Afghanistan - Fruit and Vegetable Export Project

Document of FILE COpy The World Bank FOR OFFICIAL USE ONLY Report No.P-2248-AF REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE XECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF AFGHANISTAN FOR A FRUIT AND VEGETABLE EXPORT PROJECT March 9, 1978 This document has a restricted distribution and msy be used by recipients only in the performance of their official duties. Its contents may not stherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Calendar 1977 December 1977 Currency Unit = Afghani (Af.) US$1 = Afs. 46.1 Afs. 43.0 Af. 1 = US$ 0.02169 US$ 0.02326 FISCAL YEAR M[arch 21 to March 20 Note: A depreciated exchange rate (Afs. 47.5 : US$ 1) has been used in calculating project costs. See paragraph 46 for detailed explanation. GLOSSARY OF ABBREVIATIONS AgBank - Agricultural Development Bank of Afghanistan AMSCO - Agricultural Machines and Services Company ARI - Afghan Raisin Institute ASC - Afghan Seed Company AVEC - Afghan Vegetable Export Company EPB - Export Promotion Bank EPU - Ministry of Commerce Agro-industries Export Promotion Unit  FOR OFFICIAL USE ONLY AFGHANISTAN FRUIT AND VEGETABLE EXPORT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Afghanistan. Beneficiaries: The Export Promotion Bank (EPB), The Agricultural Devel- opment Bank of Afghanistan (AgBank), The Afghan Raisin Institute (ARI), The Afghan Seed Company, (ASC) and The Afghan Vegetable Export Company (AVEC). Amount: US$18 million. Terms: Standard IDA Terms. Relending Terms: The Government would on-lend to EPB the equivalent of $10.5 million at 4 percent interest repayable over 17 years including 5 years grace for relending to ARI, ASC, AVEC and private agroindustry investors. The Government would also on-lend to AgBank the equivalent of $2.7 mil- lion at 4.5 percent interest repayable over 16 years including 8 years of grace for relending to farmers contracted with AVEC and farmers investing in vineyard trellising. Project Description: The proposed project aims to expand market access for horticultural exports such as raisins, vegetable seeds, potatoes, onions and fresh fruit through the provision of cleaning, packing and trucking equipment, grading and export certification systems and marketing and on-farm credits. The project would be executed through two financial intermediaries, three entities and other sub- borrowers. The project would benefit a total of over one million farm families mostly through improved raisin quality and raisin storage yielding higher producer prices. Increased earnings for small farmers, who are the major producers of labor intensive fruits and vegetables would be achieved by developing improved market access for horticultural crops. The project faces a risk in that the project entities, except for AgBank, are lacking in competent managerial and technical staff and are at present inexperienced in the fields of operations envisaged under the project. A large technical assistance component and a special contractual arrangement with an internationally recognized seed company would be included in the project to tackle this problem. This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs: Local Foreign Total -------(US$ million)------- I. Afghan Raisin Institute 1.9 2.8 4.7 II. Afghan Seed Company (a) Vegetable Seed Multiplication 0.1 0.9 1.0 (b) Fruit Rootstock Production 0.1 0.1 0.2 III. Afghan Vegetable Export Company 0.5 0.9 1.4 IV. Credit (a) Agroindustries 0.4 2.2 2.6 (b) On-farm 3.6 2.3 5.9 (c) Raisin Marketing 3.5 0.1 3.6 V. Technical Assistance 0.8 3.2 4.0 Base Cost 10.9 12.5 23.4 Physical Contingencies 0.3 0.5 0.8 Price Contingencies 1.4 2.0 3.4 Total 12.6 15.0 27.6 Financing Plan: Government $5.23 million Export Promotion Bank $1.23 million AgBank $1.24 million Sub-borrowers $1.90 million IDA $18.00 million Total $27.60 million Estimated Disbursement: $ millions IDA FY 79 80 81 82 83 84 Annual 2.8 3.8 4.5 2.8 3.2 0.9 Cumulative 2.8 6.6 11.1 13.9 17.1 18.0 Rate of Return: 38 percent. Staff Appraisal Report: Report No. 1782a-AF dated February 21, 1978.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF AFGHANISTAN FOR A FRUIT AND VEGETABLE EXPORT PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Afghanistan for the equivalent of US$18 million on standard IDA terms to help finance a fruit and vegetable export project. The equivalent of US$2.7 million of the proposed development credit would be relent to the Agricultural Development Bank of Afghanistan (AgBank) for 16 years, including 8 years of grace, with interest at 4.5 percent per annum, and the equivalent of US$10.5 million of the proposed development credit would be relent to the Export Promotion Bank of Afghanistan (EPB) for 17 years, including 5 years of grace, with interest at 4 percent per annum. The balance of $4.8 million would be used by the Government to finance tech- nical assistance to strengthen institutions benefiting from the project. PART I - THE ECONOMY I/ General 2. A report entitled "Afghanistan: Economic Memorandum (1030-AF)" dated June 7, 1976 has been distributed to the Executive Directors. A basic economic mission visited Afghanistan in April-May 1977 and a draft report was discussed with the Government in December 1977. The final version of the report is currently under preparation. The conclusions of the report are reflected in the following analysis. Country data sheets are attached as Annex I. Economic Structure 3. Afghanistan is an extremely poor, landlocked economy with severe structural problems. With a population estimated at about 14 million and a per capita income of around US$160 in 1976, it is one of the largest countries designated as "least developed" by the United Nations. The country's prospects for development are limited by a rugged physical terrain, arid conditions and a paucity of physical and skilled human resources. The adult literacy rate is only about 14 percent and the availability of physicians and hospital beds are one per 12,900 and 5,200 persons, respectively. Agriculture accounts for about half of GNP and engages about 54 percent of the labor force. Nomads constitute an estimated 11 percent of the population, and an estimated 14 per- cent of the total population live in the cities. Other structural features of the economy are: the low degree of monetization, a low share of government 1/ Identical to the corresponding section of the President's Report distributed to the Executive Directors on March 9, 1978 for the Second Khanabad Irriga- tion Project.  -2- revenues in national income, heavy dependence on foreign assistance for financ- ing the public investment program and the relatively heavy burden of servicing foreign debts. 4. Since the establishment of the Republican Government in July 1973, Afghanistan has made significant economic progress. This has also been accom- panied by a degree of political stability which has permitted the Government to initiate major socio-economic changes such as land reform and a graduated land tax aimed at agricultural incomes which have been hitherto untaxed. Indicative of the Government's determination to pursue land reforms has been the recent law on survey, settlement, and registration of land which provides for land registration and settlement of disputes and checks tax declaration data. The cadastral survey is continuing and a new department of land reform has been established in the Ministry of Finance. 5. There has been some improvement in public administration partic- ularly in relation to development planning and project implementation (e.g. reorganization of the Ministry of Planning, creation of the semi-autonomous Water and Power Authority which has recently been upgraded as the Ministry of Water and Power). Attempts are also being made to improve the institutional support for the country's export trade. An Export Promotion Bank has been recently established and two international trucking companies established for efficient transport of goods to USSR and continental Europe have also started operations. Some promotional efforts have also been aimed at encouraging private industrial investment (e.g. 1974 General Customs Tariff and 1976 Investment Tariff, small scale industry credit facility at the Industrial Development Bank and improved procedures for approval of such industries). A Seven-Year Development Plan (1976/77 to 1982/83) is currently in the third year of its implementation (see para. 15). Recent Economic Performance 6. Afghanistan's economy suffered a major setback from the droughts in 1970 and 1971 followed by the severe winter of 1971/72 which caused declines in wheat, fruit and livestock production, and especially heavy losses in the livestock population. Since then agricultural output has recovered rapidly due to improved weather conditions and increased use of farm inputs. Agri- cultural output during the fiscal year 1975/76, particularly wheat and cotton, was at a record level with an estimated increase of 7 percent over 1974/75 which in itself was already a very good crop year. Poor weather conditions, however, resulted in a slowdown in agricultural production in 1976/77. The increase in the food grains crop, the bulk of the agricultural produce, was at a lower rate than in 1975/76 while production of seed cotton, the main cash crop, was the same as in 1975/76. The slowdown in output growth illustrates the continued dependence on variable precipitation and the need for investment in irrigation. The performance in large scale manufacturing in 1976/77 compared to 1975/76 has been mixed. Production of urea has hardly increased, constrained by large factory stocks from 1975/76. Ginned cotton, however, has performed quite well, the estimated rate of increase being about  -3- 20 percent. 