Afghanistan - Agricultural Credit Project

RESTRICTED FIlE COPY Report No. P-831 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF AFGHANISTAN FOR THE AGRICULTURAL DEVELOPMENT BANK PROJECT May 27, 1970  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND REC011ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPiENT CREDIT TO THE KINGDOM OF AFGHANISTAN FCR THE AGRICULTURAL DEVELOPMENT BANK PROJECT 1. I submit the following report and recommendation for a proposed Development Credit to the Kingdom of Afghanistan in an amount in various currencies equivalent to $5.0 million. PART I - HISTORICLL 2. The proposed Credit would be the first financing provided by either the Bank or IDA for agriculture in Afghanistan where to date the Association has made two credits. The first credit (68-AF), $3.5 million for an education project, was signed in 196[. This project has suffered serious delays. It became effective only in March 1966; then disagreements between the consultants and the Government on project design and delays in the acquisition of land held up the project further. Tendering was attempted twice. The first failed as only two bids were received, both of which exceeded the consultants cost estimates by about 100 percent. At the second tendering in December 1968 six bids were received and five were within the consultants cost estimates. However, the GovernmXent was still unable to award a contract, largely because it had become doubtful about the appropriateness of the project. Since 1964, several bilaterally financed education projects had been completed, which made the Government feel that part of the IDA project might be unnecessary. In addition, the Government continued to have doubts about the construction standards for the proposed buildings. For these reasons the Government requested at the end of 1969 that the project be re-examined and revised in accordance with current priorities. The new Administration which assumed office in December 1969 is now expected to request cancellation of the credit. 3. A second credit for $5.0 million (158-AF) was extended in May 1969 for the improvement of highway maintenance operations. Its effectiveness has been delayed because of the need for Parliamentary ratification which was completed only on May 12, 1970. The credit should become effective within a few days. The delay did not affect the implementation of the project significantly. Consultants, under a prcgram financed by UNDP with the Bank as Executing Agency, have been engaged in preparing the project since last August, and their work is on schedule. 4. The Association's interest in agriculture dates from 1967 when a mission visited Afghanistan and reported that the Agricultural Development Bank of Afghanistan needed to be reorganized. In 1968 the Government re- quested of the UNDP/Special Fund assistance in obtaining experts required.  - 2 - The request was approved in 1969 with the Bank serving as Executing Agency and Dr. Hendrikson Associates were appointed as consultants. The Association sent a mission in the fall of 1969 when the present proposals were worked out. 5. Negotiations regarding the proposed Credit for the lending program of the Agricultural Development Bank of Afghanistan (AGBANK) took place in Washington during May 7 - 15, 1970. Representing the Borrower wzere H.E. Abdul Hakim (iMinister of Agriculture and Irrigation), and Messrs. A.A. Khorram (President, Department of Planning and Economic Analysis, Ministry of Planning), Yar Mohammed (Representative, Ministry of Finance), A. Afzal (President, AGBANK) and U. Linck (General lYanager, AGBANK). Mr. Linck is employed by Dr. Hendrikson Associates whose Managing Director, Dr. Hendrikson, was also present at the negotiations during May 11 - 14. 6. The present status of credits to Afghanistan at April 30, 1970 is summarized below: Amount (US$ Million) Year No. Borrower Purpose IDA Undisbursed 1964 68-AF Afghanistan Education 3.5 3.2 1969 158-AF Afghanistan Highway Plaintenance 5.0 5.0 Total 8.5 8.2 PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: Kingdom of Afghanistan. Amount: The equivalent in various currencies of US$5.0 million. Purpose: To help finance the credit program of the Agricultural Development Bank of Afghanistan, procure equipment and finance expert service and fellowships. Amortization: Through semi-annual instalments of half of 1 percent from June 15, 1970 through December 15, 1989 and of one and a half percent from June 15, 1990 through December 15, 2019. Service Charge: 3/4 of 1 percent per annum. Estimated Economic Return: 21 percent per annum.  - 3 - PART III - TRE PROJECT 8. A detailed appraisal of the project (Report No.PA-46a of May 27, 1970) is attached. 9. The AGBANK has been in operation since 1954 and has an authorized capital of Af.150 million ($2 million); of the Af.86 million which has been subscribed and paid up, the Government owns 7 percent, Da Afghanistan Bank (central Lard) 89 percent, Bank Melli Afghan 2.3 percent, commercial companies 0.6 percent and private individuals 1.1 percent. The headquarters are in Kabul and there are ten branch offices. It is the main source of institutional credit for farmers, but has suffered from a lack of experienced and trained management and staff. 'Since 1954 AGBANK has made loans totalling Af.225 million ($3 million). In recent years, however, its lending has declined steadily; only 15 loans were made in 1968/69 totalling Af.5 million ($70,000), and only 12 loans in the first seven months of 1969/70 totalling Af.0.8 rmllion ($10,600). The portfolio as of March 1970 was about Af.91 million ($1.5 million) after eliminating Af. 20 million of doubuful. accounts. Most of the latter stem from loans made prior to 1961. It appears that large arrears (about 30 percent) have been due to inadequate collection procedures rather than debtors' unwillingness to pay. Initial improvements have been recorded and are expected to continue. 