Tunisia - Population Project

RESTRICTED FILE COPY Report No. P-903 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 The report may not be published nor may it be quoted as representing their views.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 CREDIT TO THE REPUBLIC OF TUNISIA FOR A POPULATION PROJECT March 9, 1971 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A POPULATION PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to $4.8 million to the Republic of Tunisia. PART I - HISTORICAL 2. The proposed credit would be the Bank Group's second operation in the field of population and the first one to be financed by IDA. 3. The Government first raised the possibility of Bank Group assist- ance for its family planning program in December 1968. These exploratory discussions were continued during the visit of an economic mission to Tunisia in March 1969 and, following a Government request, a project iden- tification and preparation mission visited the country in November 1969. The project was appraised in May/June 1970. 4. Negotiations for the proposed credit were held in Washington from February 4 to 12, 1971. The Tunisian delegation was headed by Mr. Ahmed Balma, Chef du Cabinet of the Minister of Public Health, and included Mrs. Tewhida Ben Cheikh (M.D.), and Mr. Aberrahman Mezlini, Director and Admin- istrator, respectively, of the Directorate of Family Planning and Maternal and Child Welfare at the Ministry of Public Health, Mr. Chelbi, from the Ministry of Planning, Mr. Abdellatif Khemakhem, Director General of the National Institute of Productivity, and Mr. Ahmed Badra, from the Tunisian Embassy in Washington. 5. Following is a summary statement of loans and credits to Tunisia as of February 28, 1971: -2- Loan or Amount (US$ Million) Credit Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education 4.9 380 1964 Republic of Tunisia Port Development 7.0 - 449 1966 Societe Nationale Development d'Investissement Finance Co. 4.7 94 1966 Republic of Tunisia Education 13.0 4.3 484 1967 Republic of Tunisia Cooperative Farms 6.1 2.1 99 1967 Republic of Tunisia Cooperative Farms 3.1 1.1 512 1967 Societe Nationale Development d'Investissement Finance Co. 10.0 2.1 573 1968 Office des Ports Port Development Nationaux Tunisiens 8.5 6.1 581 1969 SONEDE Water Supply 15.0 14.2 606 1969 SNCFT Railways 8.5 8.5 150 1969 Republic of Tunisia Railways 8.5 7.2 S2 1969 Republic of Tunisia Highway Engineering .8 .4 648 1969 Societe Nationale Development Finance d'Investissement Co. 10.0 7.8 209 1970 Republic of Tunisia Water Supply 10.5 10.5 724 1971 STEG Gas Pipeline 7.5* 7.5 Total (less cancellations) 78.1 40.0 of which has been repaid to Bank and others 2.3 Total now outstanding 75.8 Amount sold 1.6 of which has been repaid .5 1.1 Total now held by Bank and IDA 74.7 40.0 Total undisbursed 48.7 23.1 71.8 6. Implementation of the Second Education Project (Credit No. 94) has been satisfactory, but disbursements have somewhat lagged behind sched- ule. Savings of about $1.5 million were achieved in construction and pro- curement. As an interim measure, the closing date (December 31, 1970) has been postponed by four months to permit the submission and processing of pending withdrawal requests and to examine a Government request for utili- zation of the savings. I will in due course present to the Executive Directors recommendations regarding the utilization of these funds and a further post- ponement of the closing date. * Not yet effective - 3 - 7. The Executive Directors approved amendments to Loan No. 484 and Credit No. 99 (Cooperative Farm Project) in November 1970, but the changes are not yet effective. It is expected that the amendments will become effective by March 31, 1971. 8. As a result of flood damages in the fall of 1969 and the necessity of giving priority to the repair of these damages, the Railroad Project (Loan No. 606 and Credit No. 150) is about one year behind schedule. The railroad company (SNCFT) has made efforts to reduce this delay, and substantial pro- curement contracts have been recently signed or are about to be signed. A matter of concern is the weak financial position of SNCFT, due principally to loss of traffic because of the flood damages, delays in repairing these damages and non-payment of freight charges by the railroad company's largest client, a phosphate mining company, which is in financial difficulties. However, the Government is acting to restore the financial position of both SNCFT and the phosphate company. A Bank staff member is currently reviewing the position in Tunisia. 9. Initial delays in the preparation of bidding documents and in the letting of contracts account for slow disbursements under the Second Port Project (Loan No. 573). A number of important contracts have now been awarded and a normal rate of disbursement can be expected henceforth. 10. Disbursements under the First Water Supply Project (Loan No. 581) are now reaching a satisfactory level. Implementation of the three Loans to Societe Nationale d'Investissement (Nos. 449, 512 and 648) is proceeding satisfactorily. 11. In 1962, IFC invested $3.5 million ($2 million as a loan and $1.5 million as equity investment) in NPK-Engrais, a phosphate fertilizer company. In 1966, IFC made an investment of D 300,000 (about $571,500) in the share capital of Societe Nationale d'Investissement (SNI), which in 1970 was in- creased by $630,000 allowing IFC to maintain its 20 percent participation when SNI doubled its share capital. In 1969, IFC made an investment of $9.9 million ($8 million as a loan and $1.9 million in share capital) in COFITOUR, a tourism development and holding company. 