France - Credit National Loan Project

IVI STRICTLY Document io. X C 0NdIDENTIAL PECONWEIATIONS OF THE PRESIDETT TO TIM EXECUTIV2 DIRECTORS OF TE BAIKI INTER1ATIONA.Lw BANK FOR RECONSTRUCTION AND DEVELOPME1T Recommendations of the President to the Dxecutive Directors on the Application of October8, 1946 by the Minister of Finance of the Republic of France for a loan of $500 million, to be granted to the Credit Uational pour faciliter la Reparation des Dommages causes par la Guerre, and to be guarantee4 by the Re-oblic of Fr,ance. I, RECOMM4ENDATIONTS The request for a loan of $500 million, submitted by the French Minister of Finance, has been carefully examined by the President of the Bank and by his staff with reference to the Bank's Articles of Agreement, to the needs of 7rance and to the funds at the Bankis disposal. The President recommends an immediate loan of $250 million, to be granted to the Credit Ntational pour faciliter la Reparation des Dommages causes par la Guerre, and to be guaranteed by the Republic of France. The loan is to be for a period of 30 years; it is to carry interest at the rate of 34 per cent; interest is to be charged from the date of dis- bursement and a commitment commission of 1F per cent is to be charged on the unditbursed portion; also, in accordance with Section 4(a) of Article IV of the Articles of Agreement, a commission of one per cent, is to be charged on the outstanding portion of the loan. The terms of repayment provide for the suispension of amortisation for the first five years, a low rate of repayment during the next nine and a half years and a higher one during the last fifCteen and a half years of the currency of the loaA. The proceeds of the loan are to be applied to the financing of the purchase agd import of equipment and materials that are Document 71o, X req.ired and will be uased exclusively for productive purposes in the carrying out Pf FPranQels program for the reconstruction and modernisation of its economy. The detailed terms and conditions on which it is proposed that the 3ank grant the loan are set out in the draft Loan Agreement dated 1May 6, 1947, between the Bank and the Credit National, and in the draft Guarantee Agreement dated May 6, 1947, between the Republic of France and the Bank. In recommending an immediate loan of $250 million, instead of the full amount requested, the President has been guided, first by the limited resources presently at the disposal of the Bank and by the requests of other applicants, and, secondly, by the responsibility entrusted to the Bank under Section 4(v) of Article III to act prudently both in the interests of the member that guarantees the loan and of the members as a whole. The President has stated to the French authorities that although the Bank is not now pre- pared to make any commitmients with regard to a further loan, it will be pre- pared to consider an additional application for a further loan at a later stage, though not bef6re Octoberl, 1947 in the light of the funds which the Bank shall then have available for lending and of the progress then achieved by France in carrying out its economic and financial program. Accordingly the President formally recommends to the Board of Executive Directors the approval of a loan of $250 million to the Cr6dit Fa- tional pour faciliter la Reparation des dommages causes par la Guerre, in the form and on the conditions substantially as specified in the Draft Loan Agree- ment, the draft Guarantee Agreement and accompanying documents submitted here- with, (Appendix "131). II. 00MPLIANCE 1ITH TEE CODITIOUS OF LENDIBG The loan recommended complies with Section 4 of Article III of the Articles of Agreement, setting out the conditions on which the Bank may Document Wo. X guarantee or make loans. (i) Although the Republic of France is not itself the 'borrower, it fully gappe.ntees the repayment of the principal and t3,e payment of interest and other charges on the loan. (ii) The Bank is satisfied that in the -prevailing market conditions the borrower, the Credit National, is unable otherwise to obtain the loan on conditions that, in the opinion of the Bank, are reasonable for the borrower. (iii) A competent committee, as provided for in Article V Section 7, of the Articles of Agreement, has submitted a written report recommending the purpose of the loan after a careful study of the merits of the -roposal. The report of the Committee is attached as AOpondix "A0. (iv) In the opinion of the Bank the rate of interest and other charges are reasonable and such rate, charges and the schedule of repayment of principal are ap-propriate to the purpose of the loan. The schedule of repayment has been specially designed to ease the transfer prpb- lem of France until 19624 On the basis of the conventional 30-year constant annuity Pt 3t per cent, the total amount to be paid in interest and amortisation during the first 15 years would be $196.6 million; under the terms recommended the amount to be paid during the same ocriod will be $156.4 million. (v) In making the recommendation for an immediate loan of $250 million$ the Proident is satisfied that he is acting prudently in the in- terests of France$ in those of the other members of the Bank, and in the interests of the potential investors in the Bank's deben- tures, Due regard has been paid to the prospects that the Credit National and the Republic of France will be in a position to meet their obligations under the loan. Document 'Yo. X (vi) The loan recommonded is not intended to finance a specific project for reconstruction or development; it falls within the general -ur- poses of the Bank as set forth in Article I of the Articles of Agroc- mont. Specifically, it is a loan required to finnnce the import of specific goods necessary to the rehabilitation of the French economy. III. THE JUSTFICATIOIT FOR TM LOA\T The Bankls approach to the examination of the aOolic.tion for the loan has been guided by its policy to give first consideration to the most ur- gent requirements, whether for reconstruction or development, to supply