Jordan - Agricultural Credit Project

RESTRICTED FILE CGPY Report No. P-35 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its occuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE HASHEMITE KINGDOM OF JORDAN FOR AGRICULTURAL CREDIT PROJECT December 2, 1963  REPORT AND RECONNENDATIONS OF THE PRESIDENT TO TIIE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOP- iHET CREDIT TO TEE HASHEIITTE KI!GDON OF JOPDAN FOR AGRICTJLTURAL CREDIT PROJECT 1. I submit the followiing report and recommendations on a proposed development credit to the Hashemite Kingdom of Jordan in an amount in various currencies equivalent to $3.0 million to assist in the financing of the lending program of the Agricultural Credit Corporation over approximately a two year period. PART I - BACKGROUID 2. The general survey mission organized by the Bank in 1955 pointed to the need for agricultural credit and recommended the reorganization of the govern-ment agricultural credit system. This was followed eventually by the creation of the Agricultural Credit Corporation (ACC), established in 1959 to extend loans for productive agricultural purposes. It started operations in July, 1960., 3. In 1961 the Government of Jordan applied to IDA for a credit to make possible the expansion of ACC's lending program. IDA missions which visited Jordan in December 1961 and iarch 1962 found that there was a definite need for such financing, but that ACC was not yet in a position to carry out the added responsibilities of administering an IDA credit. These missions made recommendations which to a large extent were accepted by the Government and ACC, and were reflected in Nay 1963 in amendments to the basic Law and regulations of AGC. I. A revised request for IDA assistance was received in B;arch 1963 and a third mission visited Jordan in Nay to re- appraise the project in the light of the steps which had been taken to improve the operation, management, and status of ACC. Final negotiations took place in Washington in October. 5. The Association has already made one credit to Jordan for the Amman Water Supply project (Credit No.15-JO), in the amount of $2.0 million. The amount disbursed as of October 31, 1963 was only $33,000. The delays in execution are the result of the following factors: (a) the first consultants hired to supervise the execution of the project proved un- satisfactory and new consultants had to be selected; (b) for this reason, and subsequent to the original IDA appraisal, the project had to be redesigned and re-engineered; and (c) there have been substantial delays in reaching agreement on arrange- ments for the provision of management assistance to the Municipality of Amman. The latter problem is not yet finally resolved, but it is hoped that final agreement will be reached  within the next few: wieeks. The present credit, along with the credit for the wjater supply project also being submitted to the Executive Directors today, would bring IDA assistance to Jordan to a total of ~8.5 million. There are no other IDA credits for Jordan under consideration at the present time. The Bank has made no loans to Jordan. PART II - DESCRIPTION OF- THE PROPOSED CREDTT 6. Purpose: To assist in financing the lending program to be carried out by AGO over approximately the next twvo years. Borrower: The Hashemite Kingdom of Jordan. Amount: The equivalent in various currencies of (13.0 million. Term &, 50 years with no amortization during the AmoDrtization: first 10 years. From February 1, 197T, one half of one per cent of the principal amount would be repayable semi-annually for 10 years; and one and a half per cent sermi-ainually thereafter to Auguist 1, 2013. Service 3/b of one per cent per annum on the Charge: principal amount of the credit disbursed and outstanding. Payment Blates: February 1 and August 1. Relending The Government of Jordan would relend the Arrangements: proceeds of the credit to the ACC. The Borro.wer would enter into an agreement with ACC whereby the latter would undertake to carry out the project and to renay the credit to the Government over a period of 10 years after 10 years of grace w-Ji th interest at 3* per cent per annun. AGC in turn would lend to farmers at an interest rate of 51 per cent per annum and at maturities appropriate to the individual projects. PERT III - APPRAISAL OF THE PROPOSD CREDIT The Pro,iect 7. A detailed appraisal of the project (TO-388a) is attached (NJo.1).  - 3 - 8. Agriculture is the mainstay of Jordan's economy, providing employment for more than half the employed labour force and, together with forestry, accounting in normal crop years for approximately 30 per cent of the gross nttional product. Agricultural production is still insufficient to meet the country's needs, howiever, and foodstuffs account for a large pronortion of imports (31 per cent in 1962). 