Nicaragua - Agricultural Credit Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 215-NIa APPRAISAL OF AN AGRICULTURAL CREDIT PROJECT NICARAGUA October 23, 1973 Latin America and the Caribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted | or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS U1s1 = Nicaragua Cordoba 7.00 Nicaragua Cordoba 1 oUS$o.1428 Nicaragua Cordoba 1,000,000 Us$142,800 WEIGHTS AND MEASURES 2 quintal = 46 kilograms = 101.5 pounds 21.74 quintals = 1 metric ton = 2,204.6 pounds 1 banana box = 19.05 kilograms = 42 pounds 1 meter (m) = 1.09 yards I kilometer (kn) = 0.62 miles 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 manzana = 0.69 ha = 1.70 acres 1 liter (1) = 0.26 gallon PRINCIPAL ABBREVIATIONS CB - Central Bank of Nicaragua FONDO - Special Development Fund BN - Banco Nacional de Nicaragua BANIC - Banco Nicaraguense INFOMAC - National Development Institute 1DB - Inter-American Development Bank UND? - United Nations Development Program IAN - Agrarian Institute of Nicaragua INCEI - Institute for External and Internal Trade UNASEC - Agricultural Sector Survey Uinit CACM - Central American Common Market CASA - Rice Milling Cooperative Inc. FONDO FISCAL YEAR January 1 - December 31  NICARAGUA APPRAISAL OF AN AGRICULTURAL CREDIT PROJECT Table of Contents A Page No. SUMMARY AND CONCLUSIONS.i ii- I. INTRODUCTION ......................................1 II. BACKGROUND .1 A. General I. . B. Agricultural Sector . . 2 C. Agricultural Credit. 4 III. THE PROJECT. 6 A. Definition ...................- 6 B. Detailed Features .............. 7 C. Cost Estimates and Financing. 10 D. Procurement and Disbursement . .12 IV. ORGANIZATION AND MANAGEMFNT . . .13 V. PRODUCTION, MARKETING, AND PRODUCER BENEFITS ...... 17 A. Production. 17 B. Marketing......... 18 C. Producer Benefits .19 VI. BENEFITS AND JUSTIFICATION . . 20 VII. RECOMMENDATIONS .21 Schedule A. Terms and Conditions of Lending ,This report is based on the findings of an appraisal mission to Nicaragua in January/February 1973, consisting of Messrs. C. G. Ramasubbu, Frank Thomas, and J. J. Romero-Chavez (Bank) and R. A. Crofts (consultant) and G. Sandoval (Bank trainee from Nacional Financiera, Mexico).  TABLE. OF CONTENTS (Cont'd) cTEXES 1. Agricultural Background: Table 1 Area and Population Density Table 2 Land Use by activity Table 3 Gross National Product Table 4 Production, Area and Yield of principal Crops Table 5 Principal Agricultural Exports Table 6 Farm Size Distribution 2. Banking System and Agricultural Credit: Table I Financial Accounts Of the Central Bank of Nicaragua Table 2 Interest Rates authorized by the Central Bank of Nicaragua Table 3 Balance Sheet and Profit and Loss Accounts of Banco Nacional Table 4 Balance Sheet and Profit and Loss Accounts of INFONAC Table 5 Balance Sheets and Profit and Loss Accounts of Private Commercial Banks 3. Livestock Development: Table 1 Statistics of Livestock Farms Table 2 Beef Statistics Table 3 Production of Milk in Nicaragua Table 4 Beef Exports by Value and Destination Table 5 Beef Exports by Volume and Destination Table 6 Cattle Slaughter Statistics Table 7 Beef Imports into United States under the Voluntary Program Table 8 Forecasts of Beef and Veal Production and Imports Table 9 Production and Trade in Milk Products in Central America 4. Irrigated Crops 5. Summary: List of Goods 6. Project Cash Flow 7. Disbursement Estimate 8, Projected FONDO Balance Sheets and Profit and Loss Statements 9 FONDO and the Participating Banks: Table t Net Profits and Current and Social Expenditure of MN 10. Producer Incon.es and Financial Rates of Return on Investments:  TABLE OF CONTENTS (Cont'd) Appendix 10-1 Farm Model 0 Rainfed Dairy Appendix 10-2 Farm Model 2 Irrigated Dairy Appendix 10-3 Farm Model 3 Rainfed Beef Breeding and Fattening Appendix 10-4 Farm Model 4 Irrigated Pastures and Beef Fattening Appendix 10-5 Farm Model 5 Irrigated Plantain Appendix 10-6 Farm Model 6 Irrigated Sugarcane 11. Economic Rates of Return: Appendix 11-1 Economic Rates of Return to Enterprises MAPS 0s   NICARAGUA AGRICULTURAL CREDIT PROJECT SU1MARY AND CONCLUSIONS i. This report appraises an agricultural credit project to support a three-year lending program for finaancing investments on about 550 ranches/ farms under five major categories: rainfed dairy, irrigated dairy, rainfed beef breeding and fattening; beef fattening on irrigated pastures; and ir- rigated crops. Agriculture is important to Nicaragua, contributing 70% of the country's exports and 25% of its GDP and employing 60% of the labor force. Conditions essential to growth in this sector are acceleration of the on-going process of diversification away from the traditional export crops such as coffee, and improvement of the technical effi.ciency and expan- sion of agricultural production, especially livestock, for which the country is well suited by its natural resources but inadequately equipped iD. term5 of credit and extension. The project seeks to meet