Senegal - Agricultural Development Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No.P-1590a-SE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF SENEGAL FOR AN AGRICULTURAL DEVELOPMENT PROJECT May 8, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 Currency Unit - CFA Franc (CFAF) EXCHANGE RATES Currency Unit Official Floating (as of December 31, 197h) US$1 CFAF 230.21 CFAF 225.0o CFAF 1,000 US$4.20 US$4.h4 CFAF 1,000,000 US$4,200 US$14,444 The CFA Franc is officially valued at the equivalent of FF 0.02. As the French franc is now floating relative to the US dollar, the IJS dollar/ CFAF exchange rate is subject to change. The exchange rate on December 31, 1974 of US$1 - CFAF 225 was retained for conversions made in this report. FISCAL YEAR July 1 - June 30  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR AN AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan and a proposed development credit to the Republic of Senegal for the equiva- lent, respectively, of US$7.0 million and US$7.0 million to help finance an agricultural development project. The loan would have a term of 20 years, including 5 years of grace, with interest at 8.5 percent per annum. The credit would be on standard IDA terms. Caisse Centrale de Cooperation Economique (CCCE) of France would also provide a loan of FF 40,000,000 (US$8.9 million) to the Government of Senegal for a term of 20 years, includ- ing 5 years of grace, with interest at 3.5 percent per annum. PART I: THE ECONOMY 2. A report entitled "The Economy of Senegal" (212-SE) was distributed to the Executive Directors on September 10, 1973. Country data appear in Annex I. Past Development 3. During the 1960s, the Senegalese economy experienced virtual stagna- tion, as real output increased less rapidly than population, and per capita GNP declined. Two factors were responsible for this situation. First, with Independence, Senegal lost its privileged position as the center of French West Africa and therefore had to adjust to reduced economic, administrative, and political dimensions. Secondly, the difficulties of adaptation to the new situation were compounded in the latter part of the decade when ground- nut production fell by 50 percent due to unfavorable weather and falling export prices. In 1971, a combination of several favorable factors includ- ing the recovery of weather conditions, increased incentives for rural pro- duction, promising results of rural diversification, and a successful drive to promote industrial exports seemed to mark the beginning of a period of considerably higher growth. As it turned out, the economic upturn was brief, as 1972 brought the Sahel's most severe drought in this century. 4. In 1972, agricultural and livestock production fell by more than 25 percent, setting back the standard of living of the rural population (representing 70 percent of the total) below the level reached in the early 1960s. Food emergency operations helped avoid widespread starvation, but notwithstanding this aid, both the fiscal and balance of payments situations sharply deteriorated in 1973 and early 1974.  - 2 - 5. During 1973, the balance of payments situation was characterized by substantial reserve losses. At the end of the year, total net reserves stood at minus US$31 million, the lowest level since Independence. The main underlying factors in 1973 were a sharp drop in groundnut production and exports (somewhat mitigated by exceptionally high world market prices) and a continued increase in imports, mainly of foodstuffs. Even unusually high aid inflows, including substantial food aid, were not sufficient to finance the deteriorating trade balance. In 1974, both imports and exports (goods and non-factor services) increased markedly, by an estimated 45 and 73 percent respectively, following rapidly rising prices and slightly higher quantities of Senegal's major exports (groundnuts, phosphate and petroleum products) and impor,s (food, petroleum and general imports). The more rapid climb in exports resulLed in a n)arrowing of the goods and non-factor services deficit from an all-tim.e u,g4h of US$83 million in 1973 to an estimated US$35 million in 1974. which is about a normal figure for Senegal. Net private capital outflows increased, however, to an exceptionally high figure of US$33 million. This Was largely Ude to: i. an increase in trade credits to finance exports; ii. accelerated repayments of private foreign debts; and iii. repatriation of equity capital after partial take over of foreignly-owned corporations by the Government. The phiosphate mining company Taiba alone transferred US$52 million on these accounts. Net foreirn assets dropped further to a level of minus US$44 million at the end of 1974. The worsening external position of Senegal obliged monetary autthorities to draw in December 1974 the US$5.8 million gold tranche with the IMF, and in January 1975 the full US$19.2 million oil facility. '. D)uring 1972 and 1973, wuder the impact of the drought, public fin- ances also took a serious turn for the worse. Public savings net of amortiza- tion, which lhad substantially improved during the preceding years, were all but wiped out in 1972/73 and 1973/74. Revenues were affected by the decline in economic activity. Recurrent expenditures were further increased by a rise in salaries to compensate for the rapidly increasing cost of living, substantially higher debt service payments and perhaps most importantly, heavy consumer subsidies which resulted from maintaining low domestic prices in the face of skyrocketing food import prices. Thus, at mid-1974, in spite of a USS46 million higher transfer to the stabilization fund from groundnut sales, the public finance situation was more difficult than it had been since 1960. 