Dominican Republic - Livestock Development Project

RESTRICTED F ILE COPY Report No. P-91 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DOMINICAN REPUBLIC FOR A LIVESTOCK DEVELOPMENT PROJECT April 12, 1971  INTERNATIONAL DEVELOPMENT ASSOCITATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DOMINICAN REPUBLIC FOR A LIVESTOCK DEVELOPI'IENT PROJECT 1. I submit the L'ollowing report and recommendation on a proposed credit in an amount in various currencies equivalent to US$5 million to the Dominican Republic. PART I - HISTORICAL 2. The proposed credit wrould be the second by IDA to the Dominican Republic, Because of its difficult balance of payments positLon, noted in Pa;'t V and discussed in the Economic Report, the Dominican Republic is not presently regarded as eligible for Bank loans except for projects of an enclave type, such as that made to Falconbridge Dominicana, C. por A. on December 10, 1969. 3, A Bank Group Economic Mission wihich visited the Dominican Republic in early 1969 identified the favorable possibilities for the accelerated development of livestock in the Dominican Republic and a Bank Group expert assisted in the preparation of the project during 1969, The Government requested financial assistance from the Association for it in April 1970. The project was appraised in September 1970 and negotiations were held on February 16 - 19 and March 18 - 19. The Government and the Central Bank were represented by Messrs. Diogenes Fernandez, Governor of the Central Bank, Juan Esteban Hernandez, Manager of the Central Bank and Juan 0. Velasquez, General Counsel of the Central Bank. 4. The following is a summary statement on the Bank loan and the IDA credit to the Dominican Republic as at MIarch 31, 1971. Loan or Amount (US$ million) Credit Year Borrower Purpose Bank IDA Undis- No. bursed 646-Do 1969 Falconbridge Dominicana Industry 25.0 - 12,7 C. por A. 235-DO 1971 Dominican Republic Education - 4.0 4.0 Total now held by Bank and IDA 25.o 14o Total undisbursed 12.3 .0 7  -2- Construction and disbursements under the Falconbridge loan are on schedule. The education credit -- not yet effective -- wTas approved by the Board on November 24, 1970 and signed on February 18, 1971. The signing was delayed pending agreement upon the appointment of the Project Director. 5. No other projects are at an advanced stage of consideration. Projects in the fields of irrigation, industrial credit, water supply, tourism and highways are now at various stages of preparation for later consideration by IDA. 6. There has been no IFC operation in the Dominican Republic to date. PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: The Dominican Republic. Amount: In various currencies equivalent to US$5 million. Beneficiaries: Participating ranchers Purpose: To provide financial and technical assistance for approximately 260 beef and dairy ranches to increase production through modern teciniques. Amortization: In 50 years, including a 10-year period of grace, through semi-annual installments of one-half of 1% from May 15, 1981 through November 15, 1990 and of 16 from May 15, 1991 through November 15, 2020. Service Charge: 3/4 of 1% per annum Relending Terms: Subloans to ranchers would be for seven to ten years, with grace periods of two to four years, at a 9% per annum interest rate. Economic Rate of Return: 21 percent (cf. paragraph 12 below).  -3- PART III - THE PROJECT 8. The appraisal report entitled "Livestock Development Project Dominican Republic" (PA-71a) is attached. 9. The mainstay of the Dominican Republic is agriculture, which now accounts for 25% of GDP, at least 60% of total employment and 90% of the value of commodity exports. The country is particularly well suited to the development of livestock. It is estimated that from one-third to one-half of its available arable land is better suited to grazing and livestock production than to anything else and a favorable export market exists in the U.S., particularly in nearby Puerto Rico, and in other Caribbean islands. Its development has been hampered, however, by inadequate technology and a shortage of development credit even though financing had been made available to small ranchers by IDB through the Agricultural Bank. The prospects for further growth of beef cattle are favorable for both the domestic market and export and an expansion of dairying is of high priority to meet domestic needs. 