1/ Although production of cement and sugar have hardly increased, their production levels were at the limit of their current utilizable capaci- ties. 2/ Production of cotton textiles, however, is estimated to have declined by about 22 percent; there are demand constraints facing cotton textiles, an export ban and high level of imports encouraged by exchange rate appreciation (see para. 12) have dampened the demand for the domestic textiles. 7. The Bank Group in 1976 conducted a sector survey on industry which reviewed its problems and prospects. 3/ The modern sector is dominated by the public sector with very little private sector participation. The problems of the public sector are, briefly, over-centralization of the management struc- ture, lack of proper financial control, and inadequately trained management personnel. The private sector, which consists almost entirely of import- substituting consumer goods industries, is currently stagnating and is con- strained by various practices such as export restrictions on textiles and strict application of income tax regulations without an adequate appeals pro- cedure and a statute of limitations on past liabilities. It is also being hampered by the lack of a clear Government policy on the role of the private sector in industrial development. The findings of the Bank study, including various recommendations of possible policy measures to deal with these prob- lems, have been submitted to the Government. Of late, the Government has shown a greater awareness of the large potential 4/ for private sector indus- trial investment (see para. 5). 8. Afghanistan during 1976/77 successfully continued its efforts to mobilize domestic resources. Public revenue increased by about 13 percent over the previous year while current surplus increased by about 9 percent over 1975/76, roughly as projected in the budget. Development expenditures, although falling short by about 18 percent over the budgetary estimate of Afs. 14.0 billion, increased no less than 90 percent over the previous year. This reflects the steady improvement in Afghanistan's absorptive capacity. The shortfall in development expenditures did not, however, result in a fall in the budgetary deficit because of a large shortfall in the inflow of foreign aid due to a slowdown in commitments from major donors. 5/ Contrary to the 1/ Although production of seed cotton in 1976/77 remained static at the 1975/76 level, this did not impede ginning operations because of a large backlog of unginned cotton from 1975/76. 2/ Some of the machinery is very old and sometimes inoperable; machine- rated capacities thus often exceed their utilisable limits. 3/ Industrial Sector Review of Afghanistan, IBRD Report No. 1245-AF. 4/ The forthcoming basic economic report will elaborate on this. 5/ Despite recent improvements, Afghanistan's low absorptive capacity remains a continued concern (see paragraph 14). The slowdown in aid commitments in 1976/77 was not, however, due to a lack of project prep- aration, rather due to delays on the part of the donors. The Government has partially compensated for it by committing its own resources.  -4- budgetary estimate of about Afs. 9.3 billion of gross foreign aid inflow, actual receipts were about Afs. 5.4 billion. Part of the shortfall in aid receipts was, however, made up through deficit finance of about Afs. 2.9 billion, compared with debt retirement by the Government of about Afs. 0.8 billion during the previous year. 9. Although gross aid receipts in 1976/77 were only 58 percent of the budgeted figures, they still increased by about 16 percent over the previous year's total. This however contrasts sharply with the 40 percent annual growth rate projected in the seven year development plan. Commitments by major aid donors have been very limited in 1976/77 and considerable shortfall in the plan's projections of such commitments is likely. Foreign aid receipts can be expected to be a major constraint on achieving the investment targets of the plan. Additionally, there is evidence that the newer donors are lend- ing on less concessional terms so that the debt service burden may again emerge as a serious problem. 10. The rate of increase in money supply 1/ during 1976/77 has been sub- stantial, about 33 percent; this reflects the effect of a large budgetary deficit (see para. 8) and the increase in foreign assets (see para. 11). There has been, however, no corresponding increase in the prices which are estimated to have increased by only about 3 percent. While significant exchange rate appreciation (see para. 12) helped to keep the prices of imported consumer goods down, the main restraint on prices may have come from a massive volume of hoarding of the domestic currency as pure asset accumulation. It is likely that the effect of the large increase in money supply was not fully reflected in the 1976/77 prices because of both lags and cash hoarding. As lags work through and cash hoardings are run down because of anticipated crop losses, inflationary pressures could emerge and will need to be closely monitored. 11. With regard to foreign trade, export earnings during 1976/77 increased by about 32 percent over 1975/76, compared to only about 2 percent during 1975/76. While export prices increased by about 22 percent, the increase in export volume was 8 percent. About 90 percent of the increase in export earnings came from fruits and nuts and ginned cotton which benefitted from high prices. Simultaneously, imports in 1976/77 also marked a consid- erable increase over their 1975/76 level due to the rising volume of develop- ment expenditures and the effect of continued exchange rate appreciation (see para. 12) on private imports. However, the rate of growth (about 24 percent) was less than the rate for exports so that the trade deficit was reduced from $42 million to $33 million in 1976/77. Of the other current account items, interest payments were about $9 million compared to about $5 million in 1975/76. The 1976/77 interest payments were, however, still less than their 1974/75 level, reflecting the 1975 rescheduling of the USSR debt. Net foreign aid flows were about $112 million, compared to about $94 million in 1975/76 and foreign exchange reserves increased by about $68 million. Current foreign exchange reserves are about $241 million, equivalent to about two-thirds of the current annual import flows. Apart from the improving export performance 1/ Including quasi-money (i.e. time deposits and foreign currency deposits).  - 5 - and increasing net aid flows in recent years, the continued rise in foreign exchange reserves also reflect an additional factor - central bank purchases of foreign currency from the "bazaar" (i.e. free foreign exchange market). This has helped to moderate the appreciation of the Afghani resulting largely from sizable remittances by Afghans working abroad. 