'rospe? s . W!eather conditions will remain critical to Senegal's growth pros- r,,cts. But with the rapid development of irrigated agriculture which started in the 1960s, the agricultural development of areas less affected by rainfall  - 3 - fluctuations (Casamance, Eastern Senegal) and substantial gains in industry, tourism and fisheries, by 1980 weather conditions should be a less decisive factor than today. The Fourth Development Plan (1973/74-1976/77) continues to give highest priority to rural development (36 percent of the total), housing/public utilities (18 percent) and transport infrastructure (16 per- cent). Industry and tourism, quite justifiably, see their share increase from 5 to 10 percent of the total. Assuming average rainfall conditions, Senegal's growth in real terms in the remainder of the 1970s will be of the order of 4.5 percent or about 2 percent per capita, which is still a consid- erable improvement over the past decade. 8. The balance of payments will continue to be under pressure during 1975, and will remain weak in the medium-term. In 1975, the effects of the good 1974/75 harvest will be largely offset by the expected deterioration in the terms of trade, due to a 20 to 25 percent fall in groundnut prices. This may lead to a further fall in reserves of about US$15 million during that year. For the period 1976-78, it is estimated that the terms of trade index for Senegal will continue to fall, mainly as a result of an expected drop in phosphate prices of about 30 percent respectively between 1975 and 1977. Therefore, as no major increase in the export volume is anticipated, Senegal's exports are expected to stagnate in the corming years. After 1978, a new phosphate mine is expected to come into production, while phosphate prices are expected to resume their upward trend. These prospects combined with a favorable long-term outlook for groundnut production could result in a healthier balance of payments position towards the end of the seventies. 9. Faced with the difficult situation in public finance, the Government took a number of steps in November 1974 which are expected to put public finances on a sounder footing. Consumer prices for rice, sugar, and groundnut oil were raised to bring them more closely in line with world market prices. Thus, the rice subsidy was completely eliminated (an increase of 70 percent in the consumer price), the price of. sugar was increased by 90 percent (leav- ing a subsidy of about 20 percent) and that of groundnut oil was raised by 43 percent (leaving a subsidy of about 20 percent). However, high world market prices for wheat required an increase in domestic flour prices which the Government is reluctant to pass on to the consumer and which may lead to a new subsidy on bread. At the same time, when subsidies were reduced, producer prices for groundnuts, rice, and cotton were increased substantially (40 percent for groundnuts, 35 percent for cotton and 20 percent for rice) to stimulate production and offset the effects of accelerating inflation. Also, Government salaries were raised by 16 percent on the average, but ranging from 60 percent for the lower salaries to 3 percent for the higher salaries, to compensate for the rapid increase in basic food prices. Following the five-fold increase in world market phosphate prices and the revi sion of the tax agreement between the Government and the major phosphate mining company in the country, Government revenues from this sector will be considerably increased in the coming years. The good 1974/75 harvest is unlikely to augment Government revenues because of the drop in groundnut prices. These developments are expected to raise net public savings after debt service in FY75 at the low level of about US$5 million, which may increase to US$35 million in FY76.  -4- 10. During FY75 the increased domestic resources available to finance public investment will be mostly absorbed by payments for the Government's purchase of a 50 percent interest in the phosphate mining enterprise, which is the main source of future additional income. In the following years through 1980, projected trends in revenue and expenditure would permit the generation of investable surpluses (after foreign debt service) equivalent to 20-25 percent of public investment, assuming thie public development program grows only slightly faster than the overall economy. Yet, there is considerable scope to expand the development effort and to raise the share of public invest- ment above its historically low level of 5-6 percent of GDP. Moreover, w1hile the improvement in domestic resource iobilization will ease the balance of pa,n-,rnts situation - particul.arly import demand - moderately, it wi1l not be e;:nough to restore o(,veaill equilibrium in the medium-term. Given our asstup- tions on gross capital inflows, if Senegal finances 20-25 percent of this imiodest public investment program, an annual unfinanced overall gap in th)e balance of payments averaging US$25 million a year will emerge in the years 1976/78. Part of this gap could pioboibly be financed lthrough acccss to tL!he IMAF facilities including the secor-d oil faciiity, but additional foreign exchange resources will still be needed. In sum, Senegal has taken important and commendable steps to ratioinalize the structure of domestic consumer aind producer prices, and mobilize additional public savings. Yet, the ecuulomy remains vulnerable because of its negative reserves, the volatility of world market conditions for groundnuts, and the risks of drought. In view of these factors, external lenders should be prepared to finance not only all foreign exchange costs but also a high proportion of local costs in priority projects. Creditworthiness 11. The terms of foreign aid to Senegal have been progressively harden- ing over thie years. The proportion of grant aid declined from 85 percent in the mid-sixties to 50 percent in FY72. Faced with a severe shortage of public savings, the Government borrowed heavily on the Eurodollar market in tihe past two years, in order to avoid a slowdown in public investments and to finance acquisitions and participations by the public sector. Starting in FY74, this led to a substantial increase in the public debt service which is expected to absorb about 70 percent of public savings in FY75. This ratio should decrease again in the coming years, following the marked improvement expected in the public finance situation. Senegal's external debt service is still very low, at about 5-6 percent of export revenues. But because of low foreign exchange reserves and heavy dependence on one crop, Senegal will have to remain prudent in its public debt management. PART II: BANRK GROUP OPERATIONS IN SENEGAL 12. The Bank Group has had 20 operations in Senegal to date. Total lending amounts to US$99 million (net of cancellations), including twelve IDA credits, four Bank loans, cne blend of Bank and IDA funds, two IFC  -5- operations, and one blend of Bank and IFC funds. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1975 and notes on the execution of ongoing projects. 13. Execution of these projects, apart from the Railway Project and the Site and Services Project, is moving forward without undue delays. The procurement for the railway has been slow due to time consuming contract approval procedures, but most project components have now been received or ordered. The Site and Services Project is about one year behind schedule, although physical execution is now progressing satisfactorily. Terracing of the first sub-site for Dakar was finished in November 1974 with an unexpected cost saving. The Bank Group and Senegal held discussions recently on delays in reorganizing the executing agency, Office des Habitations a Loyer Modere (OHLM), and in implementing Government's commitment to reorient its housing policy in favor of lower income groups. Some of the agricultural projects, such as the Terres Neuves Project and the Casamance Rice Project, were hampered by delays in receiving the Government's- counterpart contribution; however, owing to efforts of the project authorities, physical implementation of these projects is proceeding generally according to schedule. Two agricul- tural credits (140-SE and 404-SE) (see paragraph 20) provided for technical assistance designed to facilitate the reorganization of the Office National de la Cooperation et de l'Assistance pour le Developpement (ONCAD), but little in the way of positive results was achieved; nevertheless, the Government has recently taken steps to strengthen ONCAD's management and financial operations (See Annex II) and continues to consult with IDA on further measures to be taken. 14. In view of Senegal's need for substantially higher capital inflows, the scale of Bank Group lending is expected to increase significantly in the future. The Bank Group share of foreign aid disbursements (including grants) is expected to increase from about 6 percent in 1970-71 to 24 percent over the 1974-80 period. By then the Bank Group is likely to be the largest aid donor. This will increase the Bank Group's share of the outstanding and disbursed debt from 12 percent at the end of 1973 to about 25 percent by 1980. IBRD/IDA share in public debt service will probably go up from 2.2 percent in 1973 to about 13 percent by 1980. 