Afghanistan - Livestock Development Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1173a-AF FIL E L-d REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF AFGHANISTAN FOR THE LIVESTOCK CREDIT PROJECT March 8, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.   INTERNATIONAL DEVELOPME;NT ASSOCIATION REPORT AND RECOiDENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF AFGHANISTAN FOR A LIVESTOCK DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Afghanistan for the equivalent of US$ 9.0 million on standard IDA terms to help finance a livestock development project in the Herat region. The project would include farm development for raising sheep, provision of a range improvement center, construction of a slaughterhouse, some minor road improvement, and technical assistance for each of these components. The equivalent of US$ 5.6 million of the proposed development credit would be onlent to the Agricultural Development Bank of Afghanistan at 4h percent for 15 years including 5 years grace, to be relent for the purposes of the project. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Afghanistan" (SA-29a) dated February 1, 1972 was distributed to the Executive Directors in February 1972 (R72-39 and R72-42). More recent information on the economy was obtained by an updating mission to Afghanistan in September 1972 and is reflected in the following paragraphs. Country data are provided in Annex I. 3. Afghanistan has been a consitutional monarchy since 1930 and adopted a new constitution in 1964. The new constitution expanded the role of parliament, and Afghanistan is now.in the process of developing an effective working relationship between the legislative and executive branches of government. In December 1972, after an uncertain two and one half month period following the resignation of the former Government, a new Government took office under H. E. Mohammed Moussa Shafiq as Prime Minister. Before appointment of the new Government and while the previous Government remained in office at the request of the King, the Parliament acted on a number of long pending items. These included approval of the national budget and ratification of a number of external loans, one of which was the IDA credit for the Khanabad Irrigation Project. 4. With some 15 million inhabitants, Afghanistan is the most populous landlocked country in the world, and its estimated per capita income of about $80 makes it one of the poorest. The country is also one of the most populous of the 25 countries designated as "least developed" by the United Nations. Agriculture predominates in the national economy (contributing  - 2 - over 50 percent to GDP) but is highly dependent upon the vagaries of the country's continental climate. Although efforts are being made to develop gas production, marlufacturing and tourism, the economy remains essentially agricultural and future growth will depend largely upon progress in this sector. The economy's problems were aggravated recently by two years of severe drought in 1970 and 1971, causing agricultural output to decline by 15 percent in 1970 and by a further 8 percent in 1971. The two successive drought years were followed by a severe winter in 1971/72. Because of limited data it is difficult to measure the outcome of these developments on national income figures. Preliminary estimates, however, indicate a decline in per capita income during these two years, and a rather slow recovery, despite improved weather conditions in 1972. 5. The Government's. ability to mobilize domestic resources for development is also severely limited. Total government revenues in 1971/72 (fiscal year ending in March) were only $73 million, or about $5 per capita. Agriculture and livestock, the main sources of wealth and income, are not taxed directly. The livestock tax was suspended in 1966, and the land tax amounts to less than 2 percent of total tax revenues. Moreover, it will be difficult to raise additional revenues from livestock owners and farmers until they begin to receive more direct benefit from development programs than has been true in the past. 6. Despite its limited domest^c fiscal resources, Afghanistan in the early 1950's ended a long period of isolation from the outside world and embarked upon an ambitious investment program amounting annually to between 10 and 15 percent of the country's national income. Supported by loans and grants from bilateral donors, the program was directed at establishing the basic economic and social infrastructure of a modern society -- roads, power plants, major reclamation and irrigation schemes, hospitals, schools and urban housing projects. Over the past 22 years, the Government has contracted foreign loans amounting to some $820 million (including $134 million undisbursed), while an additional $560 million was received in grants. Partly because many of these infrastructure investments were characterized by long gestation periods, and had little immediate beneficial effect on the balance of payments, they have not given rise to a growth in debt servicing capacity equal to the growth in obligations incurred. There is now an increasing awareness in Afghanistan of the need to re-orient the development strategy towards quicker yielding projects and towards better utilization of the capacities created by two decades of infrastructure investment. 