12. During the first half of 1976, the central bank had suspended its buying activities in the "bazaar" and this led to a resumption of the appre- ciaton of the Afghani 1/ during the six months ending September 1976 from Afs. 55: US$1 to Afs. 40: US$1. Exports were, however, insulated from this appreciation through export earnings being converted at the rate which pre- vailed in February 1976, Afs. 56: US$1. Since September 1976, the central bank has resumed its buying activity in the "bazaar" and by end-March 1977 the "bazaar" rate has increased to Afs. 47: US$1, as a consequence of purchase of about $16 million. Simultaneously, however, the central bank has reduced the export exchange rate first to Afs. 50: US$1, and then in June 1977 to Afs. 48: US$1. These actions to reduce the spread between the "bazaar" rate (i.e. at which the central bank sells foreign exchange to the private sector) and export exchange rate (i.e. at which it purchases foreign exchange from the private sector), will substantially reduce the budgetary burden which is incurred on this account. Besides the impact on the Government budget, the appreciation of the export exchange rate by about 17 percent could affect export incentives in the longer-term. The IMF is reviewing this question with the Government. There is, however, no evidence yet of any slack in exports. Demand for fruits and nuts and raw cotton constituting more than half of the exports has been particularly buoyant in 1976/77. Recovery of production by competing foreign suppliers and thereby a reversal of the recent high export prices should be anticipated in the near future and a depreciated exchange rate could then become a necessity. Development Prospects and Constraints 13. The large undeveloped human, agricultural and mineral resources of Afghanistan provide the basis for a favorable assessment of the country's long-term development potential. The commitment of the Government to develop- ment and economic and social reforms gives rise to hope that this potential can be realized. Recent offers of aid, notably from the Islamic oil producing countries, are likely to increase further the external capital flow into the country in the near future. Although foreign aid receipts during the seven year development plan (see para. 15) may fall short of the target, a substan- tial acceleration over the levels achieved in recent years may reasonably be anticipated. 14. To realize the development potential of the country, however, requires timely and vigorous action to remove a number of obstacles that 1/ The average bazaar exchange rate for Afghanis to US dollars has in- creased from Afs. 80.5: US$1 in 1972/73 to Afs. 47.4: US$1 in 1976/77.  severely inhibited the country's economic and social development in the past. Included among these are: (a) Inadequacies in project preparation and the resulting shortage of projects to absorb the external economic assistance which was potentially available; and (b) inadequacies in public administration and manpower development which have led to inefficient implementation of policies and projects. The Government is well aware of these problems and has begun to take action to solve them. Particular attention is being given to improving the taxation system. The organizational changes as mentioned in paragraph 5 also indicate this awareness. Much, however, remains to be done and will be focused on in the forthcoming basic economic report. 15. The Government has begun implementing a seven-year development plan (1976/77-1982/83). The plan has an estimated expenditure total of about Afs. 174 billion ($3.7 billion) 1/ thus envisaging a more than three-fold rise in the average annual development expenditure as compared to 1975/76. The plan aims at an annual rate of growth in GNP of about 6 percent. With population expected to grow at about 2 percent per annum, the per capita income growth is expected to be around 4 percent. However, in its present form the plan is better viewed as a shopping list of projects providing a range of choice to donors than as a feasible program with a well-defined framework for the examination and coordination of policies. Thus the plan probably contains more projects than the country can prepare and implement. Moreover, the projected foreign aid inflow of about $2.8 billion may be more than can be expected from the major aid donors. The shortfall in external aid cannot be met from domestic resources given the need to increase current expendi- tures on social services in the plan period. External Debt 16. During the period between 1972/73 and 1976/77 about two-thirds of public investments in Afghanistan have been externally financed with gross aid inflows ranging from about $60 to $130 million annually. As of March 31, 1977 Afghanistan's external debt amounted to $1,748.5 million of which $911.2 million was disbursed. The major creditors are USSR (62 percent of the total outstanding debt), USA (6 percent), IDA (6 percent), and the Federal Republic of Germany (5 percent). The People's Republic of China and Saudi Arabia, both relatively new creditors, hold 4 percent and 3 percent respectively of the total outstanding debt. Loans from governments account for about 92 percent of all disbursed external public debt. Afghanistan concluded, in July 1972, an agreement with USSR to reschedule $30.2 million of some $152.4 million in 1/ At the March 1977 exchange rate of Afs. 47.5 to I US dollar which remained the same until June 1977 (see para. 46 below).  -7- debt service obligations that were due during 1972/73-1976/77. In addition, in early 1973, USSR agreed to convert some $16.5 million of loan commitments to grants. In February 1975, an agreement was concluded for the rescheduling of another $136 million of debt obligation due during 1975/80. 17. With the past emphasis on long-gestation infrastructure projects with little export-generating or import-saving impact, the growth of Afghanistan's debt servicing capacity has been outstripped by the debt-servicing obligations. Thus, although most of the borrowing over the past 20 years was on quite soft terms, the impact of debt service has become heavy and in the recent past had to be mitigated by substantial rescheduling. The debt-service ratio in 1976/77 was 8.3 percent, as against 17 percent in 1974/75, but the decline was entirely the effect of the 1975 rescheduling of the debt-service payments to USSR, the principal lender. Given the country's debt burden, its poverty and its development stage, Afghanistan does not have the capacity to service additional external borrowing on conventional terms. It is also probable that the terms of aid committed and disbursed during the seven year plan period will be less concessionary than earlier anticipated. Accordingly, it is esti- mated that the debt service ratio would climb to about 21 percent in 1982/83. This raises the probable need for a further rescheduling of debt as happened in 1975. Afghanistan also requires special consideration from external lenders, including IDA, in financing the local costs of development projects, in view of its relatively narrow tax-base and low domestic savings capacity. PART II - BANK GROUP OPERATIONS IN AFGHANISTAN 1/ 18. IDA has provided fourteen development credits totalling US$115 mil- lion (net of cancellations) to Afghanistan. IFC invested $0.3 million in the Industrial Development Bank of Afghanistan (IDBA) in July 1973. However, IDBA has been nationalized and IFC has been fully paid back its investment by the Government. Annex II contains a summary statement of IDA credits and IFC investments as of January 31, 1978, and notes on the execution of the ongoing projects. 19. Bank Group lending in Afghanistan began in 1964 with a $3.5 million credit (Cr. 68-AF) for an education project, but in July 1970, before any con- struction took place, a major portion of the credit was cancelled at the request of the Government following education policy changes. A resident mission was established in Kabul in 1969 and since that time, with a consider- able input of staff time and effort on project preparation, the Bank Group has provided financial assistance to Afghanistan at an average level of about $13 million annually. IDA has made six credits totalling $69 million in the 1/ Identical to the corresponding section of the President's Report dis- tributed to the Executive Director on March 9, 1978 for the Second Khanabad Irrigation Project.  agricultural sector, three credits totalling $19 million in the transportation sector, one credit of $2 million for an industrial development bank project, one credit of $9 million for a water supply project, one credit of $?0 million for a thermal power project and one credit of $6 million for a second educa- tion project. The proposed credit would be the seventh for the agricultural sector. 20. Difficulties have been experienced in disbursing the proceeds of the IDA credits made since 1971. The main reasons were substantial delays in fulfilling effectiveness conditions, slow progress with the selection of consultants, minor project changes and, in the case of the Industrial Develop- ment Bank (IDBA) Project, a lack of sub-projecits. These problems have now been corrected satisfactorily, with the assistance of the Bank's resident mission in Afghanistan, but in the case of the irrigation and livestock proj- ects, the delays incurred aggravated the effect of very heavy inflation on the project costs. Disbursements are now proceeding on a normal schedule. In close cooperation with IDA staff, the Government is trying to remove obstacles to satisfactory project implementation for those projects which are currently being prepared or whose implementation has just: started. For instance, a proj- ect implementation unit for the Second Education Project was fully established soon after the negotiations, and a project unit has already been established in preparation for the fruit and vegetable export project. 