9. Jordants agriculture is nostly a peasant agriculture with a comparatively large number of commercial farmers. Tw.o- thirds of the agricultural land is fanred by owmers and one- third by tenants, wqho are mostly share-croppers wlithout secure tenure. Population pressure on arable land is high and results in development of marginal land. Total farm indebted- ness is estimated to be substantial. 10. Despite institutional deficiencies, agriculture offers promising opportunities for development - both thlrough inten- sification of oroduction on land under cultivation and through expansion of agricultural area. The East Ghor irrigation project, about to be comoleted, should result in a substantial increase of agricultural outnut, assumming adequaue on-farm develonnent and an intensified cropDing pattern. The efforts nowJ being made byIr the government to improve agricultural research, extension services and marketing facilities must be accompanied by an expansion o-' agricultural credit facilities if a sustained grovth Df agricultural cutout is to be achieved. 11. AGC is the only significant institutional source of agricultural investment credit in Jordan. It is a semi- autonomous institution of the government. The amended law governing ACC enacted in TKay 1963 has given the Board full authorityr to administer ACC and determnine its loan policy. Its Chairman, vhD is the chief executive officer, is assisted by a Deputy Gieneral i7anager; both the present appointees are able administrators canable of running ACG soundly. The head office is in Amman and there are ten branch offices; the operational staff numbers about 115, of whom 90 are in the branches. 12. ACG's authorized capital is JD 7 million, of which the paid-in capital, amounting to approximately JD b million (US 211.2 million), represented mainly the outstanding loans of the predecessor institutions amalgamated into ACC. At present ACCGs resources for newi lending activities are virtually restricted tD recoveries on previous loans. The IDA credit -would enable AGC to expand its lending for agri- cultural develonment in accordance wJith an agreed program totalling the equivalent of 1b5 million over the next twJo years. AGC's owin resources are expected to be sufficient to cover about one-third of the proposed program, or aboout $1.5 million; the IDA credit would cover tw-o-thirds. The  foreign exchange component of the lending proCrai is estimated at rouglly 4jl million. 13. Although AGC's operations and management have become substantially more effective, there is still room for improve- ment. To this end, external technical assistance in accounting and lending procedures will be utilized by ACC during the execution of the project. At the present time, the U.S.A.TI.D. is miaking available the services of an expert to advise on loan appraisals. The IDA credit would nrovide aorroximately t,70,GOC for the foreign exchange costs of the services of foreign experts fDr accounting equipment. IL. Loan anplications would be processed after reviewl of detailed investment projects, farm nlans and budgets. ACG and the technical services of government denartments and agencies would nrovide assistance to farmers in nrenaring and documenting projects. ACC would continue to have due regard to the security for its loans but wqould pay increasnrg attention to the economic benefits of projects and to the financial returns fron its onerations. Loan arounts and terms wxould be flex.ible and Mould take into account the borrowers' requirements and repayment capacity. 15. AGC has agreed to raise the interest rate on its loans to farmers from b ner cent to 51 per cent. It has also agreed to revise this rate upwiard whenever there has been a general increase in the interest rates charged by other lend- ing institutions in Jordan. It has agreed to make every effort to improve the present unsatisfactory rate of recovery on loans. It will introduce and enforce a penalty interest rate of no less than 1 ner cent for defaulting borrowers and will take other measures as necessary to enforce repayment of loans in arrears. These steps should enable ACC to meet its increasing administrative exnenditures and to accumulate an adeauate reserve for bad debts. 16. AGC has already made a valuable contribution to the agricultural developrent of the country. InvestiEnts under the nrDnosed lending program would increase domestic production of food crops and dairy products and the production of export crons, and would thereby assist in reducing the trade deficit. The increase in farmerst gross annual income resulting from the lending prDgram should be about JD 1 million within a few years. 17. The scale of nrojects - even of joint irrigation projects - is too small to attract foreign contractors. Local trade channels would be used for nrocurement of m.achinery and equip- 1ment; foreign producers of the kind of equipment required are well represented in Jordan.  