12. The Bank and IDA are presently considering projects in the fields of highway construction, agricultural credit, fisheries and tourism infra- structure as well as a fourth loan to Societe Nationale d'Investissement. PART II - DESCRIPTION OF THE PROPOSED CREDIT Borrower: Republic of Tunisia Amount: $4.8 million equivalent in various currencies. Purpose: To assist in expanding and improving Tunisia's national family planning program through the construction of maternity hospitals and mater- nal and child health centers and the provision of consulting services. Amortization: In 50 years including a 10-year period of grace, through semi-annual installments of 1/2 of 1 per- cent from May 15, 1981 through November 15, 1990 and of 1-1/2 percent from May 15, 1991 through November 15, 2020. Service Charge: 3/4 of 1 percent per annum on the principal amount of the credit withdrawn. PART III - THE PROJECT 13. An appraisal report entitled "Appraisal of a Population Project, Tunisia" (PP-4a) is attached. 14. Tunisia's annual rate of population growth has risen to 2.8 per- cent in recent years. This high rate of demographic growth is impeding eco- nomic progress, aggravates the unemployment problem and has serious social consequences. Against this background, an experimental family planning program launched by the Government in 1964 was expanded into a national program in 1966. 15. After six years of existence, Tunisia's family planning program leaves much room for improvement. Despite a generally favorable climate for family planning ideas, strong political support and adequate budgetary resources, the program reaches only 2.5 percent of women in the fertile age group each year and the 1969 number of 21,300 new acceptors compares with 28,000 in Jamaica and 35,000 in Singapore for the same year, countries with somewhat less than one-half of Tunisia's population. The weak performance is not a result of inadequate demand for family planning services, but is rather attributable to shortcomings and constraints on the supply side, particularly with regard to organization and staffing patterns, administra- tive procedures and overcrowding of the urban maternity hospitals. 16. The project is designed to enhance the effectiveness and increase the capacity of the program through the provision of technical assistance, the construction of four maternity hospitals, two rural maternity centers and 29 maternal and child health centers and the extension of a Paramedical School in Tunis, including a postgraduate section. 17. A particularly important objective of the project's technical as- sistance component is to strengthen the management and improve the organi-- zation of the family planning services with the help of management consul- tants. They will design and assist in implementing a system which would ensure an optimum use of the resources at the disposal of the program. Their terms of reference have been agreed upon during negotiations and their appointment would be a condition of effectiveness. - 5 - 18. With regard to the physical facilities, it may be noted that the cost of the maternity hospitals included in the project is almost twice that of the maternal and child health centers. At the same time, 85-90 percent of the 55,000 new acceptors expected yearly from the project will be attributable to the 29 centers, and only 10-15 percent to the hospitals. It may thus seem that the cost-effectiveness of the centers by far exceeds that of the hospitals. Such a comparison is not appropriate, however. The two components are indivisible and cannot be regarded as independent al- ternatives since the maternity hospitals are indispensable for providing the requisite supporting gynecological services to the centers, in addition to supplying in-service training opportunities for family planning personnel. 19. The figure of 55,000 new acceptors expected to result from the project every year has been calculated on the basis of very conservative assumptions, and does not take into account the impact of the project on the efficiency of the whole family planning program through the implemen- tation of the recommendations of the management study and the reorganization of the Directorate of Family Planning and Maternal and Child Welfare; al- though this impact is not quantifiable, it is expected to be substantial. 20. Agreement was reached during negotiations on the functions and responsibilities as well as the organization and management of the Direc- torate of Family Planning and Maternal and Child Welfare at the Ministry of Public Health, which at the present time is the entity to implement the project. The Government is in the process of establishing an autonomous Institute of Family Planning with a view to endowing the family planning services with greater administrative flexibility and financial autonomy. When created, the Institute would take over the functions and responsibil- ities of the Family Planning Directorate, including implementation of the proposed project. Agreement was reached during negotiations that the Institute would be established along lines which would ensure the efficient implementation of the project and of the whole family planning program. 21. The cost of the project is estimated at approximately $7.7 million and, with the possible exception with regard to management consulting ser- vices noted in the following paragraph, the proposed credit of $4.8 million would cover the project's estimated foreign exchange component. 