21. The Bank Group's lending strategy recognizes that special efforts are required to help Afghanistan which is among the 29 least developed coun- tries designated by the United Nations. Its landlocked position, its extreme poverty and difficult economic problems, the structure of its political and economic system, the underdeveloped state of physical resources and shortage of trained manpower impose severe limitations on the country's absorptive capacity and thus inhibit its development. Considerable staff time is required, therefore, to help identify, prepare and implement future projects. During the forthcoming years, we expect to establish a basis for financing an average of three projects each year, which would assist in institution building, expand production, increase the foreign exchange earning capacity, improve absorptive capacity and enlarge government resources for development. To that end, technical assistance will continue to be an important feature of most future projects. 22. An appraisal report is being prepared for a water supply and sewer- age project. The Government is preparing the preinvestment studies for a third education project by utilizing the expertise available within the Government and limiting outside help to the minimum. A grain storage project is ready for appraisal on the basis of a study financed by the British Gov- ernment. After completion of an FAO/IBRD CP preparation report on a rural development project, the Government is taking further preparation steps in consultation with IDA. The project should be ready for appraisal by June 1978. Preparation of the third irrigation project is also well advanced. Preparation of a second Industrial Development Bank project will depend on further development of overall industrial investment policies by the Govern- ment, particularly for the private sector, and the initial experience of the program to support small and medium scale industry (see para. 5).  - 9 - PART III - THE AGRICULTURAL SECTOR IN AFGHANISTAN 1/ 23. Agriculture is the key sector in the economy of Afghanistan. It employs about 54 percent of labor force and accounts for about 50 percent of GDP and about 60 percent of total exports by value. About 85 percent of the total land area of 63 million hectares is comprised of mountains, desert and forests, unsuitable for cultivation. Afghanistan has an extreme continental climate, with its hot, dry summers and severe, cold winters. Afghanistan is very poorly endowed with surface water. High evapo-transpiration rates in summer make the Afghan economy vulnerable to climatic changes. The drought between 1970 and 1971 followed by a severe winter in 1971/72 caused a more than 20 percent drop in agricultural production. Climatic and topographical factors together with inefficient traditional irrigation systems and the institutional problems as described below act as severe constraints to the improvement of agricultural productivity and consequently to the development of the country. 24. Grain crops, of which 75 percent consist of wheat, are grown on 80 to 90 percent of the cropped land. About 30 to 40 percent of the unarable land is used for livestock grazing, mostly for sheep. During the past three years, Afghanistan achieved a long-standing Government objective of self- sufficiency in foodgrains particularly in wheat. About 2.9 million tons of wheat are estimated to have been produced in 1976/77 as compared to 2.4 mil- lion tons in the pre-drought year of 1969/70. Rice production has also in- creased from 407,000 tons in 1969/70 to 450,000 tons in 1976/77. Production of the two major cash crops, sugarbeet and cotton, almost doubled between 1969/70 and 1976/77. The value of agricultural exports increased by over 100 percent for the period 1971/72 to 1975/76, due to a 50 percent price increase and a similar increase in volume. However, the year 1977/78 may again require imports of about 200,000 tons of wheat due to low rainfall. 25. The average size of land holdings is estimated at around 3.5 hec- tares of cultivable land, but the distribution of land ownership varies considerably among the regions. The majority of the estimated 1.5 million agricultural households have less than 0.5 hectare, and rely on sharecropping arrangements with landlords. Fragmentation and multiple ownership, resulting from the traditional inheritance law, discourages investment in mechanization and improvements including the introduction of fertilizers and other inputs. The landlord may invest little or nothing in his land but often acquires a substantial part of any production increase achieved by the tenant. In an effort to break through these socio-custom constraints, the Government has recently introduced a land reform law and a graduated land tax system and, under the current seven year development plan, proposes to expand greatly its program for the settlement of landless farmers. As the first step to support 1/ Paragraphs 23-27 are identical to the corresponding paragraphs of the President's Report distributed to the Executive Directors on March 9, 1978 for the Second Khanabad Irrigation Project.  - 10 - the Government efforts in this area, the Third Agricultural Credit Project for which an IDA credit of $12 million was approved in June 1977, includes credit facilities for farmers resettling under the Government land settlement program. 26. The agricultural sector in Afghanistan still faces a number of institutional constraints including insufficient credit facilities, cumbersome administrative regulations, inadequate domestic financial resources, a short- age of trained staff, inadequate extension services and above all, cultural and social constraints including the fact that about 90 percent of the popula- tion is illiterate. Although harsh topographic and traditional socio-economic customs restrain optimism in the Government's efforts in solving these prob- lems, there have been some encouraging signs of improvement in these fields particularly during the past few years. The previous IDA credits for the agricultural sector have started to address, on a project basis, several of these constraints. In addition to their main objectives for production increases, the irrigation, livestock and agricultural credit projects are contributing to streamlining administrative arrangements, strengthening institutions connected with these projects and training staff in these fields. Furthermore, the recent second education project is designed to increase the number of middle level agricultural extension agents and to improve general teacher training. 27. The Ministry of Agriculture is the main administrator of agricultural development in Afghanistan, but its achievement and influence in agricultural development has been rather limited due to a shortage of trained and expe- rienced staff, limited budgetary allocations and an unsatisfactory administra- tive framework including overcentralization of authority. The transfer in 1975 of the responsibility for irrigation development from the then Ministry of Agriculture and Irrigation to the Ministry of Water and Power and the creation of Department of Rural Development in the Prime Minister's office has improved efficiency in irrigation development, but these two Ministries and the Depart- ment of the Rural Development continue to face the same major constraints as listed above for the Ministry of Agriculture. With the three IDA credits amounting to $30 million as the main financial support, the Agricultural Development Bank of Afghanistan (AgBank) has developed a financially and institutionally strong basis and established itself firmly as the leading agricultural development institution in the country. Its reorganization and strengthening in 1969 with assistance from UNDP and IDA were the first major steps to make institutional credit facilities available to farmers. The first agricultural credit project has been successfully completed and a completion report for the project has been finalized. The second agricultural credit project is being implemented successfully and is shortly to be phased into the third agricultural credit project which became effective in September 1977. Since its establishment in October 1973, the Afghan Fertilizer Company has contributed greatly to increasing the use of agriculture and improving the supply and distribution network of fertilizers with strong support from the United States Agency for International Development (USAID). The Afghan Seed Company, a recently organized Government organization, is expected to increase production and contribute to multiplying and distributing improved crop seeds particularly of wheat and cotton. The company is being assisted by a $14 million loan from the Asian Development Bank. The Herat Livestock Development  - 11 - Company organized under the First Livestock Development Project, for