit. T he Government holds 25 percent of its capital, other public bodies 60 percent, and 15 percent is held privately. The institution is well managed and its staff competent. A fairly high present financial engagement vis-a-vis Societe Tunisienne d'Industrie Laitiere (STIL) whicli will be tlie sub-borrower for the date-palm sub-proj- ect, has now been adequately secured and will be gradually reduced under a covenant of the Loan Agreement. 15. BNT would make project sub-loans at 8 percent annual interest. Grace and repayment periods would correspond to requirements of sub-projects and would be longest for the date-palm sub-project where the total repayment period would be 15 years. Interest rates for agricultural credit in Tunisia are presently around 4 percent. The increase to 8 percent for project sub-loans would mean an important chanige in the present low interest policy and would lead to better resource allocation. To moderate tie impact of the interest rate increase the Government would temporarily pay farmers a direct subsidy towards investment cost. Tihis subsidy would not exceed the equivalent of 2 percent annual interest so thal farmers would pay a minimum effective rate on sub-loans of 6 percent per annum. The same condition would apply if farniers eligible for project sub-loans would apply for loans from otlher fun-ds administered by BNT. In tic meantime, agricultural subsi- dies as well as the system of higlh agricultural taxation are expected to be reviewed as part of an overliaul of agricultural policies which the Governnient is now undertaking. 16. At the request of the Government, it was agreed that the Government re-lend the IDA funds to BNT at 1 percent. The average cost of Bank/IDA funds (4.9%) and of bNT's own resources (4%) would tlien result in a blended cost of 4.7% giving 13NT an overall margin on project operations of 3.3%. This margin would be adequate to cover project overheads, lncluding adminis- trative expenses ancd provisions for bad debts, and would help in establishing adequate reserves for BNT. 17. At present BNT's liquidity position is strained because of large advances made to cooperatives amounting to D 5.6 million, which have not yet been repaid. These loans had been granted under a Government guarantee andl the Government has now agreed to repay in five equal installments an anmount of D 2.6 million owed by cooperatives whiclh were dissolved in the wake of the 1969 policy changes. Already in the agreements amending Loan Agreement No. 484 and Credit Agreement No. 99 dated November 23, 1970, it - 5 - had accepted to reschedule D 3.0 million owed by cooperatives which were rmaintained on State lands after 1969. These debts will be repaid over five years partly by the Government and partly by these cooperatives. 18. Most of the goods and services needed for tlhe project would, not be suitable for bulk procurement, and would, therefore, be bought through existing commercial channels. Supplies arc adequate, prices competitive and servicing facilities available. Drilling contracts under the date- palm development sub-project would be awarded after international competi- tive bidding except for four impending operations to be completed before August 1971 where application of international bidding procedures would delay groundwater development and cause the loss of a planting season. 19. Financial rates of return on the project would be higlh. For the grain farming sub-project, they would vary from 21 to 25 percent according to farm sizes, reach 26 percent for the dairy farm sub-project and 14 percent for tie date development. The overall economic return on the project is estimated at 22 percent. 