22. Contracts for civil works, equipment and furniture will be let on the basis of international competitive bidding. Bids would be invited in packages likely to encourage both international and local contractors. A preference of 15 percent (or the existing import duties, if lower) is pro- posed for evaluating bids from local manufacturers of furniture and equip- ment. The Government has proposed that the Tunisian National Institute of Productivity, in association with an experienced foreign firm, be assigned a significant role in the management consulting services (see para. 17). Provided that a satisfactory proposal is submitted by the Borrower on this basis, it is proposed to finance 80 percent of the services of not only - 6 - foreign management consultants, but also of the Institute. Such an arrange- ment would encourage and contribute to the development of domestic manage- ment consultant capability. The amount of local currency financing involved is not likely to exceed $100,000. 23. As explained in the appraisal report (para. 3.14, Annexes 4.3-4.5), Tunisia's family planning program is receiving substantial support under bi- lateral aid programs. This assistance, which at present amounts to about 75 percent of the recurrent cost of the whole program, is mainly provided in the fonn of expatriate staff, equipment and supplies. While supplementing scarce local personnel and adding substantially to the program's material resources, the bilateral assistance has probably had a limited impact at the level of policy formulation and central administration of the family planning services. Through improving the overall performance of the program, the proposed project would help to enhance the effectiveness of bilateral aid. Improved management procedures, in particular, are likely to make possible a more efficient utilization of foreign assistance. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 24. The draft Credit Agreement between the Republic of Tunisia and the Association, the Recommendation 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 Credit are being distributed to the Executive Directors separately. 25. The following provisions of the draft Credit Agreement are of particular interest: (a) Section 3.04 and Schedule 4 defining the organization, functions and responsibilities of the family planning services and requiring the Borrower to provide sufficient resources for the effective implementation of the national family and population planning programs; (b) Section 3.06 and Schedule 5 setting forth a number of administrative arrangements designed to overcome existing shortcomings in the family planning program; (c) Section 7.02 specifying as an event of prematuring the Credit any suspension, abrogation or amendment of the organization, functions and responsibilities of the Family Planning Directorate which, in the opinion of the Association, would impair the ability of the Borrower to carry out the Program. The purpose of this section is to make sure that the Institute of Family Planning as successor to the Department of Family Planning is established along lines that will not adversely affect the project. - 7 - PART V - THE ECONOMY 26. The latest economic report on Tunisia dated May 4, 1970 (EMA-22a) was distributed to the Executive Directors on May 5, 1970, and an updating memorandum was issued on March 3, 1971. An economic mission is presently in the country. A basic data sheet is annexed. 27. Tunisia's economic development during 1970 has, on the whole, been less favorable than had been forecast. GDP at constant prices, which at the beginning of 1970 was expected to rise by 7.7 percent, grew by not more than 4.5 percent. Agricultural production actually declined as a good grain harvest was more than offset by poor olive and vegetable crops, and a fall in livestock production. Output in most other sectors also fell short of expectations partly because of disruptions caused by the disastrous floods in September/October 1969. Domestic demand, on the other hand, continued to rise strongly with public expenditures leading the way. Investment out- lays increased by 12 percent while consumption expanded by 6 percent. The combination of low production and buoyant demand put pressure on prices and led to an 8 percent increase in imports. As exports grew only slowly, the current account deficit in the balance of payments rose by $24 million to an estimated $128 million. But the deficit was more than covered by in- creased foreign aid, and reserves continued to rise moderately. 28. Tunisia's economic development over the last few years had been affected by unfavorable weather conditions, severe marketing constraints especially for exports, and a number of organizational difficulties which resulted in slow production growth, deteriorating public savings, increasing inflationary pressures, and a high external debt burden. These factors have contributed to recent political changes and led to a serious search for a more successful set of economic policies. These efforts culminated in a new economic strategy, presented by the Prime Minister last November, which aims at accelerating the growth of production and exports by reducing direct government interference in economic decisions, encouraging private initia- tive and entrepreneurship, and relying more extensively on market forces as guide for investment and production. More specifically, the Government has stated its intention to give priority to increasing agricultural output, and to the promotion of labor intensive small and medium scale industrial enterprises. Productivity and export orientation will be the principal criteria for investment allocation. Workers' emigration will be encouraged as an outlet for surplus labor, while efforts to control the increase in population will be intensified. 