which an IDA credit of $9 million was made in 1973, has been expanding its activities into an extensive animal health program under the Second Livestock Development Project, for which an IDA credit of $15 million was made in July 1976. Since lack of an efficient extension service system has hindered the agricultural development in Afghanistan, IDA has recently made a US$6 million credit for a second education project which mainly aims at producing middle level extension agents. Although there are about 2,600 extension agents in Afghanistan their quality is low and additional extension agents are needed to provide adequate services to farmers. Horticulture Subsector 28. Fruit and vegetables account for about 6 percent of the total culti- vated area, 10 percent of seasonally irrigated land and about 10 to 15 percent of permanently irrigated land. About 100,000 farmers are directly engaged in horticultural production, mostly vegetables, while nearly the whole agricul- tural labor force engages in some seasonal work in horticulture. For the past two years, Afghanistan produced about 900,000 tons of fruits and 720,000 tons of vegetables. Fresh and dried fruits, nuts and medical herbs make up about 35 to 40 percent of total exports. The Afghan yields in the horticulture sector are substantially below those of other major horticultural producers for virtually all crops. The main reasons for the far lower yields are insuf- ficient inputs and poor quality combined with inadequate farming and management skills. Given the scope for improvements on both these fronts, the potential for increasing yield in this sector is very large and the proposed project would make a significant contribution to that effect. 29. The targets in the seven-year development plan call for a 4.2 per- cent annual increase in fruit production and a 2.9 percent yield growth which compare with a 0.8 percent and 0.25 percent, respectively, annual growth during the previous seven-year period. The high export growth of 9 percent p.a. over the past seven years was at the expense of a decline in domestic per capita consumption as the area cultivated was almost unchanged. Substantial efforts to increase fruit production will be necessary to maintain and increase exports in the face of rising domestic consumption. The plan's targets for vegetables, calling for increases of 3.9 percent p.a. in area, 2.1 percent p.a. in yield and 7.0 percent p.a. in total output are also ambitious. Domestic consumption is unlikely to rise fast enough to absorb such an increase in output. However, there is a potential for exports if the necessary investment and effort is made, an exporting system is rapidly developed and access to export markets is permitted by lifting the ban imposed on vegetable exports because of the scarcities caused by the drought of 1970 and 1971. The proposed project is designed to help Afghanistan to realize its production and export potential for both fruits and vegetables, and to develop further its export markets especially in Iran and USSR. 30. The horticulture subsector faces a number of constraints among which low yields, slow growth in productivity, farmers' preoccupation with wheat production, difficulty in obtaining institutional credit and no incentive for private investment are conspicuous. The lack of market access, particularly for fresh produce, negates the potentially high returns to horticultural pro- duction, causing actual returns to be lower than those of alternative crops.  - 12 - Since no refrigerated transport or storage now exists, the volume and quality of fresh produce exports is restricted and the ability to manage the market is almost non-existent. As the first step to improve this situation, the Government is actively involved in establishing joint ventures with interna- tional firms to provide improved truck transport for exporters, incorporating protocols to avoid the tax difficulties which have been discouraging private investment in this field. Less important, but still significant constraints to growth in productivity and yields are share cropper and tenant farmer access to irrigated land, unequal distribution of water rights and uncertain availability of irrigation water during the dry summer season. Farmers con- tinue to be preoccupied with wheat production due to the need of the individual to ensure personally that adequate quantities of storable food are available for themselves over the lengthy harsh winter period. The Government is now working to expand and improve the public food storage and distribution system to reduce this burden on individual farmers. IDA is currently assisting the Afghan Government in preparing a grain storage project in collaboration with the British Government (para. 22). A major reason for the low level of inputs and thus low productivity in horticulture is the difficulty in obtaining credits from the Agricultural Development Bank which may legally accept col- lateral principally in the form of land titles or joint liabilities through a cooperative or group. The Government and AgBank are aware of this problem and are currently working on improved arrangements for individual farmers to obtain credits through less rigid collateral requirements. PART IV - THE PROJECT Project History 31. In early 1976, Afghanistan requested IDA to assist financing a fruit and vegetable export project to improve horticultural production and yields, and provide established markets for fruits and vegetables. This would be the seventh IDA credit for the agricultural sector in Afghanistan excluding a sup- plementary credit for the Khanabad irrigation project. The proposed project was identified by an IDA horticulture subsector survey mission in May 1976, and prepared by a US consulting firm funded by' UNDP for which the Bank served as executing agency. During the preparation phase and copntinuing during the post appraisal phase, IDA has sought out and supplied information to firms who might be interested in participating in a joint venture or technical assis- tance arrangement in carrying out the project. The project was appraised in June 1977 and negotiations were held in December 1977 in Washington. The Afghan delegation was headed by H.E. Abdul W. Karim, the Ambassador to USA and included representatives of Ministries of Planning and Commerce, the Export Promotion Bank and the Afghan Seed Company. The Project 32. The main objectives of the project are to: (a) provide aew, and improve and expand existing marketing channels for export of raisins, vegetable seeds and fresh vegetables; (b) increase production of grapes and vegetables,  - 13 - and raise labor productivity; and (c) develop and strengthen the institutions related to the project. The project would help achieve the objectives of the seven-year developnment plan, and would provide outlets for high-value labor intensive crops. The Credit and Project Summary describes the major features of the proposed project. The Staff Appraisal Report (No. 1783-AF) entitled "Afghanistan Fruit and Vegetable Export Project" is being distributed sepa- rately to the Executive Directors. 33. The project would consist of seven components: (i) Raisin Marketing - to expand and reorganize the Afghan Raisin Institute (ARI) to equip it to implement a comprehensive quality control program through investment in eight rural stores with cleaning equipment, through demonstration trellised vineyards, and through developing grading and certification and market information schemes at the farm and export processing levels. About 60,000 tons of raisins could be processed annually at full development. No raisins go through such a comprehensive quality control program at present; (ii) Vegetable Seed Multiplication and Fruit Rootstock Production - to provide the Afghan Seed Company (ASC) with facilities, equip- ment and technology to multiply vegetable seeds for export under contract to an international seed firm and to produce fruit rootstock, principally grapevine seedlings, to meet domestic needs; (iii) Vegetable Exports - to establish the Afghan Vegetable Export Company (AVEC) and equip it to export about 8,500 tons of vege- tables annually, produced under contract with local farmers and on its own farm; (iv) Agroindustries Credit - to provide, through the Export Promo- tion Bank (EPB), investment financing for development of horiti- culturally based agro-industries, such as small fresh-fruit packing and precooling plants and refrigerated trucks; (v) On-Farm Credit - to provide through AgBank medium- and long- term credit for on-farm investment, primarily for trellising about 900 ha of vineyards for raisin and grape production; (vi) Raisin Marketing Credit - to provide through EPB a line of short-term credit to farmers to enable them to phase their raisin marketing over a longer period and participate in the ARI quality control program; (vii) Technical Assistance - to provide the necessary experts to assist in implementing the project and train local personnel in managerial and technical skills.  - 14 - 34. The project is specifically designed to realize the considerable potential of the horticulture subsector as identified in IDA's Horticulture Subsector Survey which was distributed to the Executive Directors in May 1977. The survey shows, inter alia, that Afghanistan is very well placed to in- crease its production of fruits and vegetables, in particular raisins. Afghanistan's extremely competitive position in raisins, fresh grapes and some other horticultural crops would be greatly enhanced by a better quality control program, and better supporting services for farmers including provi- sion of market information, institutional credits and improved storage and transport facilities. The high economic return on the project demonstrates its importance to Afghanistan. 35. Any project designed to realize the potential of the horticultural subsector is bound to be complicated because it involves a large range of activities related to different fruits and vegetables which require different production techniques and marketing arrangements. This inevitable complexity is reflected in the lending arrangements for this project elaborated in paragraphs below. 36. The development of trellised vineyards is an important innovative component of the project. Afghan farmers follow traditional non-trellised systems, except in some part of the Parwan regions in the north of Kabul where the recent introduction of trellising resulted in 200 to 400 percent yield increase. In order to promote interest in trellising investment, the Govern- ment would subsidize 30 percent of the cost of poles and wires for trellising investments under the proposed project (Section 3.10, Development Credit Agreement). This would total 14 percent of investment cost for a trellised vineyard. Coupled with an active demonstration and promotion program to be carried out under the project by ARI, AgBank and the Ministry of Agriculture, this investment grant is expected to create a sufficient incentive for farmers to introduce the new technique. Organization and Execution 37. Investment financing for sub-borrowers under the project would be channeled through two specialized banks; the Export Promotion Bank to private investments in agro-industries and raisin marketing and AgBank for on-farm credit. The funds for the components to be implemented by ARI, ASC and AVEC would also be channeled through EPB. Monitoring and evaluation would be carried out by a small Ministry of Commerce Agro-Industries Export Promotion Unit. All project entities are operationally independent of each other and their activities are quite specialized. Since three of the project entities are of recent origin while one has been just established, and virtually all of the project activities would involve significant technical innovation in Afghanistan, a sizeable volume of technical assistance, 69 man-years, would be included in the project with emphasis on training of local staff. To enable ARI and ASC to perform operations proposed under the project, the existing charters of ARI and ASC have been revised, and a new charter has been ratified for the establishment of AVEC.  - 15 - Export Promotion Bank (EPB) 38. EPB was established in 1976 to extend financial assistance to exporters and exporting industries. Like all other banks in Afghanistan, it is fully owned by the Government and is under the supervision of Da Afghanistan Bank (the Central Bank). EPB extends short-term credit for up to 75 percent of the invoiced value of the export goods, for which it charge 11 percent fixed interest rate. The terms of its operations appear to provide adequate protec- tion against losses, and the experience to date has been satisfactory. 39. Under the project, EPB would establish a Financial Planning Depart- ment and an Internal Audit Department, and its Credit Department would be reorganized and strengthened. The establishment of the first two departments would be a condition of effectiveness. Three experienced expatriates would be employed initially to head these departments and later to phase into advisory roles. Qualified local counterpart staff would also be employed. The employ- ment of these experts and staff would be a condition of effectiveness (Section 5.01, Development Credit Agreement). By December 31, 1978, EPB would retain an accounting firm to establish a computerized accounting system, develop with ARI a system of implementing the raisin marketing credit program and a train- ing program to be financed under the project, and submit the programs for IDA's approval (Section 2.06, First Project Agreement). The Government would allocate necessary capital to EPB to ensure that EPB's debt/equity does not exceed 5:1 and that EPB has sufficient operating funds at all times (Section 2.11, First Project Agreement). Agricultural Development Bank of Afghanistan (AgBank) 40. Since its reorganization in 1969 under a UN Special Fund technical assistance project for which the Bank continues to be the executing agency, AgBank has achieved a remarkable transformation from an inefficient and small- funding channel into the leading agricultural development institution in the country with a professionally competent staff and the ability to generate revenues. The proposed IDA credit would be the sixth to be wholly or partly channeled through AgBank. AgBank continues to make generally satisfactory progress in its agricultural development operations, but the recent poor per- formance of its Supply Department could have an adverse effect on its progress. It is expected, however, that with the recent appointment of a qualified president of AgBank, the situation will improve in the near future. 41. AgBank would, with AVEC, develop a scheme and submit it by September 30, 1978 for IDA's approval, for restricting seasonal credits to farmers con- tracted with AVEC and channeling contract payments through AgBank (Section 2.06, Second Project Agreement). AgBank would also provide on-farm develop- ment credit for vineyard trellising purposes and procure and distribute necessary tools and materials for trellising and raisin production. The Afghan Raisin Institute (ARI) 42. ARI was established in 1975 by the Ministry of Commerce as a non- profit service institute for the purpose of increasing production, carrying  - 16 - out trade promotion and storing raisins. Mainly due to the shortage of capital and technical expertise, at present, ARI can touch only a small portion of the problems affecting the raisin prodnction andl ex--rt -;>-d"tr ' Since the immediate need is to upgrade the quality of export raisins, ARI is working on a mandatory export grading and certification scheme for raisins and must submit such a scheme by December 31, 1978 for iDA's approval CSec-iGri 3.04, First Project Agreement). To strengthen] ARI's management and technical expertise and to train its staff, a viticulturalist, a processing and trans- portation specialist and a marketing specialist, would be employed by September 30, 1978 for a period of five years and a training program for local staff would be submitted by December 31, 1978 for IDA's approval (Sections 3.03 and 3.04, First Project Agreement). A qualified local accountant would be retained for four months annually over a four-year period to develop an acccunt::n. and auditing system in ARI (Section 3.03, First Project Agreement). The Afghan Seed Company (ASC) 43. ASC was established in August 1976 by the Government to produce cer- tified seed. At present its scope is restricted to the production of cotton and wheat seeds under a project financed by a $14 million credit from the Asian Development Bank. ASC's current capital assets, valued at $6.9 million, mainly consist of land and consequently ASC is short of liquid assets- This problem is exacerbated by a lack of financial management expertise. To improve the situation, ASC would employ by June 30, 1978 an expatriate finan- cial manager together with an Afghan counterpart for the entire company. It would also employ a pomologist for its fruit rootstock and seedling production operations, a technical manager and a seed-processing technician to assist in the development of the vegetable multiplication division (Section 4.02, First Project Agreement). The latter two positions could be filled by staff pro- vided by an international seed company who would contract for the vegetable multiplication and export marketing of seed. As a result of IDA's efforts to arouse interest in the project among internationally established seed com- panies, a satisfactory number of companies have responded very positively. ASC is likely to begin negotiations shortly with one of these companies. No disbursement would be made to ASC for vegetable seed multiplication until ASC has completed contractual arrangements, satisfactory to IDA, with an estab- lished internationally recognized seed company for multiplication and exnort marketing of vegetable seed (para. 4, Schedule 2, Development Credit Agree- ment). By September 30, 1978 ASC would establish a separate accounting system, approved by EPB and IDA, and separate operational divisions, for its activities under the project (Section 4.03, First Project Agreement). ASC would submit a training program by December 30, 1978 for IDA's approval (Section 4.05, First Project Agreement). Experts from the contracted Thter- national seed company are expected to carry out the major part 5f the tratning of local staff. The Afghan Vegetable Export Company (AVEC) 44. AVEC has recently been established to export vegetables produced under contract with local farmers and on its olwn farms. It is a Joint stock company with a capital stock of Afs. 20 million or $420,000 in which the Gov- ernment owns and subscribes to a minimum of 51 percent of the capital stock.  - 17 - Initially the Government takes up 100 percent of the capital stock but will release up to 49 percent of its stock as demand by non-Government sources rises. A fully qualified president of AVEC has been recently nominated. The Government would provide AVEC with a farm of about 500 ha at Herat to ensure AVEC of a minimum level of supplies to meet export contracts and to permit continuous operations year round. Initially production would be restricted to potatoes and onions in view of their lower perishability and lower wastage. About two-thirds of the vegetables would be produced by con- tracted local farmers who would obtain credit for working capital through AgBank under the project's on-farm credit component. AVEC would employ five management and technical experts by June 30, 1978 (Section 5.02, First Project Agreement). Since the most likely market for AVEC's vegetables would be Iran and the USSR, AVEC would be located in Herat. A recent market survey on the Iranian markets financed by UNDP and executed by IDA has shown promising prospects for vegetable exports to Iran. Ministry of Commerce Agro-Industries Export Promotion Unit (EPU) 45. This Unit would be responsible for monitoring and evaluation of activities and would send a proposed system for these purposes by June 30, 1978 for IDA's approval (Section 3.07, Development Credit Agreement). Quarterly reports would be submitted to IDA by the Unit on financial and physical progress of the project. EPU would also review procurement actions on behalf of the Government, prior to such references to IDA, and would assist EPB and AgBank in identifying potential subborrowers. Promptly after the completion of the project, it would furnish to IDA a project completion report in a satisfactory manner to IDA (Section 3.08, Development Credit Agreement). By May 30, 1978, EPU would employ an expatriate general advisor (Section 3.07, First Project Agreement). Project Cost and Financing 46. The estimated total cost of the proposed project is $27.6 million equivalent, of which the foreign exchange component would be $15 million or 54 percent. A total of about 670 man-months of consulting services would be provided under the project at an average cost of about $6,800 per man-month including contingencies. Since no customs duties are levied on IDA-financed imports, and other local taxes are insignificant, the cost estimate is net of duties and taxes. Details of the costs are given in the Credit and Project Summary. The exchange rate used in the staff appraisal report for the calcu- lation of project costs - US$1:Afs. 47.5 - dates from March - June 1977 as compared to the December 1977 exchange rate of US$1:Afs. 43.0. The exchange rate in Afghanistan is highly volatile, responsive to seasonally variable but significant flows of workers' remittances as well as capital flight from neighboring countries, and intervention by the central bank. It is therefore, preferable to use an exchange rate which reflects more stable trends. The proposed IDA credit of $18 million would finance the full foreign exchange costs and $3 million equivalent of the local costs, and would amount to 65 percent of the total project costs. IDA's financing of local costs in Afghanistan is justified for the reasons given in para. 17 of this report.  - 18 - The Government would be the borrower and would bear the exchange risk for all project entities except ASC and AVEC which receive their revenues in the form of foreign exchange, and are therefore able to bear the exchange risk and repay their loans from EPB in foreign exchange. The remaining local funds needed to finance the project would come from the Government ($5.2 million), EPB ($1.2 million), AgBank ($1.3 million) and subborrowers ($1.9 million). 47. The Government would on-lend to EPB the equivalent of $10.5 million of the credit proceeds for agroindustry investments at 4 percent interest with a repayment period of 17 years including 5 years of grace. EPB would relend these funds to ARI for its raisin marketing activities, ASC for its vegetable seed multiplication and fruit rootstock production, AVEC for its vegetable pro- duction and export and private investors for their investments in fresh fruit packing plants with cold stores and refrigerated trucks. EPB's subloans would be made at 10 percent interest with a repayment period of up to 17 years including a grace period of up to 5 years. A gross interest spread of 6 per- cent between the Government's 4 percent and EPB's 10 percent lending term would leave to EPB a net spread of 1.9 percent on the IDA credit proceeds after deducting operating costs, provision for loan losses and profit taxes. The 1.9 percent net spread is considered to be a reasonable return to EPB and would be sufficient to provide a possible special promotion fund. The Govern- ment would also on-lend to AgBank the equivalent of $2.7 million of the credit proceeds for on-farm investments at 4.5 percent interest with a repayment period of 16 years including 8 years of grace. From these funds AgBank would provide to farmers long-term loans for investments in new and replacement trellised vineyards. These loans would be for up to 12 years including a maximum of 5 years grace period at 8 percent interest. Medium-term loans for trellising existing vineyards would be made for up to 6 years including a maximum of 2 years of grace period with an 8 percent interest rate. The recent inflation rate has been fairly low (about 3 percent in 1976/77) and this provides a positive real margin. AgBank would also make short-term seasonal loans for vegetable producers contracted with AVEC at 10 percent interest. The Government would make available a total of $4.8 million of the credit proceeds to EPB, ARI, ASC and AVEC for technical assistance including fellowships for local staff. Procurement 48. Project procurement for loans through EPB would be arranged by the subborrowers with the assistance and supervision of EPU. AgBank would be responsible for procurement of poles and wire for trellising. Equipment and materials which may be subjected to international competitive bidding would consist of vehicles, farm machinery, cold storage plants, refrigerated trucks, greenhouse equipment, grading and packing equipment, poles, rein- forcing rods and wires for trellising. The estimated total cost of these is about US$7.0 million. In addition technical assistance totalling about US$5.0 million would be procured internationally. To facilitate speedy implementation, in view of the lengthy investment period the number and variety of independent subborrowers with relatively small annual investments requiring continuity in after sales service and the relatively large volume of specialized equipment (for raisin and vegetable seed processing), addi- tional procurement procedures are provided. The purchase of equipment and  - 19 - materials costing less than $5,000 may be made on the basis of at least three independent price quotations and in accordance with procedures acceptable to IDA. The total amount of such purchases shall not exceed $55,000. The purchase of common items, including vehicles and farm machinery, costing less than $150,000 may be made on the basis of competitive bidding advertised locally with procedures acceptable to IDA including, for purchases greater than $25,000, timely notification to IDA member countries which have diplo- matic representation in Afghanistan. The total amount of such purchase shall not exceed $4,500,000. The purchase of specialized items, including raisin drying mats, and greenhouse and laboratory equipment, may be made on the basis of competitive bidding advertised locally with procedures acceptable to IDA including timely notification to IDA member countries which have diplomatic representation