10. The project consists of the development of 260 beef ranches and dairy farms in the Eastern, Northern and Cibao regions through credit and technical services. Project funds would be channeled by the Central Bank's Department of International Agreements (DIA) to ranchers through financial intermediaries including commercial banks and the Agricultural Bank. The alternative of making the IDA Credit available directly and exclusively through the Agricultural Bank was judged inappropriate because of the importance of developing additional channels of lending to agriculture. On-ranch development subloans would be granted for land clearing and preparation, pasture establish- ment and renovation, fencing, watering points, cattle handling facilities, machinery and equipment and purchase of cattle. Participa- ting credit institutions would *-fitani& shbrt-term loans for working capital requirements wihile rediscounting with DIA 100% of on-ranch development loans. The contribution of IDA, the Central Bank, participa- ting credit institutions and ranchers would be 55i%%, %15, 13% and 17% respectively. 11. Ranchers, who are likely to be commercial operators, will receive loans from participating financial institutions at 9 percent, the same interest rate as is charged to industrial borrowers by DIA. These loans wrill be discounted at 5 percent by the Central Bank. The Central Bank will receive funds from the Government out of the proceeds of IDA's credit, paying interest to the Government at 3.5 pcrtent and repaying the principal on the same schedule as that of IDA's credit. The Central Bank would use the difference between the repayments it received from the participating banks and the repayments it had to make to the Government for further lending to agriculture. The IDB has already made a loan for small ranchers and is contemplating a further similar loan. To avoid confusion the Government intends to restrict the use of the proposed credit to ranch development loans of more than U&S` 10,000.  -4- 12. The economic rate of return of the project is estimated at 2lpi. In addition, there would be substantial non-quantifiable benefits, particularly the introduction of superior livestock production techniques, the building of local expertise and encouraging credit institutions to become familiar with livestock development financing. 13. The cost of the project is estimated at approximately US$9 million (including working capital). The proposed credit of US45.o million would finance the foreign exchange component of about US$2.4 million and US$2.6 million of local costs. This is justified because the fulfillment of the country's development program, modest as it is, will require funds in excess of the domestic savings and public and private capital that can be expected from external sources. These funds cannot reasonably be provided to the country in adequate amounts if the foreign exchange component of development projects alone were to be financed. In financing this project IDA should also exert a beneficial influence on the country's development since the project is a key element in the Dominican strategy to diversify agricultural output and strengthen the structure of the balance of payments. 14. Goods required for the project Twould be procured through existing commercial channels. Individual contracts would be small and numerous. There are sufficiently competitive outlets for both local and imported goods needed for the project, and duties and taxes on them are low. PART IV - LEGAL INSTRTIENTS AND AUTHORITY 15. The draft Development Credit Agreement between the Dominican Republic and the Association and the draft Project Agreement between the Central Bank and the Association and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Artic'les of Agreement and the text of a Resolution approving the proposed credit are being distributed to the Executive Directors separately. The draft Agreements contain covenants normally included in agreements for agricultural credit projects. A Subsidiary Loan Agreement, satisfactory to the Association, between the Government and the Central Bank will be executed on the same date as the Development Credit Agreement and the Project Agreement, and will include an amortization schedule on the same terms as provided for the Government under the Development Credit Agreement. The relending to ranchers through participating banks will be governed by the terms of the Project Agreement and of a Project Administration Agreement, to be entered between the Cential Bank and each participating credit institution (Section 2.04 of the Draft Project Agreement).  -5- PART V - THE ECO,1OMY 16. A new economic report, "Current Economic Position and Prospects of the Dominican. Republic" (CA-8) is boing distributud separately. A basic data sheet is annexed. The report notes the uncertainty surrounding the country's balance of payments prospects, which hinge upon continued access at favorable terms to the U.S. Sugar market, Even on the basis of optimistic assumptions, the Republic's future capacity to service external debt on conventional terms is judged to be severely limited, The report also notes the Government's successful efforts in carrying out effective fiscal and monetary policies with the result that public investment has expanded significantly, prices have been fairly stable and balance of payments surpluses have been recorded in the past few years. However, in view of the basic balance of payments weakness, and an international reserve position which as of the end of 1970 wHas negative to the extent of US$10.6 million, the Dominican Republic is properly following a general policy of obtaining external loans on con- cessional terms whenever possible. PART VI - COIMPLIAINqCE WITH ARTICLES OF AC-REEMENT 17. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VIIr - RECOIfENDATION 18. I recommend that the Executive Directors approve the proposed credit. Attachment Robert S. McNamara President April 1.2, 1971 Washington, D.C.  ANNEX BASIC DATA Area: 48,442 km Population: (1970, midyear) 4.1 million Rate of growth (1960:-70) 3.0% per year Density: 84 per km2 Gross National Product at Factor Cost Real Rate of growth 1964 1970 1964-1970 Total (current US$ million) 807.3 1,187.6 3.5% p.a. Per capita (current US-$) 236 292 0.5% p.a Industrial Origin of GDP (% distri- bution at current ma-ket prices) Real Rate of growth 1964 1970 1964-1970 Agriculture 24.1 22.4 2.4% p.a, Industry, mining, electricity 18M6 20.2 3.4% p.a. Construction 4.4 5.4 6.o% p.a. Transport and communication 6.o 8.2 4.9% p.a. Commerce and finance 19,3 18.5 3.6% p.a, Government, services and housing 27.7 25,3 1.1% p.a. Expenditure on GDP (% share at current market prices) 1964 1970 Private consumption 73.4 75.0 Public consumption 15.0 11.9 Gross Fixed Investment 15.5 19.4 Changes in Stocks 1.8 1.3 Resource Gap 5.8 7.6 Domestic Savings 11.5 13.1 Net Factor Income - 1.7 - 1.9 National Savings 9.8 11.2 Public Sector Accounts (RD$ million) 1964 1970 Central Government Current Revenue. 186.2 233.5 Central Government Current Expendi- ture 151.9 153.3 Central Government Current Surplus 314.3 80.2 Other Non-financial Public Sector Current Surplus - 20,2 - 6.o Total Public Sector Current Surplus 14.1 74.2 Fixed Investment 30.9 88.9  Money Credit and Prices (RD$ million) Growth Rate 1964 1970 19661-l970 Money 117.1 165.7 6.0% p.a. Quasi-Money 51.2 148.6 19.4% p.a. GDP Deflator - - 0.9% p.a. Wholesale Price Index (Santo Domingo) - - 1.2% p.a. Retail Price Index (Santo Domingo) - - 0.6% p.a. Cost of Living Index (Santo Domingo) - - 0.2% p.a. Balance of Payments (US$ million) 1964 1970 Exports (FOB) 179.4 217.0 Imports (FOB) 202X4 270.5 Net Services -57.4 - 75,8 Balance -80,4 -129.3 Concentration of Commodity Exports T/7 of Total Merchandise Exports) 1964 1969 Sugar and By-Products 53.3 53.7 Cocoa and By-Products 9.1 10.9 Coffee 17.0 11.6 Tobacco and By-Products 8.3 6.9 Bauxite 5.0 7.9 Otlher 7.3 9.0 External Debt and Reserves (US$ million) December 31 1964 1970 Public Debt Outstanding (including Undisbursed) 134.4 281,6 Foreign Exchange Reserves - 38.6 - 10.6 Debt Service 1966 1970 Debt Service (US$ millions) 20.2 12.9 Debt Service Ratio (% of total exports net of factor payments) 20.6 5.4 Bank/IDA Operations (US$ millions) December 31 1970 Total Loans; Bank $25.0 Repayments - Total Loans Outstanding $25.0 DIF Position (US$ million) December 31 December 31 1964 1970 Quota 25.0 43.0 Drawings Outstanding 15.0 17.3 SDR's -. 5,4 Use of SDR's - 5.4 Credit Tranche 16.2 39.8