29. The new budget for 1971 reflects already to some extent the changes in overall policy. It offers incentives for private investors and reduces the amount of public capital expenditure. Government investments will focus on the completion of ongoing projects and on complementary works to raise the productivity of existing facilities. The expansion of current spending will be more limited and selective than in previous years. Moreover, a major over- haul of the tax structure has been started with the objective of removing existing production and export disincentives. - 8 - 30. Stimulated by the new budget, private investment is expected to rise during 1971, particularly in the agricultural sector. Agricultural production is likely to recover somewhat, especially since favorable weather conditions are likely to produce a good olive crop. Industrial output is expected to continue its moderate rise, concentrated mainly in food proces- sing and textiles. Crude oil production is unlikely to grow, but consider- able gains may be expected from tourism. Overall production could be 6-8 percent higher than in 1970. This together with rising imports and the fiscal restraint should reduce the inflationary pressure. 31. However, much remains to be done to carry out the structural re- forms envisaged by the Government. Institutional changes will have to be made and the responsibilities of government agencies, banks, and enterprises need to be newly defined in order to establish an efficient market economy. Adequate export incentives will have to be given and a more liberal exchange system is required. In addition, there is urgent need for a reappraisal of sectoral policies. The Fourth Plan (1973-76) which will soon be prepared, could play a leading role in the implementation of the necessary economic reforms. 32. Tunisia's external debt burden is high. In 1970, about 22 percent of gross foreign exchange earnings had to be spent on servicing external debt obligations, most of it for public and publicly-guaranteed debt. The structure of external debt, however, has been improved in recent years by reducing the amount of new short and medium-term borrowing. Nevertheless, payments on present debts will remain large in coming years, and while there is scope for some additional borrowing on conventional terms, Tunisia will continue to depend to a large extent on the availability of aid on lenient terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 33. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 34. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President March 9, 1971 ANNEX TUNISIA BASIC DATA Area 164,000 square kilometers 63,380 square miles Population (mid-1970 estimate) 5.1 million Annual Rate of Growth (1965-1970) 2.8 percent Density 31.0 per km2 Gross Domestic Product (1970) 1/ D.559.3 million Per Capita (1970) 1/ US$210 Annual Rate of Growth (1965-1970) 2/ 0.8 percent per capita Industrial Origin of GDP (1966 Prices) Annual Growth Percent Shares 1965-1970(%) 2/ 1970 / Agriculture -4.5 14.3 Mining, Water and Power 17.7 8.5 Manufacturing 5.2 15.2 Construction and Public Works 2.5 8.8 Transport and Communications 2.3 8.6 Services 2.7 25.3 Government Wages and Salaries 8.8 19.3 GDP at Factor Cost 3.6 100.0 Indirect Taxes less Subsidies 5.0 17.7 GDP at Market Prices 3.8 117.7 Expenditure on GDP (Current Prices) Private Consumption 4.3 62.2 Public Consumption 10.7 20.0 Gross Investment 5.0 24.3 Exports of Goods and NFS 8.4 22.5 less: Imports of Goods and NFS 4.0 -29.1 Expenditure on GDP 6.5 100.0 Gross Domestic Savings 11.7 17.8 Resource Gap as % of Investment (1970) 26.9 Money, Credit and Prices Annual Growth End-1969 1964-1969 (%) (D. million) Total Money Supply 7.5 182.2 Time and Saving Deposits 17.2 50.5 Bank Credit to Government, Net 5.5 94.2 Bank Credit to non-Government Sectors 13.3 241.0 Consumer Price Index (1962 - 100) 4.0 130.2 Wholesale Price Index (1962 100) 4.8 139.8 General Government Operations Annual Growth 1970 1965-1970 ()(D. million) Current Revenue 9.3 190.0 Current Expenditure 11.2 172.8 Current Surplus -2.7 18.1 Gross Fixed Capital Formation 2.0 52.1 Other Capital Expenditure 5.3 21.7 Overall Deficit 5.1 55.7 Domestic Financing, Net -10.7 6.1 External Financing, Net 8.5 49.6 Balance of Payments Exports of Goods and NFS 8.5 148.4 Imports of Goods and NFS 2.4 191.4 Deficit on Factor Services 14.0 -24.2 Current Account Deficit -3.5 -67.2 Net Public Capital 5.2 59.3 Net Private Capital -15.0 14.9 Change in Reserves N/A -7.0 Net Foreign Assets (End-1970) -2.2 External Debt 1969 ($ million) Public Debt Outstanding at Year's End Total Debt Service Ratio (%) 24.9 Public Debt Service Ratio (%) IMF Position (US$ million) December 31, 1970 Quota 35.0 Drawings outstanding 19.5 Bank/IDA Position (US$ million) December 31, 1970 Bank loans (less cancellations) 70.1 Repayments 2.3 Total loans outstanding 67.8 IDA credits (less cancellations) 40.0 Total Bank/IDA 107.8 of which disbursed 44.4 undisbursed 63.4 1/ At current factor costs and at the official rate of exchange. 2/ 1970 compared to 3-year averages centered on 1965 to remove the effect of exceptionally good weather on agriculture in 1965. March 9, 1971