these needs part:1y 'y providing long-term credit and supporting technical assistance to sub- borrowers in a spectrum of ranch/farm sizes. ii. This would be the fifth Bank loan to Nicaragu.a in the agricu tural sector. The first three, made in the 1950's for grain silos and machinery, were almost fully disbursed but the fourth, approved in 1963 for financing an irrigation project, remained largely undisbursed and was later cancelled, mainly because of an unforeseen rise in project cost. iii. The proposed loan of US$8.5 million to the the Central Bank of Nicaragua (CB) on the guarantee of the Republic of Nicaragua would finaace 54% (which is almost equal to the foreign excharige component) of total proj ect cost, estimated at US$15.8 iaillion equivalent. The Special Development F nd (FONDO), owned by Government and administered by the CB, Swold contribut US$1.6 million equivalent, or about 10% of the total cost, while the baldnce of about 36% would be contributed in equal shares by the participating bas ks and the sub-borrowers. Of the project cost, 26% would be for rainfed dairy farms; 12% for irrigated dairy farms; 26% for rainfed beef breeding and fattening ranches; 18% for irrigated beef fattpening unIts; and '12% for irrigated crop farms. The balance would be for supporting and tech nical servIces. iv. The period of sub-loans would vary from five years for irrigatsd beef fattening to 1 2 years for rainfed beef. Loans to relatively small beneficiaries would be charged interest at i0.25% and others would p1ay 72-,$ made up of 11% interest and an appraisal and suparvision fee of 1% While the FONDO would earn a spread only on loans to sub-borrowers other than smal'l beneficiaries, participating banks would retain a larger awiouiat (3%) on loans to small sub-borrowers than on those to others (2.50%).. Other features of the project aimed at ensuring that project lending would not be restricted to a few large ranchers would be (a) the smaller contributions  - ii required from banks and small beneficiaries to projects of such sub-borrowers; (b) the stipulation that no sub-loan would be made by a participating bank to a,ixS sub-borrower in excess of US$100,000; (c) the condition that the annual pKToportion of loans to small beneficiaries to total project loans made would be at least 15% in the first year, 20% in the second year and 25% in the third year, and (d) the reservation of US$1.5 million out of the Bank loan proceeds for such sub-borrowers. v. The project would be administered by the Central Ba-nk for the FONDO through a Special Project Unit. The FONDO would finance sub-borrowers through the Government-owned Banco Nacional de Nicaragua (BN), the largest bank in. thte country and the major institutional source of agricultural credit, and through six private commercial banks whose modest role in agriculture has so far beer restricted mainly to production credit. The Special Project IUnit, under an internationally recruited Technical Director and a Nicaraguan Co-Director, would employ its own technicians and also guide those engaged by the banks to appraise and supervise their sub-loans. The project would strengthen BN's current efforts to improve its financial position. vi. Items to be financed are varied and would not be suitable for bulk procurement th'rough international competitive biddirng. Farmers/ranchers would make their purchases through normal co7.ercial channels, which prow-de adequate competition and supplies and represent various international firmz. Vehicles and supplies costing $20,000 or more which are required for tech.nical services would be procured on the basis of quotations invited through local advertizing with notification to embassies to assure international competition. vii. Estimated financial rates of return range from 17% to 40% and the estimated overall economic rate of return is 25%X With appropriate assur- ances, the project would be suitable for a Bank loan. of US$&85 million re- payable in 16 years, including five years of grace. The borrower wou-ld be the Central Bank of Nicaragua and the loan would be guaranteed by the Re- public of Nicaragua.  NI CARAGUA AGRICULTURAL CREIDIT PROJECT I. INTRODUCTION 1.01 Despite reserves of natural resources and the enterprise of com- mercial farmers raising established crops, agricultural development in Nicaragua has been handicapped by the lack of suitable term lending facil- ities, especially from commercial banks, and the inadequacy of extension services. The proposed project is designed to help remedy these weaknesses by providing medium- and long-term credit, together with supporting technical assistance, for financing investment in the livestock and crop sub-sectors of Nicaraguan agriculture. A loan of US$8.5 million to the Central Bank of Nicaragua (CB) on the guarantee of the Republic of Nicaragua is recommended. 