7. As a consequence of large scale foreign borrowing, Afghanistan faces an increasingly serious debt service problem. Project aid disburse- ments declined sharply from a peak of $75 million per annum in 1966/67 to less than $30 million in 1971/72. During the same period annual debt service payments have increased from $7 million to $28 million, with a  resulting decline in net capital transfers (excluding commodity aid, mainly food) from $68 million in 1966/67 to $2 million in 1971/72. Over 20 percent of the Government's revenues were budgeted for debt service in 1971/72, and debt service is estimated to have absorbed about 29 percent of export earnings in 1972/73. Afghanistan has recently concluded an agreement with the USSR to reschedule $30 million of $135 million in debt service obligations due on existing debt during the next five years, and repayment of the remaining $105 million is expected to be linked closely with the export of natural gas. Obligations due to Western creditors during the same period are about $64 million, and the Government has asked these creditors to consider rescheduling a portion of the payments. Without such rescheduling, and including additional servicing of newly contracted debt, Afghanistan's debt service payments during the next five years are projected at an average of $39 million annually compared with exports (including invisibles) averaging about $110 million each year during the same period. Because of its poverty and debt burden, the country does not have the capacity for servicing additional debt on conventional terms. In light of recent efforts to improve economic performance, however, Afghanistan is eligible for and is expected to make good use of additional IDA financing. 8. The Government has requested the Bank to act as Executing Agency for a UNDP-funded Development Advisory Group project, and this proposal is now being considered by the Bank and UNDP. The proposed Advisory Group would assist the Government in formulating both national economic strategy and specific sectoral policies, programs and projects. In a related development, the Government has also announced its intention of introducing changes in the development machinery of the country and of strengthening the role of the Prime Ministry in the entire economic process. These two efforts would do much to overcome weaknesses in Afghanistan's development machinery. Partly because earlier efforts in development assistance and project implementation were carried out largely by teams provided by bilateral donors, they had little training value or institution-building impact. The proposed advisory group would consist of a nucleus of three or four full-time advisors working closely with counterparts in the Government; this nucleus would be supplemented by specialists on short-term assignments to assist Afghan agencies with particular development proposals. PART II - BANK GROUP OPERATIONS IN AFGHANISTAN 9. The Bank Group has made four development credits totalling US$15.0 million (net of cancellations) to Afghanistan. These credits were for education in 1964 (only $0.3 million disbursed and recently refunded under the Khanabad Irrigation Credit), highway maintenance ($5.0 million) in 1969, agricultural credit ($5.0 million)in 1970, and Khanabad irrigation  - 4- ($5.0 million) in 1971. Anmex II contains a summary statement of IDA credits to Afghanistan as of February 28,1973, and notes on the execution of the on-going projects, with particular reference to the problems imposed by the recent drought. There have been no IFC investments in Afghanistan, but a small equity investment in the recently estab ished Industrial Development Bank of Afghanistan is being considered.- 10. Afghanistan became a member of the Bank in 1955, but because of its economic structure and poverty, financing on standard Bank terms was deemed inappropriate. In 1961, Afghanistan joined IDA and a $3.5 million credit for education was approved in 1964; but the project ran into various difficulties, and, by mutual agreement between the Government and IDA, the major portion of the credit was cancelled in 1969. Thereafter, staff time and effort (including that of a resident mission established in Kabul in 1969) have been devoted largely to projects to improve agricultural and industrial production as well as highway maintenance, air transportation, and tourism. 11. The Bank Group's lending strategy recognizes that special efforts will be required to help Afghanistan in view of its landlocked position, its extreme poverty, its shortage of physical resources and trained manpower, its political situation, and its difficult economic problems. Considerable assistance wilL, therefore, be required in preparing and implementing projects. The IDA staff aims to finance two or three projects each year which, in addition to their developmental and insti- tution-building impact, would be geared to increasing production and to alleviating the critical foreign exchange shortage. In order to ensure sound project implementation, institutional development, and training of Afghan counterparts, technical assistance will continue to be an integral feature of most projects. 12. An aviation communications project and a project for fostering industrial investments through the new Industrial Development Bank are likely to be ready for consideration of the Executive Directors before June 30, 1973. A tourism development project -- for which the detailed design and engineering work will be initiated shortly with UNDP financing and the Bank as executing agent -- is expected to be ready in FY74. A second road maintenance project is likely to be appraised in the Spring of 1973, and to be ready fo:-. presentation to the Executive Directors in 4Y7h. Preparatory work has also been initiated on other agricultural and public utilities projects. During FY74 IDA intends to undertake a manpower review in conjunction -with an education reconnaissance mission to explore the possibility of future assistance for education. 1/ IDBA was established March 3.  - 5 - PART III - THE SECTOR AND THE PROJECT The Agricultural Sector 13. Agriculture is the key sector in theeconomy of Afghanistan. Over 50 percent of the population depends upon it for their livelihood, and it accounts for over 50 percent of GDP and 70 percent of exports. Afghanistan's harsh climate, rugged topography, and poor natural resource endowment impose serious obstacles to development of this sector. The continental climate, with its hot, dry summers and cold winters, limits the growing season and necessitates extensive irrigation. Rugged mountains and deserts account for about 80 percent of Afghanistan's 635,000 square kilometers, and much of the remaining land is unsuitable for agriculture without irrigation. About half of the roughly 5 million hectares currently under cultivation must be irrigated. Traditional farmers rely upon either seasonal diversion of river water or ancient, underground canal systems, and many farmers leave up to half of their land fallow for lack of an assured water supply. Afghanistan's dependence upon inadequate irrigation systems makes its agriculture vulnerable to drought such as the one experienced in 1970 and 1971, during which production in the sector declined by over 20 percent. Such periods followed by characteristically cold winters cause particular hardships for the predominantly rural population. The few large-scale irrigation projects undertaken in Afghanistan have required substantial investment and long gestation periods, and they are only now beginning to yield results. 