funds for this our-ose that private capital is not now willing or able to furnish, and to ensure that its funds are used for productive purposes. In this ai- proach, the Bank has been faced with three basic issuos, a) The first is the need for the loan. b) The second is the recovery pros-oct of France. c) The third concerns the conditions on which the loan should be granted. (a) The Need for the Loan The first consideration must be the need for the proposed loan. This has been examined under two headings; (i) the need of France for financial assistance and (ii) the importance to the rest of Europe of economic re- covery in France. (i) France's oeed of Foreign Zxchan:e Francols need for the proposed loan arises directly from the inade- quacy of its exorts and other means at its disposal for the purchase and im- port of materials and. equipment essential to economic rehabilitation. Docu.ient 1o, X The Fronch econony was seriously weakened by the cumulative effoct of the wars of 1914-18 and of 1939-45, by heavy expenditure on defenco btwooi the two wars and by the low rate of exenditure on the replacement and modern- iOtion of industriaj equipment in the fthirtiesl. At the time of tho country's liberation, its productive capacity was, on an average, about 20 per cento smaller than before the war, and much of the remrining equipment was in neod of replacement4 Farther, the country had been denudod under the occupation of its stocks of raw Matorialå - its working capi- tal, Industrial production was baroly one-third of the pre-war rate and =X- ports - the main source of foreign excharge for the purchaso of imports - wore virtually suspended. The country was thus faced with the task of restoring production from its existing equipment and, in order to ro-croate prosperity, with the modern- isstion of its equipment and methods. This involved heavy irnorts of materials and oquipment and, pending the restoration of food production, of cerorls and other food.s. By the cad of 1946, the volume of production had been restored. to bout 90 per cent, of the level of 1938 and the volume of exports to 75 Ter cent. This expansion in productio.n and exports could only be achieved, apart from in- ternal efforts, by heavy imports of essential materials and equipment, Es>orts, though incressing, have hitherto fallen far short of providing the foreign ex- change for the purchase of necessary iimort8t Hence, the country was correlled (a) to d.raw heavily on the gold and foreign assets at its disposal and (b) to raise loans abroad.. The official gold and "hard" currency holdings were reduced from the equivalent of $2,614 million at the liberation to about $1,000 million at the end of 1946. (They have since been reduced to less than $900 nillion). In 1946, a belinning was made with the requisitioning and liquidation of Document No. X declared Drivato balances ind invöstnents abroad to the equivalent of $130 mil- lion. In addition, since its liberation, France has borrowed abroad the civo lont of $2,600 million nainly in the United States, Yet, France is still far from having restored equilibrium in its cur- ront transactions with other countries. According to official French estimatos, the income of foreirn 1xchango from exports, from the liquidpation of private balances and investments abroad, fror, the oroceeds of existing loans, and from other sources, is ex2ectod. to fall below the oxenditures on imports of essential goods and services, by $540 ¤il- lion in 1947, $428 million in 1948 and $198 million in 1949. Even these figures assune the liqidation of the greater part of declared -rivr,tely held forcign balances and investments. By 1950, France expects to restore eqluilibriuma in the transactions of the franc aren with the rest of the world. The astinates of the gap between the income and cxenditure of foreign exchange during 1947-49 are, of course, based on a series of assurntions that mey be modified by actual experience, But the gap exists; and it is a serious one. In other words, France needs the proposed loan of $250 million if the country is to have the oppor'tunity to finance imports essential to the exvansion of donestic Troduction and the modornisation of its industry and agriculture. (ii) The Imuortance of Economic Recovery in France By renson of its sizo and productive capacity, France is nivotal in the western par't of Euro9e, The economic rehabilitation of France would. specd the recovery of surround.ing countries and, through an expansion in trade, would be beneficial to the rest of the world. First, by reason of an expansion in production, France will be able to supply part of the needs of surrounding countries and to provide a market Document No., X for part of their exports, The development of the interchange of goods and ser- vices will depend, in a large measure, on the success achieved in the division of labour between France and its neighbours. Such a division of labour seems a pro-requisite of the rehabilitation of Europe. Secondly, in contributing to the rehabilitation of surrounding coun- tries, economic rocovery in France will indirectly benefit the rest of the world. Before the war, in 1938, continental Euroio imported some 32 per cont, of the exports of the rest of the world, and it supnlios 26 per cent. of the imports of the rest of the world. At the same time, French imports wore oquivalont to 17 per cent, of continental European imports from all sources, while its etports were equivalent to 15 per cent, of continental European exorts to all other countries. At present France and other countries in Europe depend on American and other foreign loans and credits to finance a substantial proportion of their imports. Equilibrium can only be restored by an expansion in European exoorts and this is conditional on an increaiso in production. (b) The Recovery Pros-ect of France (i) The Noed to expand Production While the need for the loan arises from the fact that exports and other means at the disposal of France are still inadequate to pay for necessary im- ports, its ultimate purpose will