1.02 The Bank has made four loans to Nicaragua in the agriculutural sector: (A) NI-52 of US$550,000 in 1951 for construction of grain silos; (b) NI-44 of US$1,200,000 in 1951 to Banco Nacional de Nicaragua (Bli') for purchase of agricultural machinery; (c) NI-130 of US$1,500,000 in 1955 to Instituto de Fomento Nacional (INFONAC) for equipment, machinery, and sup- plies for opening up new land, pasture improvement, and purchase of breeding stock and such; and (d) NI-332 of US$2,600,000 in 1963 for the Rivas Irriga- tion Project. The first three were almost fully disbursed, but only US$0.12 million of the last loan was drawn, the balance being cancelled, mainly be- cause of an unforeseen increase in project cost and the inability.to deter- mine suitable high-value crops on the basis of available technical and ec- onomic data. 1.03 The reports of two FAO/IBRD Cooperative Program missions which visited Nicaragua in February/March 1972 and of a Bank pre-appraisal mis- sion in July 1972 and further preparatory work done by. CB provided the basis for this project. This report is based on the findings of an ap- praisal mission to Nicaragua in January/February 1973, consisting of Messrs. C.G. Ramasubbu, Frank Thomas, and J.,J Romero-Chavez (Bank), and R.A. Crofts (consultant) and C. Sandoval (Bank trainee from Nacional Financiera, Mexico). II. BACKGROUND A. General 2 2.01 Nicaragua has an area of 118,358 knm and an estimated population of about 2.1 million in 1972 (which is growing at about 3.2% per year), representing an average density of about 18 per km2. The country is divided 0  -2- into three distinct zones: the Pacific, the Atlantic, and the Central (Map), The Pacific Zone, which extends broadly from the border wlth Honduras to the western shore of Lake Nicaragua, is endowed with fertile soils and consistent rainfall. It is the most accessible in terms of roads and inland water rotates and accounts for 60% of the population. The most sparsely populated and poor- ly developed is the Atlantic Zone, which extends from the lower sloues of the Central Highlands to the Atlantic Coast and is characterized by heavy rainfall, tropical forests, and poor roads. Between the two lies the Cerntral Zone with its mountain ranges, small plateaus, and valleys of grasslands. Despite ln- creasing migration to urban areas - Managua alone accounting for about a fit th' of the country's population - about 52% live in rural areas. 2.02 Because economic growth has been affected in the vast by cyclical fluctuations in the world markets for a few primarv comnodities, export di- versification has been a major goal of national pollcy. These efforts have helped cotton to replace coffee as Nicaragua's main export and, meat, tex- tiles, and chemicals to emerge as new exports. Annual growth rate of GDP at 1958 market prices averaged 4.3% between 1966 and 1970 and the per capita income reached US$436 by 1971 but the benefits of growth have not been wide- ly dispersed. The earthquake which rocked MTanagua in Decemiber 19?'2., has -re- sulted in a loss estimated at about one-third of the 1972 GNP and about 10% of the nation's capital stock. Reconstructionv is now actively in progressn supported by external assistance. 2.03 Nicaragua's overall balance of payments position is comfortable,. thanks to high reserves, favorable prices for traditional exports and exter_- nal aid. Its balance of trade in agricultural products has been favorable, desoite fluctuating export earnings resulting from world Tmarket trends. a eluding sugar and meat, agricultural exports rose from USIJS49 million i,i 1960 to US$132 million in 1971 and US$163 million in 1972 (estimated). Agricul- tural imports (US$9 million in 1972) mainly included vegetab'les, maize, plantains, and beans. The 1972 drought has affected exports and increased the need for imports, some of which, however, are being fi-nanced bv P-Xternal grants . B. Agricultural Sector 2.04 Agriculture is important to Nicaragua as, it accounts for about 25% of GDP, nearly 70%. of exports, and about 50 to 60% of total employment. Tlle structure of agriculture is dualistic, with a modernized sector of large- and medium-sized farms producing export-oriented crops such as cotton, coffee, sugarcane, bananas and irrigated rice and beef and a traditional sector (en- gaging about one-half of the farmers) producing maize, beans, sorghum, and non-irrigated rice. Traditional farmers use little fertilizer, pesticides, or machinery and produce under rainfed conditions mainly to meet domestic consumnption requirements. During the off season, they serve as harvesting labor on the coffee and cotton farms.  -3- 2.05 Modern farming is concentrated mainly in the Pacific Zone where it is based on rich volcanic soils and supported by fertilizer supply services, machinery dealers, and agricultural industries. The Central Zone has many medium-sized farms, generally raising coffee and livestock, while the large plain of the Atlantic Zone is undeveloped but shows good promise for live- stock production. 