20. The Bank/IDA contribution would meet th1e foreign exchange expendi- ture anmounting to 53 percent of project cost. 17 percent would be provided by BNT, and farmers would contribute tlhe remaining 30 percent. Bank/IDA would disburse 75 percent on eachi sub-loan made by BNT which would correspond to the 53 percent overall foreign exchange component. PART IV - LEGAL INSTRUMENTS AND AUTIIORITY 21. The draft Loan Agreement between the Bank ancd Banque Nationale de Tunisie, the draft Guarantee Agreement between the Republic of Tunisia and the Bank, the draft Development Credit Agreement between the Republic of Tunisia and tlhe Association, the Report of the Committee provided for in Article III, Section 4 (iii) of the Bank's Articles of Agreement, the Re- commendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association, tlhe text of a Resolution ap- proving the proposed Loan and the text of a Resolution approving the pro- posed D)evelopment Credit are being distributed to tlhe Executive Directors separately. 22. The draft Loan, Guarantee and Devclopmenit Credit Agreements conform substantially to the pattern of agreements for agricultural credit projects. I would call your attention to the following features: (1) Botlh tlhe Loan and Development Credit Agreements have idenitical provisions witli respect to thie allocation of thle proceeds of tlhe total financing to bc providecl by tlhe Bank anid the Association for tlue Project (Sclhcdule 2 of botli Agreements); - 6 - (il) The Loarn will not be disbursed until tlie amnount of the Developiment Credit has beeii fully withdrawn or coinnitted (aforemneiitioned Sclhedule 2). 23. The Loan, Guarantee and Credit Agreements will be subject to rati- fication. 24. I amn satisfied that ttue proposed loan and credit would comnply witli the Articles of Agreement of the Bank and of the Association. PART V - THE ECONOMY 25. A brief statement on the Tunisian economy was included in my Report and Recommendation on a proposed loan to Tunisia referred to in paragraph 4 above. A basic data sheet is attached. PART VI - RECOMIENDATION 26. I recormmend that the Executive Directors approve the proposed loan and the credit. Robert S. McNamara President Attachments May 18, 1971 ANNEX TUNISIA BASIC DATA Area 164,000 square kilometers 63,380 square miles Population (mid-1970 estimate) 5.1 million Annual Rate of Growth (1965-1970) 2.8 percent Density 31.0 per km2 Gross Domestic Product (1970) 1/ D 565.1 million Per Capita (1970) 1/ US$ 211 Annual Rate of Groiwth (1965-1970) 2/ 0.6 percent per capita Industrial Origin of GDP (1966 prices) Annual Growth Percent Shares 1965-1970 (%) 2/ 1970 Agriculture -3.9 14.9 Mining, Water and Power 18.6 8.9 Manufacturing 5.1 15.3 Construction and Public Works 2.0 8.7 Transport and Communications 1.3 8.3 Services 2.7 25.5 Government Wages and Salaries 7.4 18.4 GDP at Factor Cost 3T. 100.0 Expenditure on GDP (Current Prices) Private Consumption 3.9 63.8 Public Consumption 10.6 19.9 Gross Investment 1.2 22.2 Exports on Goods and NFS 8.7 22.7 less: Imports of Goods and NFS 2.2 -28.6 Expenditure on GDP F5.7 10 Gross Domestic Savinge 9.8 16.3 Resource Gap as % of Investment (1970) 26.8 Money, Credit and Prices Annual Growth End-1970 1965-1970 (%) (D. million) Money Supply 9.0 198.8 Time and Saving Deposits 11.7 56.0 Bank Credit to Government, Net 2.9 91.1 Bank Credit to non-Government Sectors 12.5 271.6 Consumer Price Index (1962 100) 2.9 134.7 Wholesale Price Index (1962 100) 3.1 148.0 General Government Operations Annual Growth 1970 1965-1970 (%) (D. million) Current Revenue 9.8 196.1 Current Expenditure 11.2 173.8 Current surplus 22.3 Gross Fixed Capital Formation -0.7 45.7 Other Capital Expenditure 6.8 24.9 Overall Deficit 2.2 48.3 Domestic Financing, Net -22.0 3.0 External Financing, Net 6.6 45.3 Balance of Payments Exports of Goods and Services -10.2 171.4 Imports of Goods and Services 4.2 229.4 Current Account Deficit -58.o Net Public Capital 50.8 Net Private Capital 14.2 Change in Reserves -7.0 Net Foreign Assets (end-1970) -o.6 External Debt 1970 Public Debt outstanding at Yearts End ($ million) 760o0 Debt Service Ratio (%) 22 IMF Position (US$ million) December 31, 1970 Quota 35.0 Drawings outstanding 19.5 Bank/IDA Position (US$ million) Bank loans (less cancellations) 70.1 Repayments 2.3 Total loans outstanding b7 " IDA credits (less cancellations) 40.0 Total Bank/IIDA 107.8 of which disbursed 44.4 undisbursed 63.4 Rate of exchange 1 US$ = 0.525 Dinar (D) 1/ At current factor cost and at the official rate of exchange. 2/ 1970 compared to 3-year averages centered on 1965 to remove the effect of exceptionally good weather on agriculture in 1965. May 18, 1971