10. AGBANK expects to make loans for investment made by farmers over the next three years equivalent to about $5.8 million, of which $3.7 million would be lent from funds provided by IDA, $0.8 million from AGBANK's own re- sources and $1.1 million from the farmers themselves. The amount provided by IDA for relending by AGBANK would be used for the following purposes: Imported equipment such as tractors, attachments and pumpsets $2,705,000 Locally made farm equipment $ 111,000 Minor irrigation works $ 81ho 0oo $3,656?000 This amount will be transferred to AGBANK as a contribution to its permanent capital. AGBANK would charge borrowers not less than 8 percent per annum for medium- and long-term loans and not less than 10 percent per annum for short- term loans. Part of the proposed Credit will be used for tractor spares which will be purchased by farmers as required in an amount of $ 227,000 11. The balance of the proposed Credit would be used by the Ministry of Agriculture and Irrigation and AGBANK for: Vehicles, irrigation design and construction equipment $ 393,000 Technical services and fellowships $ 724,000 $1,117,000  12. All equipriient to be financed under tle Credit would be procured by AGBANK through international competitive bidding with two exceptions, office and design equipment costing less than $20,000 and locally made animal- drawn implements and threshers. Local competitive bidding only is required for irrigation rehabilitation schemes, as these labor intensive works are not expected to attract foreign bidders. 13. Of the total project cost estimated at $7.2 million, the IDA participation would be $5.0 nmllion or 70 percent. $4.8 million would cover the foreign exchange cost of the project. The equivalent of about $220,000 would finance expenditures in local currency of which about $160,000 would be for minor irrigation works and the remainder for local extension services. 1h. As a result of the Credit, AGBANK's annual lending operations are expected to increase from an estmliated $0.3 million equivalent in 1970/71 to about $1.9 million in 1973/74. Tne project would substantially increase farm income by intensifying and improving production on irrigated farms through the use of tractors and ox-draw7n implements, and by providing addi- tional and reliable water supply through irrigation rehabilitation and pump irrigation. Returns to farmers are estimated to range from 22 percent on irrigation rehabilitation to 31 percent on tractors; the overall rate of return to the economy is estimated at 21 percent. Additional benefits wiould result from institutional improvements of the AGBANK and the Ministry of Agriculture. The estimated value of annual production attributable to the project would be about $12 million equivalent, including about $4.6 million of import savings and about $1 million in direct annual export earnings. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Development Credit Agreement (Agricultural Development Bank Project) between the Association and the Kingdom of Afghanistan, the Recommenx1ion of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credit Agreement are being distributed to the .51ecutive Directors separately. The draft Development Credit Agreement includes provisions for (a) transfer of the proceeds from the Credit designated for credit operations to AGBANK as equity capital (Section 4.02); (b) the establishment of a separate Minor Irrigation Section (MIS), and a Groundwater Development Sub-Section (GWBD) within the IllS to deal with work arising from the Project and for provision of expert services, with the experts being responsible for the HIS and G,D (Section 4.03); and (c) adoption by AGBANIK of operating policies and proce- dures, including loan regulations, satisfactory to the Association (Section 4.06).  PART V - TITW ECONOfY 16. The most recent economic report "Current Economic Position and Prospects of Afghanistan" (SA-6a) dated May 27, 1969 was distributed to the Executive Directors on June 3, 1969 (R69-110). an economic mission is in Afghanistan at the present time; its report is expected by September. 17. Afgha:-iistan is one of the least developed countries in the world. In spite of considerable investment in the last decade, economic growth is probably still barely keeping pace with the increase in population, if it does at all. Investments, three-fourths of which were financed from foreign sources, have been mainly concentrated in large infrastructure projects, which have not yet begun to contribute significantly to the growth of the economy. The financing of development is constrained by very low domestic savings and rising debt service payments, and there is a critical need for skilled and experienced manpowqer at all levels. 18. In recent years, there have been signs of modest improvement in Afghanistan's economic prospects. In agriculture, self-sufficiency in wheat- a major food crop - may be reached as a result of an increase in the irri- gated acreage, application of fertilizer and introduction of a new high- yielding variety of seeds. In industry, the response to the 1967 Private Investment Law aimed at stimulating private investment, has been encouraging; as of the end of 1969 some 80 of 130 project applications had been approved (mostly to small industrial and handicraft enterprises), involving an esti- mated total investment of about $30 million. Progress in actual investment, hovever, has been slow; in part because of a lack of credit. A proposal for the establishment of an industrial bank has been before Parliament for some time and action on it is expected this year. 19. The Government has begun to recognize that there is room in many sectors for increasing output by making better use of existing facilities and by improving techniques of production. The most important of these sectors is agriculture, which accounts for over 50 percent of gross domestic product and 75 percent of the labor force. It appears that the total output of staple food has not kept pace with dernand. While the results of the recent introduction of modern practices are encouraging, farming practices are generally primitive, and productivity is low. Two of the main factors inhibiting progress are inadequate extension services and the lack of agri- cultural credit, both long and short term, at reasonable interest rates. 20. Over the next several years it should be possible to achieve modest improvement in several sections of the economy. The Government is attempting to complete on-going infrastructure projects and does not intend to invest in new projects of a similar nature. Their aim is to emphasize investment in the productive sectors and on quick yielding and export-oriented projects  - 6 - J--.r of yahich are oqite small. Domestic resource mobilization for development wall cont_nue to be an acute problem, and the chronic deficit on the balance of payments is likely to remain for some time. These, together with the fact that total overseas aid has been declining, meant that Afghanistan will continue to be in great need of external capital if even a modest development program is to go forward. PART VI - COMPLIANCE I=TH ARTICLES OF AGREEMENT 21. I am satisfied that the proposed Credit complies with the Articles of Agreement of the Association. P.rRT VII - RECOTNMENDATIOi 22. I recommend that the Executive Directors approve the proposed Credit. Attachments Robert S. McNamara President May 28, 1970