2.06 Large tracts of arable land such as the natural grazing areas of the open pine savanna in northeast Nicaragua are still not accessible but new land has been progressively brought to use during the last two decades, especially in the Central and Atlantic Zones. In 1971, about 40% of Nic- aragua's total land area was in use, with nearly 50% of the 4.9 million ha estimated to be under improved and natural pastures. The balance is used for raising perennial and annual crops. Only about 6% of the cultivated land (41,000 ha) was under irrigation in 1971 but substantial supplies of underground water are understood to be available. A UNDP study, covering about 158,400 ha in the Leon-Chinandega plain, estimated that, without deplet- ing groundwater resources, 25,000 to 66,000 ha of this area could be irri- gated annually, according to cropping pattern. Past irrigation schemes, i however, have not been particularly successful, mainly because of the fail- ure to develop crops justifying the high investment costs and in some cases because of the use of unsuitable equipment. 2.07 Expanding irrigation and bringing additional land into use have helped progress towards the Government's goals of food self-sufficiency and increased and diversified exports. The production of maize and beans has been steadily rising over the last two decades and rice production has doubled since 1963. Total agricultural exports have grown appreciably - despite the ups and dowms of cotton - and beef and sugar have emerged as two significant exports (Annex 1). Goveriment has sought to support agri- cultural developirent by keeping land and agricultural taxes low and pro- viding an expanding volume of production credit. 2.08 Concentration of land holdings is an important feature of Nicaragua's agrarian structure. About half the holdings are less than 7 ha and account for 3.5% of the cultivated area. On the other hand, holdings above 350 ha occupy 41.1% of the area, though they make up only 1.5% of the total number. The Institute of Agrarian Reform (IAN), set up in 1963, has been concentrat- ing on issue of land titles (about 15,000 up to end 1972) and extension of land ownership through colonization schemes, assuming that redistribution of holdings is not necessary at present in view of the progress being made in opening up land for farm use. A major IAN project for bringing newq land into production for transfer to landless peasants is the Rigoberto Cabezas colonization scheme (350,000 ha) being developed with IDB assistance. IAN's programs have generally been handicapped by lack of adequate funds and field staff (Annex 1). 2.09 Official agricultural extension, education, and research are general- ly deficient in Nicaragua, partly because of the insufficient allocation of  -4- tunds to the Ministry of Agricu'lture for these purposes. Except for improved cotton seed varieties and control of diseases affecting that crop, research has contributed little to Nicaraguan agriculture. The benefits of -wiat has been done have not reached most farmers because of the limited size of the extension staff and the failure to link its activities with research, credit, and marketing. On the other hand, extension activities of BN (para 2.14), mainly for the major export crops, and the INFONNAC (para 2. 15)i for tobaccco, livestock, and fisheries, have had an impact, thanks to the larger nrmber of technicians and their association with credit. Also, an Argentine ecnsulzio'ng firm (Latinoconsult).is providing valuable technical guidance to selected farmners under a contract with CB. 2.10 The inadequacy of the rural infrastructure, including serviceas 3a'cn as extension and marketing and facilities sucn as rural trananort, hae; partic ularly handicapped the small farmers in participating in the gr!owh of country' s crop and livestock sub-sectors. Thus, it Is fotnC t'.at thug;h t.".s small farmer-oriented Credito Rural Program (implemented by BE wth 7E S port) financed over 22,000 small farmers, mainly for their s Lorttsxem needs and helped increase production, it was badly handicaSpred in regard to support in terms of marketing and technical services ard hence "Led to ' gh delinquency (Annex 2, paras 33 to 35). Further, certain promisi.ng types of on-farm investment have not proved relevant for very small farmers. In the extensive area of inadequate and uncertain rainfall, the mini-mw-n viabe size for a livestock unit tends to be larger than the average omall ad. the irrigated area (in which intensive cultivation could make Investment o.n a smal1 farm worthwhile) is only 670 of the total cultivated area and heI.d 3 nic" by medium and large producers. Identified investment op-portunities I)eing thus limited, tne requirements of smxall farmers have been, mainly for proo-.jrn- tilon credit and have been tackled as such unrder the Credito Rural Progrxxr Efforts are, however, being made to promote onfar-t.n investm.e-t and infztrUk ture development on a cooperative basis, ith cred.t proizided b7 BE! (supporied LI IDB) in the colonization schemes of IAN1 for benef