14. Wheat is Afghanistan's staple crop and is grown on up to 90 percent of the cultivated land. The country normally produces about 3 million tons and imports another 100,000 to 200,000 tons of wheat each year. During the recent drought, however, production declined appreciably and wheat imports exceeded 400,000 in both 1970 and 1971. Other crops, including barley, rice, cotton, sugar beet, and assorted fruits, nuts and vegetables, are produced in much smaller quantities. Dried fruits and nuts account for 3h percent of agricultural exports, and wool and skins (including karakul -- Persian lamb -- pelts) for another 32 percent. 15. As is the case in many developing countries, the agricultural sector in Afghanistan faces a number of institutional constraints which the Government is attempting to relieve. These include insufficient but improving credit facilities, inadequate extension services, and limited supply and distribution of seeds, fertilizers and other essential farm inputs. The task of improving credit services was begun in 1969 with the reorganization and strengthening of the Agricultural Development Bank of Afghanistan (AgBank) in conjunction with the IDA Agricultural Credit Project. With the assistance of the United States Agency for International Development, a government fertilizer corporation has also been established recently to improve the supply and distribution of fertilizers. Two new institutions, dealing with national livestock policy and project execution, would be established in conjunction with the proposed project (see paragraphs 25 and 26). The Government is also developing pricing and marketing policies, particularly for cotton, pelts and meat, aimed at stimulating agricultural output.  -6- The Livestock Sub-Sector 15. About two-thirds of Afghanistan's population is engaged in some form of livestock raising, and the livestock sub-sector contributes 10 percent of GDP and 24 percent of exports. Sheep dominate the sub-sector with a national herd estimated about 22 million animals before losses during the recent drought (see paragraph 18); cattle and goats account for only 3.7 and 3.2 million animals respectively. Mutton and wool sheep predominate in the regions south of the Hindu Kush divide, and karakul (Persian lamb) sheep are raised in the north. 17. Despite its importance in both the agricultural sector and the national economy, the livestock sub-sector faces a nunber of serious problems. While karakul producers have been doing reasonably well under the leadership of the Karakul Institute (a non-profit organization), herdsmen and farmers who raise meat and wool sheep have lacked similar guidance and support. The problems facing these producers include insufficient water supp'Ly, overgrazed pastures, widespread disease and malnutrition (especially in winter and Spring), primitive animal husbandry and breeding technicues, and inadequate market outlets. The proposed project would address these problems in the important Herat region which contains about one-fourth of the national sheep herd. 18. The problems of the livestock sub-sector were particularly evildent during the recent drought. Low prices and the traditional practice of retaining sheep as a store of wealth against hard times has led to serious over-grazing of Afghanistan's range land. As a result, sheep producers live with a precarious balance between water and feed supply on the one hand and the size of the sheep herd on the other. Their vulnerability was demonstrated during the drought of 1970 and 1971, and in the severe winter of 1971/72 which followed, when flock losses estimated at 40 to 70 percent (compared with normal losses of 20 to 30 percent) were reported in some areas. Many farmers, faced with the prospect of a severe winter without sufficient feed, slaughtered an excessive number of animals, particularly in the summer and fall of 1971. In August 1971, exports of live animals and meat were legalized in an attempt to recoup somethinrg from this difficult situation and to take advantage of much higher prices of meat prevailing in neighboring countries. Fortunately, the regenerative capabilities of the remaining sheep are such that the losses can be replaced within a few years. The challenge in the livestock sub-sector is, then, to reduce the vulnera- bility of herdsmen and farmers to similar disasters in the future, and to provide them with credit, other inputs, technical guidance and marketing outlets which would con-tribute to the growth of this critical sub-sector of the economy.  -7- Project History 19. The proposed project was identified by an FAQ/IDA mission and prepared by the FAO/IBRD Cooperative Program. Appraisal took place in June 1972. Negotiations were held in Washington between February 2 and February 14, 1973. The Afghan delegation, headed by His Royal Highness Sultan Mahmoud Ghazi, included Mr. Ali A. Khoram, Deputy Minister of Planning, Mr. Abdul Samad Khaliki, representing the Ministry of Finance, Mr. Habib Seraj of the Ministry of Agriculture, and Messrs. Abdul Salim Saidi and Joseph Duester of the AgBank. The Project 20. The proposed project consists of the development of (i) about 1,200 sheep fattening and breeding farms in Herat Province, (ii) the establishment of an Experimental Range Improvement Center, (iii) the upgrading of about 68 Kms of access roads, (iv) the construction of a slaughterhouse in Herat which would purchase the output of project farms and export meat to neighboring countries and (v) provision of technical assistance to assure efficient implementation of each of the project elements. The project would be located in Herat Province to take advantage of the region's sizeable traditional sheep herd and its proximity to the rapidly growing Iranian market for mutton and lamb. Farmers in the area are already growing some alfalfa for fattening sheep, but they are constrained by insufficient water, credit, seeds, fertilizers, slaughtering facilities, and market organization. Annex III presents the major features of the proposed project. The Appraisal Report (Report No. 56AF) is being circulated separately to the Executive Directors. 