Tunisia - Second Agricultural Sector Adjustment Loan

Document of The World Bank FOR OFFIIAAL USE ONLY 30'-7 X- tv)AJ Report No. P-5001-lTUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US$84.0 MILLION TO THE REPUBLIC OF TUNISIA MAY 1, 1989 This document has a resticted distribution and may be used by recipients only In the pform:nce of their offlial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALE4TS SDR 1.00 = dinars (TD) 1.2287 (February 1989) Official exchange Rate: Dinar (TD) Per US Dollar Period End of Period Period Average 1980 0.4187 0.4050 1981 0.5157 0.4938 1982 0.6158 0.5907 1983 0.7271 0.6788 1984 0.8666 0.7788 1985 0.7570 0.8345 1986 0.8402 0.7940 1987 0.7770 0.8287 1988 0.8985 0.8578 1989 (February) 0.9298 0.9371 Source: INF, International Financial Statistics, February 1989 WEIGHTS ANID MEASURES 1 kilometer (km) a 0.6214 mile (mi) I hectare (ha) = 2.4711 acres (ac) 1 liter (1) = 1.0567 quarts (qt) 1 metric ton (ton) = 2,204.6226 pounds (lb) 1 quintal (qt) = 220.46226 pounds (lb) FISCAL YEAR January 1 to Deeember 31  FOR OMCIL US ONLY GLOSSARY OF ABBREVIATIONS ARAPPI :Irrigated Land Reform Agency (Agence pour la Reforme Agraire dans les perimitres publics irriguds) BUT :National Bank of Tunisia (Banque nationale de Tunisie) BNDA :National Rank for Agricultural Development (Banque nationale pour le developpement agricole) CCGC :Central Cooperative for Field Crops (Cooperative centrale des grandes cultures) CCPS :Central Cooperative for Seeds and Seedlings (Cooperative centrale des plants et semences) CES :Soil and Water Conservation Department (Conservation des Eaux et des Sols) CGC :General Compensation Fund (Caisse Gendrale de Compensation) CGP :Fishery Authority (Conuiissariat Gdndral de la Peche) COCE8LE :Central Cooperative for Wheat (Coopirative centrale du bld) COSEN :Seed Cooperative (Coopdrative des semences) CRGR :Research Center for Rural Engineering (Centre de Recherche du Genie Rural) OWAFL :Department of Legislation and Land Ownership (Direction Generale des Affaires Foncteres et de la Legislation) DGE6TH :Department of Studies and Large Hydraulic Works (Direction Gendrale des Etudes et des Granca Travaux Hydrauliques) OG6R Cepartment of Rural Engineering (Direction Gdnerale du Gdnie Rural) DGPOIA :Department of Development Planning and Agricultural Investments (Direction Gendrale de la planification du developpemnt et des investissements agricoles) 06PA :Department of Animal Production (Direction Gendrale de la production animale) OGPV Department of Crop Production (Direction Generale de ta production vigitale) oRE :Department of Water Resources (Direction Gdndrale des Ressources en Eau) OPCE :Department of Prices and Economic Control (Direction des Prix et du Contr6le Economique) ORS :Soils Division (Direction des Ressources en Sols) FOSOA :Agricultural Development Funds (Fonds spectaux de developpament agricole) INRAT :Tunisian National Institute for Agricultural Research (Institut National de la Recherche Agronomique de Tunisie INRF :Tunisian National Institute of Forestry Research (Institut National de la Recherche Forestire WTASAP :ldiue -Term Agricultural Sector Adjustment Program aC :National Cereal Authority (Office des cdrdales) ODESYPANO :Northwest Rural Development Authority (Office de ODveloppement Sylvo-pastoral du Nord-Ouest) OEP :National Livestock and Range Agency (Office de l dlevage et du paturage) OmV :Irrigation Development Office (Office de mise en valeur) OII :lattonal oil Board (Office national des huiles) PPI :Public Irrigation Perimeters (Pdrimltres publics irriguds) SOR A National Farm Mechanization Company (Socidtd nationale de motoculture) STEC :National Fertilizer Company (Socidtd tunisienne des engrais chimiques) UCP :Production Cooperative (Unitd coopdrative de production) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  REPUBLIC OF TUNISIA SECOND AGRICULTURAL SECTOR AOJUSTMENT LOAN Loan and Program Summarv Borrw4gr: Republic of Tunisia ount: US$84.0 million equivalent Terms: 17 years. including S years of grace, at the standard variable interest rate sgfriljtion: The proposed loan would support the implementation of the second phase of the Government's medium-term agricultural sector adjustment program (MTASAP). within the framework of the overall adjustment program presented in the VIIth Plan (1987-91). The foreign exchange provided by the loan would be used to finance: (a) a positive list of agricultural inputs needed to stimulate agricultural production. incluJing animal feed, petroleum products, agricultural machinery and spare parts (US$SO.O million); and (b) part of the foreign exchange cost of agricultural projects and programs (US$34.0 million). The principal objective of the sector adjustment program is to maintain the growth rate in agriculture in a time of reduced public resources. To achieve this objective. actions would be taken in both the short and medium term to: (i) reform the price, marketing and institutional framework; (ii) reorient the public investment program in agriculture; (i) strengthen agricultural support services including rationalizing the role of the public sector; (iv) improve management of natural resources of land, forests and fisheries; and (v) build