only be served if France succeeds in crrrying out the present GovornmentIs policy of economic rehabilitation. In other words, the pre-requisite of recovery is an expansion in prod.uction. The Rap)ort Gen.eral sur le Premier 4lan de Modernisation et Equiment adopteod. by the French Government in January, 1947 is designed to rally fll classes of the French -people in a common effort tQ rehabilitate the French econ- omy. Its ultimate objective is to achieve an increase in the production of we"'lth per head, thus im3roving the standard of living and, by wy of increased Document No. X. exports, restoring equilibrium to the French balance of payments. Although the progr-nt fixos definite production targets for the major industries - the levol of national production is to be raised to the 1938 level this year and 30 per cent above that level by 1950 - it may bo rc- garded as a policy rather than as a rigid series of production targets. The program envisages the investmont of the equivalent of some $18,900 million during the four years 1947-50; of the totai, about $800 million are des- tined for investmont in overseas territories. As much as 84 per cent of this proposod invostrent expnditure is e,pccted to conc from domestic resourccs, that is from tho savings of the French people and of corporn,te entor-lrisos, This is equivalent, according to Fronch calculations, to about one-fifth of the estimated net resources availablo fQr domestic utilisation (total domostic ijro- duction, plus inports, less exports and maintenancc expencliture). It is clear, therefore, that the successful achievemcnt of this program will depend mainly on the efforts and self,discipline of the French peQplc. Of the remaining 16 per cento of the proposed invostment it is contempltod that nearly throc-;uar- ters (11½ per cent.) will be financed from the sale of foreign assets and loan.s alro7dy obtained, and one-quarter (4' per cent.) from new loans and credits, While the policy of modernising the French economy adcPted by tha Government is an indication of the will of France to recover, the goals will not bo easy to reach. First, the proposal to set aside for invostment one-fifth of the coun- tryls avail-ble resources apjears to demand a degroc ,f austerity on tho part of tho French pcoplo th-,t it will be difficult to achieve. Secondly, the program assumes a volume of import of coal rnd other materials that may iot be forthcoming in full, even if the requisite foreign Document yon x exchange could be made available.' Indeed the stcol production targot for 1947 has already boon reduced. (ii) The Need to Arrest Inflation A most urgent condition of recovery is the restoration of confidence in the countryls finances. Wage rates and prices have substantially increased since the liberation and, as a result, confidence has been undermined. Ie difficulty of avoiding inflation in a period of scarcity must not be under- estlmatQd,but firmness is necessary to face the problem squarely. It will have to be attacked from many sides, but psychologically the most important point of attack is the national budget, Last year the current expendithre of the French Government, estimated at Frs. 573,000 million ($4,815 million) exceeded revenue by Frs. 153,000 million ($1,285 million)6 The ordinary budget for 1947 has been under consideration for several months and the Government has stated th,-t it ex- pocts to balance it. Unless the bud0',t is balanced, the lack of confidence in the countryts finances would continue and the difficulties in the way of securt ing anything like one-fifth of the nationrl resources for )ur)oqe of invostment would be seriously increasedq Behind the problems of expanding prod-vtion, balancing the c-tornal accounts and improving the cou ntry's finances lies a more general -roblon: the problem of a country which has been deeply shaken by four years of forcicn occu- pation -nd has to recteato a climate of cooperation in the connon aim of nation, al recovery, France has shown much of its customary resilience since its libera- tion4 But only a sustained and common effort can brinC it again into the line of progressive nations. The Bank is fully alive to the uncertainties in the pjrospects of France, the difficulties of exnanding )rocuction, of inmroving the countrys Documbnt No, X finonces int of balancing the accounts with foreign countrics, in the rcsent circumstances. These difficulties are the result of the develoymcnts in the past thirty yenrs and cannot be overcome in the short space of a few years. Some of the factors impeding recovery, such as the low level of coal inDorts, are beyond the control of France. But the fundamental fact that emerges from any detailed analysis of the countryfs economy is that it is master of its own future. The adUitional foreign exchange expectea to be required by France in 1947 and, even nove, pending the balancing of its external accounts in 1950, exceeds the amount of the loan recommended. True, those needs can be modified, for examnle by a more rapid expansion in exDorts and by a further curtailment of imoorts or by both. But given its available funds and the requests of other countries, the Bank cannot now commit itself beyond the amount recomponded. (c) The Condition of the Loan The detailed conditions of the loan recommonlod are set out in the accompanying Draft Loan Agreement and in the Draft Guarantee Agreement. Atten- tion is particularly called to the fact that the terns of repayment have becn designed to meet French needs, It is recommencled that there shall be no revay- ment for the first five years and only small payments on account of DrinciDal during the subsequent nine and a half years, when FWance already has heavy com- mitments on other loans. In accordance with Section 5 (b) of Article III of the Articles of Agreement, arrangements are also proposed to ensure that the proceeds of the loan are used for productive purposes and only for the pur?oses for which the loan is recommended. International Bank for Reconstruction and DevoloDment by (signed) John J. McCloy President.