Peru - Fourth Agricultural Credit Project

RESTRICTED Report No. P-431 FILE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE FOMENTO AGROPECUARIO DEL PERU FOR AN AGRICULTURAL CREDIT PROJECT May 10, 1965  REPORT ANXD RECOMJI'TDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS 0N A PROPOSED LOAN TO BANCO DE FOIENTO AGROPECUARIO DEL PERU FOR AN AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $15 million to the Banco de Fomento Agropecuario del Peru (hereinafter called "Banco"). The loan would help finance the program of medium and long-term agri- cultural credit of the Banco. PART I - INTRODUCTION 2. Bank missions went to Peru in June and December 1264 to appraise the Banco's three-year lending program for which Bank financing had been requested. The background of the request and the history of the three past Bank loans to the Banco are described briefly in para- graphs 7 and 8 below. 3. Negotiations for the loan took place in Washington from April 5 through 9, 1965. The Government was represented by Mr. Carlos Gibson, Minister Counsellor of the Peruvian Embassy in Washington, and the Borrowier by Messrs. Ismael Benavides and Ramnon Remolina, respective- ly President and General llanager of the Banco. 4. The proposed loan would increase the total of Bank lending to Peru from $134.3 million to $149.3 million net of cancellations. The status of previous Bank loans as of March 31, 1965, excluding the $11 million loan to San Lorenzo which was approved by the Executive Directors on April 20, 1965, is summarized below: ($ million) Total loans, net of cancellations 123.3 of which repaid 28.1 Balance outstanding 95.2 Amount sold 11.6 of which repaid 8.0 3.6 Met amount held by the Bank 91.6 5. A discussion of the status of the loans for which there have been some delays in disbursements is contained in paragraph 5 of the "Report and Recommendation of the President to the Executive Directors  on a Proposed Loan to the Republic of Peru for the San Lorenzo Irrigation Project" which was sent to the Executive Directors on April 12, 1965. No substantial change has occurred since then. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: Banco de Fomento Agropecuario del Peru. Guarantor: Republic of Peru. Amount: The equivalent in various currencies of $15 million. Purpose: To help finance a three-year program of medium and long-term credit for agriculture. Term and Amortization: 15 years (including 4 years' grace); 22 semi- annual installments beginning October 1, 1969 and ending April 1, 1980. Interest Rate: 51g per annum. Commitment Charge: 3/8 of 1% per annum. PART III - THE PROJECT 7. A detailed appraisal of the project is attached (IJo. TO-470a). The Banco is an autonomaous credit institution with a capital equivalent to $15.6 million, paid in by the Peruvian Government, and the equivalent of some $85 million in borrowed funds, largely in the form of sight and short-term deposits. The Banco is the major source of short, medium and long-term agricultural credit in Peru, and the only institution providing medium and long-term agricultural credit. It extends credit for practical- ly all kinds of agricultural development projects and operates in all parts of the country through a network of 93 field agencies. Banco does not merely provide credit: its large technical staff assist borrowers to plan their investment and give them follow-up advice. In 1963/64 the Banco made loans for about $55 million equivalent, of which $50 million was for short-term and $5 million for medium and long-term. At present, the total amount of loans outstanding is about $88 million equivalent. The profit record of Banco has not been entirely satisfactory, and in 1963/64 writing off uncollectible credits accumulated in previous years and the increase of depreciation allowances caused the accounts to show substantial losses.  8. In order to improve its organization, reduce its operating costs and strengthen its financial position, Banco has agreed (a) to reduce existing arrears on its loan portfolio according to an agreed schedule, and (b) to define with the help of consultants, and promptly carry out, a general reorganization plan. On its part, the Government has guaranteed that Banco will receive at least 40 million soles a year ($1.5 million) as equity contribution. Tne Government has also agreed to supply the Banco with the funds that may reasornably be required to meet the demand for short-term credits, should such funds not be avail- able to the Banco from the normal sources. FurtLermore, if the Banco should be prevented by law or any other governmental action from apply- ing interest rates adequate to cover its operating expenditures and charges, the Government would reimburse the Banco for any losses in- curred by it for that reason. 9. The Banco received three loans from the Bank for $5 million each in 1954, 1957 and 1960. The loans were utilized to finance the foreign exchange component of successive three-year programs of medium and long-term credits for agricultural machinery, irrigaticn and related facilities, fertilizers and pesticides, and livestock. The loans, which were fully disbursed by October 1963, and liave final maturities varying between 8 and 8