21. As part of the proposed project, credit would be extended to about 1,200 sheep farmers who would grow alfalfa for fattening and breeding sheep. Although there are a few large landowners in the project area, the main recipients of credit would be farmers with relatively modest holdings on farms averaging about 13 hectares each. Farm credits would include funds for groundwater development (dug-wells, pump-sets and distribution systems), establishment of alfalfa for sheep fattening, and the purchase of draft animals and breeding stock. With a more assured water supply, project farmers could cultivate their entire holdings throughout the growing season instead of leaving up to half of their land fallow for lack of water as is now the practice. The project would also provide for the establishment of a 174 hectare demonstration and sheep fattening farm belonging to the Herat Livestock Development Company (HLDC). This farm would be used to demonstrate alfalfa production methods to project farmers as well as to produce feed for use in breeding, fattening and holding sheep for slaughtering.  -8- 22. The project woula also include a slaughterhouse to be owned and operated by HLDC. At full, double-shift capacity, the slaughterhouse would process 3000 sheep daily. Fattened sheep would be purchased from project farmers, and fresh, chilled meat would be exported to Iran and other neighboring countries. The project would also include the establishment of a Technical Service Unit to provide extension services to project farmers and an Experimental Range Improvement Center to develop and demonstrate improved range management practices which could subsequently be extended to cover a wider area. Project Costs 23. The estimated total cost of the proposed project is $11.0 million, of which the foreign exchange component is about $6.7 million, or roughly 61 percent. Farm development amounts to $2.7 million of total project costs. Slaughterhouse design, construction and equipment including contingencies are expected to cost $4.2 million, exclusive of transport equipment, working capital, engineering and supervision which amount to another $1.3 million. The Experimental Range Improvement Center is estimated to cost $0.4 million, technical services including international experts about $2.3 million and some minor road improvements $0.1 million. The proposed credit of $9.0 million would finance 82 percent of project costs including $2.3 million or 51 percent of local costs, with participating farmers, AgBank and the Government financing the remaining $2.0 million in local costs. Organization and Arrangem,3nts for Charnelling Project Funds 24. The project would rely on the AgBank as an onlending channel for IDA funds. The AgBark was reorganized and its management substantially improved with the assistance of international management experts as part of the IDA agricultural credit project in 1969 (see Annex II ). After evaluating the financial and technical aspects of farm development plans, AgBank would onlend project fulds for farm development to farmers participating in the project. It would also serve as the administrative channel for IDA funds to be used by HLDC. 25. HLDC, which is being established with Bank Group assistance as a joint stock company, under the Commercial Code, would execute all except the agricultural credit portion of the project. A Bank Group lawyer visited Afghanistan in December 1972 to assist in establishing HLDC, and the Government has agreed in principle with the major provisions to be included in the Articles of Incorporation for the company. HLDC is expected to be incorporated within a few weeks and, in any event, before signing of the credit. The Government is also taking steps to acquire land for HLDC's slaughterhouse and farm. With the assistance of nine internationally recruited experts, HLDC would (a) establish and operate the project slaughterhouse (b) develop export markets for mutton and lamb fromn the project, (c) estaLblish and operate the demonstration farm, and  - 9 - (d) establish and operate on behalf of the Government the Technical Service Unit and the Experimental Range Improvement Center. The international experts for each of these activities would provide their counterparts with practical training which would be supplemented by a number of fellowships for study abroad. HTDC would have a Board of Directors which is expected to delegate most operational responsibility to a management board composed of the principal officers of the company. Although it will be incorporated as a wholly Government-owned company, HLDC will offer its share at par to the general public with the objective of ultimately extending private holdings in HLDC to about 49 percent. 26. The Government also intends to establish a National Livestock Development Commission (NLDC) in conjunction with the project. As distinct from the project entity, NLDC would consist of several prominent members of the Government and would recommend national policies for the livestock sub-sector to the Government. In this respect, NLDC is expected to perform for the meat industry some of the functions which the Karakul Institute has undertaken on behalf of the karakul industry. 27. The Government would onlend $5.6 million of the proposed credit to AgBank at 4