up institutional capacity for sector performance monitoring and impact analysis. The Government's macroeconomic adjustment program is designed to implement policy changes that would allow Tunisia to achieve sustained growth in the framework of an internally and externally balanced economy. Benefits and Risks: The reforms agreed under the loan are expected to lead to more efficient use of resources in a time of resource constraints. In particular, changes in the institutional and agricultural pricing and incentives framework and public expenditure priorities are expected to make the sector a more efficient producer of import substitutes and export products. Risks relate to the length and difficulty of the process, possible social and political pressures. unoredictable developments in the external environment and uncertainties in the response of the private sector. These risks are limited by the Government's strong commitment to objectives of both the macroeconomic and sectoral adjustment programs, and by the inherent flexibility of the phased medium-term approach. Estia& ted Disbursements: The proceeds of the loan, including for the investment component, would be disbursed in two tranches: US$42 million equivalent soon after effectiveness; US$42 million equivalent after implementation of specific actions, including an overall review of the implementation of the sectoral adjustment program. Aporaisal Renort: None. F40s No. tBRO 21344 No. IBRO 21345 No. IBRO 21346 39061/pS  REPUBLIC OF TUNISAA SECOXND AGRICULTURAL SECTOR ADJUSTMENT WAN Table of Contents Page No. LOAN AND PROGRAM SUMMARY PART I - THE ECONOMY. . . . . . . . . . . . . . . . . . . . . . . . . . 1 PART II - BANK GROUP OPERATIONS AND ASSISTANCE STRATEGY . . . . . . . . . 7 PART III - THE EVOLUTION OF THE MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM . . . . . . . . . . . . . . . . . . . . . . 10 A. Background . . . . . . . . . . . . . .*. . . * . . * * * .* 10 B. The Ongoing Sector Adjustment Program . . . . . . . . . . . 13 - Origin and Objectives .n.... . .ecti .................. 13 - Progress to Date (ASAL-I) . . . . . . . . . . . . . . . . 14 - Justification for Continued Bank Involvement . . . . . . . 14 - Price, Marketing and Parastatal Reform . . . . . . . . . . 15 - Reorienting the Public Investment and Expenditure Program . . . . . . . . . . . . . . . 23 - Strengthening Essential Government Support Services . . . 23 - Improving Management of Natural Resources . . . . . . . . 29 - Building Up Sector Performance Monitoring and Impact Analysis Capabilities . . . . . . . . . . . . 31 PART IV -LOAN ADMINISTRATIAN . ....................31 - Eligible Expenditures. ........... ...... 31 - Investment Component . . . . . . . . . . . . . . . . . . 32 - Procurement . . . . . . . . . . . . . . . . . . . . . . . 33 - Disbursement . . . . . . . . . . . 34 - Accounts and Audits ........ .34 - Release of Funds and Tranching. ... . 34 - Management, Coordination and Monitoring . . . . . . . . . 36 - Cooperation with Other Agencies. . . . . . . . . . . . 36 - Economic, Financial, and Social Impact . . . . o . 36 - Environmental Impact . . . . . . . . . . . . . . . . . . 40 - Risks . . . . . . . . . . . . . . 40 PART V - RECOMMENDATION . . . . . . . . . . . 41 This report is based on the findings of an appraisal mission consisting of D. Lister (Mission Leader) and C. Chung (EK2AG), C. Vuylsteke (VPLKG), R. Meddeb, A. Moens and J. Gastaldi (Consultants) who visited Tunisia in October/November 1988. (29063)  REPUBLIC OF TUNISIA SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Table of Contents (continued) ANNS I. Key Economic IndicaLors II. Status of Bank and IFC Operations in Tunisia III. Progress under Existing Adjustment Operations (ASAL-I, ITPAL and SAL) IV. Letter of Sectoral Adjustment Policy V. Supplementary Project Data Sheet VI. Value of Agricultural Production VII. Disbursement Schedule MAPS IBRD 21344 - Location of Main Crops IBRD 21345 - Soil Suitability for Crops IBRD 21346 - Rainfall and Irrigated Areas SUPPORTING VOLUME: Comprehensive Matrix of the Medium-Term Agricultural Sector Adjustment Program (MTASAP) < as  REPORT AND RECOMMENDATION OF THE PRESIDENT OP THE NERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTVE DIRECTORS ON A PROPOSED SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN IN AN AMOUN EQURALENT TOUS$84.0 MELLIO TO THE REPUBUC OF TUNISIA INTRODUCTION 1. submit the following zeport and recommendation on a proposed loan for the equivalent of US$84.0 million to the Republic of Tunisia. It would support the second phase (1989/90-1990/91) of the country's medium-term agricultural sector adjustment program (MTASAP) begun in 1986/87 under the first Agricultural Sector Adjustment Loan (ASAL-!)