in Afghanistan, and, additionally, international shopping if so desired. Contracts for small civil works may be procured on the basis of competitive bidding advertised locally in accordance with procedures accept- able to IDA. The total amount of such contracts shall not exceed $5,000,000. Disbursement 49. Disbursement of IDA credit allocated to the agroindustries compo- nents and the raisin marketing credit program would be made through EPB, while disbursement of IDA credit allocated to on-farm credit would be made through AgBank. IDA disbursements through EPB would be over a period of 5 years, but disbursements through the AgBank would extend over a 6 year period, although the on-farm investments would extend over a 10 year period. All IDA funds disbursed through AgBank would be completely committed by the sixth year at the latest. In order to restrict the disbursement period to 6 years, dis- bursements to AgBank have been proportionately increased. Disbursements would be made as follows: (a) vehicles and equipment - 100% of foreign expenditures if imported and 70% of local expenditures if procured locally, (b) buildings, furniture, stores and deep wells - 17% of expenditures, (c) trellising - 40% of amounts disbursed for existing vineyards and 65% for new vineyards, (d) subloans to farmers for vegetable production - 80% of amounts disbursed, and (e) technical assistance and training - 100% of foreign expenditures. Disburse- ments for (c) and (d) above will be made against statements of expenditures and AgBank will retain the supporting documents for review by supervision missions. 50. The estimated annual disursement schedule for the credit is given in the Credit and Project Summary. Environmental Impact 51. The project would have no adverse effects on the environment. Reduction of waste in fruit and vegetables and other improved horticultural practices would contribute in the environmental improvement. Benefits 52. The project would benefit a total of over 1 million farm families or about 6.5 million people. Of these, 900,000 families would benefit through  - 20 - improved raisin quality and raisin storage yielding higher prodzn7er prices. About 100,000 families would benefit from the rootstock production program, 600 families from the vegetable export component and about 1.500 fo.riJie from investment in trellised vineyards. Of the families benefitting from thie proj- ect, about 420,000 belong to the target group, defined as families below the absolute poverty level of $546 per family compared to a GNP pC: .ami1; , about $1,040 per annum. The average annual income of all families benefitting from the project would increase from $512 to $720 per family, while the aver- age annual income of the families in the target group benefitting from the project would increase from $450 to $512 per family. At full development in 1993, the project would result in annual incremental production of (a) about 5,000 tons of fresh grapes; (b) about 3,800 tons of raisins; (c) about 500 tons of vegetable seeds; (d) about 300,000 fruit tree rootstock and vine seed- lings; and (e) about 4,500 tons of potatoes and 3,750 tons of onlonE Th-le annual incremental foreign exchange earnings for Afghanistan as a result of the project would be about $7.1 million at full development. The financiai rates of return from the agro-industry investments range from 12 percent to 16 percent, and financial rates of return are 35 percent for trellising exist- ing vineyards and 18 percent for new trellised vineyards. On-farm vegetable production gives a financial rate of return to the farmer of 29 percent for potatoes and 42 percent for onions. The short-term raisin marketing credit and storage program yields the farmer very high financial rates of return ranging from 87 percent by merely achieving the average market price and without quality improvements to 434 percent, including the moderate price increase due to quality improvements. 53. The economic rate of return is estimated at 58 percent for the raisin quality control program, the cost of which is $4.7 million, 26 percent for the vegetable seed multiplication, the cost of which is A1,3 -zillion, 14 percent for the fruit rootstock production, the cost of which is $0.2 million, 26 percent for the vegetable export program, the cost of which is $0.2 million, 86 percent for the on-farm credits for existing vineyards, the cost of which is $1.2 million and 31 percent for the on-farm credits for new and replacement vineyards, the cost of which is $4.6 million. The overall economic rate ot return is 38 percent based on the total project cost. The economic rate was calculated on an exchange rate of Afs 55:$1.00. This is a more appropriate rate than the average 1976/77 free market exchange rate of abo-ut kMs 47-5-$ . .0 The latter reflects the effect of sizeable remittances on a rather thin free foreign exchange market and does not reflect changes in the comparative costs of Afghanistan's exports. The depreciated exchange rate used in projecL appraisal reflects the relative cost changes of Afghanistan's exnortse Un- quantifiable benefits of the project include institution building for the project entities and the development of emphasis on quality and cost effi- ciency among Afghan fruit exporters particularly through waste reduction. Risks 54. The principal risk under the project would be that the project entities, except for AgBank, are inexperienced in the fields of operatices envisaged under the project. EPB was established only in 1975, and its financial policies and loan appraisal ability have not been tested. AR! and  - 21 - ASC were also established recently, and have no experience in the fields of operation proposed under the project. AVEC is still to be established. However, following the successful pattern of the AgBank, the large technical assistance component included in the project with special emphasis on institu- tion building and training of local personnel, is expected to reduce consider- ably the risks arising from inexperience. The benefits arising from this institution-building effort in Afghanistan outweighs the risks arising from a complex project in a country with little experience in project implementation. Emphasis would also be given to training local experts in production, quality control, transfer of seed production technology, and marketing. ASC would also be assisted by operating experience of a well-established international seed company. PART V - LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Development Credit Agreement between the Republic of Afghanistan and the Association, the draft Project Agreement between the Association and AgBank, the draft Project Agreement between the Association and EPB, ARI, ASC and AVEC, and the Recommendation of the Committee provided for in Article V, Section I(d) of the Articles of Agreement of the Association, are being distributed to the Executive Directors separately. 56. Features of the Project of special interest are listed in Section III of Annex III. 57. Special conditions of the effectiveness of the IDA credit are as follows: (a) the execution of the Project Agreements on behalf of AgBank, EPB, ARI, ASC and AVEC has occurred after having been duly authorized or ratified by all necessary corporate and government action; (b) the execution of the Subsidiary Agreements on behalf of the Borrower and AgBank, and of a Subsidiary Agreement between the Borrower and EPB, has occurred after having been duly authorized or ratified by all necessary corporate and govern- ment action; (c) the execution of Subsidiary Agreements between EPB on the one hand and AVEC, ARI and ASC on the other hand, has been duly authorized or ratified by all necessary corporate and government action; (d) the Government has granted AVEC effective export quotas for vegetables adequate to meet AVEC's anticipated scale of operations; (e) the Financial Planning Department and the Internal Auditing Department of EPB have been established; and  - 22 - (f) contracts of employment have been executed between EPB and the three counterparts and between EPB and three experts in the disciplines of bank credit, financial planning and accounting. 58. A special condition of disbursement of that portion of the IDA credit allocated to ASC's vegetable seed multiplication program would be that ASG has completed contractual arrangements satisfactory to IDA with an estab- lished internationally recognized seed company. 59. I am satisfied that the proposed IDA credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 60. I recommend that the Executive Directors approve the proposed devel- opment credit. Robert S. McNamara President Attachments March 9, 1978 Washington, D.C.  ANNE I TABLE 3A Page 1 of 4 pages AFGHANISTAN - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) --------------------------------------