tConomiU S-itu3:_iDor 13. A renort on recent develonrnents in the econDmy of Jordan (RA - 93b) wias distributed to the Exccutive Directors Dn October 29, 1963 (R63-1 26). 19. Tn recent years Jordm has mnaintained a fairly satis- factzory rate of grouth irithout serious inlationary pressllres. The industrial sactor is still ver- small. In agriculture, crdrction cf cereals, ,<h.Mca is 1lwrgely Jep:endert orn erratic w.eather, has nat iroved, ut nrcduction o fr-uits and verzetaW; es has nearly dci'led over toie last few years. Fcrei=n axchanEe earniings, ferived manaly from tourism-, agricultural produce and nhosrhates, have nearly doubled over the nast three or four yrears. They still cover, ho-vwever, only aboult one cqarter of the irnort bill, and the w4hole economy rerains heavily denendent on fDreign assistance. 22D Jordan has an annual nar capita prDduct varying betwJeen y1i50 and 419g. WTith the addition Df foreign 2id and orivate remnittances, which together are ecual to about one quarter of the natio-nal Lncore, total resources of the economy. arounited in 1961, a good crop year, to $265 ner canita. Almjost 90 ner cent of the available resources are consunted. Pub'lic invest- ne.nt absDrbs only abouAt 4-5 rer c:ent of total resources. A serious attemnt is nowr being sa.e to step u, the rate cf invest- ment. A!ccording tD the -ioht-Year ProgreM (1963-in) now under discus.EiDn the tentative level af public investmient propDsed, bu.t rnot finally decidled, armunts to JdD 1165 rmilLion, an average of JT) 1-15 million p)er year - more than double the nresent level. Jordan rosy, hoiever, h -ve d-iffCulty ln finding tLe requisite personnel to carry cut a nrogram of t his size, dcespite the recentL series of reforms resignred to irynrcve standards of' nublic adininistration. Zven if the Drorrar is reducead so as to concentrate on the mrajor prof`ects in agriculture ard anining a vigDrous effort will be needed to mobilize greater domestic resources. T he Povernmer2t intends to cover an increasing share of eLrrent exoenditures out -of its own revenues, thereby relea.ng foreign aid fDr financing develonrment. FoDreignf assistance, which has levelled off -at abjout JD 18-19 rmillion ner e,ear, is now largely devoted to buidget sunnort (deferse exneenditures) but an increasing proportion is exoected to 'De nade availa'ble by the aid-giving countries for development. 21. Net foreign exclange reserves rose substantiolly in 1061 and 19,62, but fell by more th.an JD h million dcring thne first half of ,1963. fJn June 30 of this year they arounted to JD 28.6 million, Eufficient to cover abut eight rznths' irnrorts. 22. Jordan is a coor country, with limited natural resources and with an acute anaeployment problemi narticularly-W an.one the refugrees who -make uo almost one-third of the population. he  country's geogranhical nosition has led it to maintain a high level of defense exnenditures. These facts have been recog- nized in the very considerable amount of external assistance made available to Jordan for defense exoenditures and to some extent for development. With sound ecoDnoric policies, Jordan's denendence on external supnort nay decrease over the coming years, but at present the economyr is not viable. Desnite the fact, therefore, that the service of ex1stinn e,xternal debt constitutes an insignificant burden, the country cannot at this time afford to finance its investment program with loans on conventional terms. PART IV - LEGAL IINSTRUNRINTS AND LnAT: AUTHORITY 23. Attached is a draft Develoument Credit Agreerient between the Hashemite Kin,rdom Df Jordat. and the Association (No.2) and a draft nroject Agreement between ACC and the Association (qo.3) dealing wi,ith the pronosed credit for the agricultural credit project. 2L. Attention is drawn to the followsing provisions: (a) The Credit Agreement provides that the Borrower re-lend the proceeds of the Credit to ACC for the Project (Sections 4.02(a) and 6.01(b)). (b) The Project Agreement provides that: ACC lend the proceeds of the Credit nursuant to terms, conditions and procedures satisfactory to the Association (Section 2.02); that ACC's operations, management and advisors be satisfactory to the Association (Section 2.01(a)); that ACC obtain the prior approval of the AssociatiDn for eny loan or loans to a single project in an amount exceeding the equivalent of $100,000 (Section 2.01(b)); that ACC charge interest rates which will enable it to recover all costs and charges and to accumulate adeouate reserves (Section 2.07); and that ACC must obtain the Asmsciation's cDnsent before contract- ing any debt with a maturity of more than one year (Section 2.09). 25. The recommendations of the Committee provided for in Article V, Section l(d) of the Articles of Agreerent of the Association are attached (No.l). PA0RT V - COITLIANTCE UTT-I ARTICLES OF AGREW