." Under the proposed operation, Tunisia would further liberalize the agricultural economy, strengthen essential Government support services and improve management of natural resources as described below. The US$84.0 million loan would be a hybrid operation financing a positive list of agricultural imports and part of the foreign exchange cost of high priority agricultural projects and programs. The adjustments underway in agriculture are part of the overall adjustment process aimed at promoting sustainable growth with'n a framework of internal and external balance. ASAL-II would be the fourth quick disbursing operation for Tunisia. The first was ASAL-I, for which a US$150 million loan was approved in FY87. The second was the Industrial and Trade Policy Adjustment Loan (ITPAL), for which another US$150 million loan was approved in FY87. The third was the Structural Adjustment Loan (SAL), for which a US$150 million loan was approved in FY88. Performance under these operations has so far been fully satisfactory (Annex III). Tunisia also successfully completed the program agreed with the IMF under its first stand-by arrangement covering the period November 1986 to May 1988, and an extended financing facility, signed in July 1988, has been proceeding satisfactorily. PART I - TME ECONOMfY Background 2. Tunisia is a medium-sized, middle-income country, with a population of 7.5 million and a per capita income of US$1,210. Much of the country is arid or semi-arid. Only 3 percent of arable land is irrigated and rainfed agriculture is subject to severe year-to-year fluctuations in rainfall. Nevertheless, nearly one-third of the labor force is occupied in agriculture. Tunisia's most important raw materials are petroleum, natural gas, and phosphates. Output of known exploitable reserves of oil and gas is diminishing because of depletion, and the limited new reserves require costly off-shore drilling. With the rise in domestic energy demand, Tunisia is expected to become a net oil importer In the early 1990s. There is a substantial phosphate processing industry, but it is constrained by the low 1/ Report No. P-4368 of September 3, 1986 (in 2 volumes). 3907E  quality of the phosphate deposits. Tourism, however, has been developing rapidly and has much further potential. 3. Tunisia has undertaken a massive effort to develop its human resources, paying special attention to family welfare and education. As a result, between the early 1960s and 1985, infant mortality declined from almost 160 to 60 per thousand, life expectancy at birth rose from 48 to 62 years, adult literacy increased from 15 percent to 62 percent, and calorie intake per capita increased from 95 percent to 121 percent of minimum standard requirements. An active family planning policy led to a decrease in birth rates of 27 percent between 1965 and 1985. Nevertheless, as mortality declined by 45 percent over the same period, population growth has continued at 2.5 percent p.a.. The population has a young age structure, which, together with the increasing entry of women into the labor force, has caused the labor force to grow faster than population. The effect on unemployment, which according to official estimates, reached 15 percent in 1988 and particularly affects young entrants into the labor force, is a major concern of the Government. 4. During the 1970s the Tunisian economy performed strongly, aided by oil exports. GDP growth averaged 7.4 percent per year over the decade and non-oil exports grew at over 10 percent p.a. on the average. All sectors did well, especially manufacturing, whose share in GDP and exports increased substantially. To a great extent the rapid growth of GDP was due to high levels of investment, about 30 percent of GDP, which was compatible with a respectable growth of per capita consumption and a modest level of external financing, thanks to earnings from oil. The current account deficit averaged 5-6 percent of GDP, though there was a brief increase in 1976-78 to a peak of 11 percent of GDP, which the resurgence of oil prices reduced again without necessitating cutting back investment or consumption. Since Tunisia attracted considerable foreign investment, it had no difficulty in completing the financing of the current account from external sources. The country emerged from the decade with a modest increase in external indebtedness to 42 percent of GDP in 1979, as compared to 38 percent in 1970, and a debt service ratio of only 10 percent. Domestic inflation remained moderate, averaging 6.1 percent a year. 1980-84: Deteriorating economic performance 5. Difficulties began in the 1980s: although oil extraction declined as expected and, in addition, world oil prices fell, the necessary economic adjustments were slow in coming. The VIth Plan (1982-86) did, in fact, propose maintaining internal and external balance by reducing the investment rate, increasing emphasis on exports, and slowing the growth of recurrent budget expenditures. To promote job creation it envisaged a shift to more Wahor-intensive investment. But, in fact, these objectives were not pur.,Jed. Instead, from 1980 to 1984, investment remained high, around 31 percent of GDP with agricultural investment at about 4% of GDP. The greater part of investment was in the public sector and included a number of large capital intensive projects yielding few jobs and low economic returns. The five year non-oil ICOR for this period was 6.0. Wages increased substantially faster than productivity, further reducing the demand for labor. Inflation rose to an average of 10.0 percent p.a., and exports slowed. The current account deficit grew to 10.9 percent of GDP in 1984 with the agricultural merchandise 3907R  - 3 - trade deficit representing 3.2% of GDP. These expansionary policies kept growth high; it averaged 4.5 percent for the period, despite a drought in 1982 that slightly reduced GDP. But they depended on continued external borrowing which raised Tunisia's external debt (public and publicly guaranteed) to 46 percent of GDP and the debt service ratio to 21 percent by 1984, reflecting a shortening of average maturities. The Government attempted to restrain its expenditures; nonetheless, the overall budget deficit stayed close to 6.7 percent of GDP. 1985-87: Stabilization and the start of adiustment 6. By 1985 Tunisia had begun to experience problems in obtaining external financing for its high current account deficit and it became clear that a balance of payments crisis was threatening. Accordingly, after responding with some initial restrictive measures, the Government began a process of policy revision that has broadened into a wide-ranging process of structural adjustment. Its first step was to restrict imports. This succeeded in bringing the current account deficit down to 7.1 percent of GDP of which agriculture accounted for 2.0X, but, as usual with such controls, shortages of raw materials and spare parts developed, as well as biases against exports. The Government also reduced its investment, which had accounted for most of total investment. By these measures, and by mobilizing donor support, it avoided a full crisis. But it recognized that it had a large external debt burden and, as Tunisia's oil reserves ran out, the resources available to the public sector would diminish. Hence, the role of the public sector would need to contract in favor of the private sector. The Government also recognized that economic incentives were distorted and that the incentives structure would need to change for an efficient and active private sector to develop. In particular, the Government would need to make the economy more outward oriented, reduce administrative controls, reform the tax system, and improve the efficiency of financial intermediation. In August 1986 it announced a program prepared along these lines in dialogue with the Bank and DMF to stabilize the economy and lay the basis for sustained growth. A full description of Tunisia's adjustment objectives is presented in the document of the VIIth Plan (1987-91) and in the President's Report for the SAL. 7. The commitment of the Government to economic adjustment, despite difficult political transition problems, has led to substantial support by the Bank and other donors. The Bank's support has included the first Agricultural Sector Adjustment Loan (ASAL, approved by the Board in September 1986) and an Industry and Trade Policy Adjustment Loan (ITPAL, approved by the Board in February 1987). The Board approved a Structural Adjustment Loan of $150 million on June 16, 1988. The DMF supported Tunisia with a Stand-by arrangement from November 1986 to May 1988 for the equivalent of SDR 104 million (75 percent of quota) and for purchases of the equivalent of SDR 115 million under the compensatory financing facility. This Stand-by program was successfully completed and, on July 25, 1988, the IMF approved an Extended Arrangement for SDR 207 million. A first review of the EFF was undertaken at the end of February 1989. The staff found that progress has so far been satisfactory and agreed on a program for 1989. The IMF Board will discuss the staff recommendation in May 1989. 3907E  - 4 - 8. The Government's stabilization measures have reduced the imbalances in the budget and the external current account and have established the conditions for carrying on the liberalization program begun ia 1986. The Dinar was devalued 23 percent In nominal terms in 1986, yielding a 17 percent depreciation in real terms over the year. Wage increases have been tightly restrained. Total investment fell sharply in 1985 and 1986 to about 23.5 pc.cent of GDP and has remained at 21-22 percent since then. The devaluation and demand restraint caused the volume of imports to fall sharply, and by 1987 they were 18.4 percent below their 1984 level. Non-oil exports responded strongly to the devaluation; their 1987 volume exceeded that in 1984 by 33 percent. Remittances from Tunisians abroad also picked up: in 1987 they were 53 percent above their 1984 level in real terms. As a consequence, the current account deficit declined to 1.0 percent of GDP in 1987 and the Government deficit, net of amortization, to 2.8 percent. Inflation over 1985-87 was held to about 7 percent p.a. 9. Exogenous factors considerably affected the economy's performance and were, on the whole, unfavorable. In 1985 difficulties with Libya led to the repatriation of 30-35,000 Tunisian workers, thus ending their remittances and most exports to that country. The dispute has since been amicably settled. Regional security problems also reduced the number of tourists substantially, until the dissipa:.ion of the apprehensions of potential tourists, aided by the cheaper Dinar, caused visits from abroad to increase sharply in 1987. The drop in oil prices caused a big loss of income for Tunisia and accounted for nearly all of a 14 percent deterioration in the country's terms of trade. Agriculture rar