15. The objectives of Bank Group project lending in Senegal fall under four main headings. Top priority will continue to be rural development, in- cluding development of irrigation in the Senegal River valley and in the Casamance region (e.g., the Debi Lampsar engineering credit approved by the Board although not yet signed, and a proposed second stage of Credit 252-SE), intensification of groundnut production and diversification into new crops and new regions (e.g., the project described in the present report and the proposed Livestock Project in Eastern Senegal). As in the past, our agricul- tural lending is expected to exceed one third of the total. Secondly, we shall assist diversification of the economy by lending for the growing sectors of tourism and industry (e.g., the proposed tourism infrastructure project on the Petite Cote and a possible Ship Repair Project, based on  - 6 - studies financed under Loan S-3SE; since these latter studies were undertaken, the market prospects for such a project have been considerably altered by virtue of changes in the pattern of international oil consumption, reopening and possible enlargement of the Suez Canal and other developments affecting the number and size of ships that will require repair facilities of the type envisaged--these market prospects are now being reviewed). Thirdly, we shall continue investment for modernizing and expanding the country's infrastructure (e.g., two proposed highway projects and a proposed fishing wharf at Dakar Port). Finally we shall continue lending to reorient and expand the country's education system, as in the Second Education Project. PART III -- THE AGRICULTURAL SECTOR 16. Agricuilture plays a central role in Senegal's economy, employing v3ver 7n percctit of the total labor force. Although it contributed only 38 percent of CUP in 1974, the sector's leverage on the economy is and will remain cc.risidcrable through its impact on exports and its purchasing power for locally--produced goods and services. Groundnuts and millet are the country's main agricultural proclucts, and groundnuts are the cotuntry's princi- pal eoxport. During tle last four years groundnuts have comprised between 35 arid 55 percent of total exports and generated about 60 percent of value added in tWe agricul tural sector. Millet continues to be the staple food grain alt%ough rice and wheat consumption arc increasing rapidly, particularly in uroan areas. Since 1968 Senegal has suffered from a series of severe droughts and in 1968, 1970 and 1972 abnormally large food imports were needed to meet de;oand. 1972 was the worst season and during it agricultural and livestock production fell by moic than 25 percent. Weather has been better in the last to7o years, but even in years of normal rainfall, domestic agricultural pro- duction meets only about 60 percent of the country's food requirements, and food imports absorb 15-20 percent of total export earnings. This situation is to the extreme variability of rainfall in Senegal, where not only sharp annual variations in total rainfall occur, but where there is wide variation between years in the distribution pattern of rainfall. 17. Small-scale rainfed farming accounts for 95 percent of production, and there is a limited though growing amount of irrigated development in the Delta of the Senegal River and in the Casamance Region. Commercial farming is restricted to a few vegetable-growing operations and a large sugar cane plantation in the Delta. The small farm sector consists of about 360,000 farms most of which range in size from 3 to 10 hectares. The cropping pattern is very similar throughout the country with millet/sorghum and groundnuts each occupying about half of the cropped area. Simple animal-drawn equipment is widely ulsd and there is virtually no mechanized farming. Per capita annual incomes from a typical farm average about US$85. Rural incomes are signifi- cantly lower in the undeveloped areas of the Senegal River valley, the nort:l eryi area of the Croundnut Basin and in the relatively undeveloped area of eastern Senegal. The use of improved seeds, fertilizers and pesticides  7- is slowly expanding assisted by government subsidies, but despite this, production remains low because of poor soils and erratic rainfall and the country is increasingly unable to feed its growing urban population. Imports of cereals have amounted to 400,000 to 440,000 tons in recent years, of which 150,000 to 200,000 tons of rice. 18. Population densities and agricultural development potentials differ between regions. In the north and east of the country, large areas are only suitable for extensive livestock production. In the Groundnut Basin, where the bulk of the rural population is concentrated within about 100 miles of Dakar, population pressure, relatively poor soils and erratic rainfall make it difficult to increase agricultural production and farmer incomes. However, through introducing improved farming practices supported by farmer training programs, the prospects are good for increasing and diversifying crop production in Sine Saloum, which is situated on the southern boundary of the Groundnut Basin and where rainfall is better and population density lower than in the rest of the Basin. 19. In the years immediately following Independence, Government assigned low priority to the agriculture sector in allocating public investment and recurrent expenditures. Since then, however, increasing priority has been given to the sector. Thus while only 4-6 percent of the current budget now goes to agriculture, the sector's share of the investment budget has increased steadily and currently amounts to between 20 and 25 percent. In November 1974 Government raised the producer prices for groundnuts (by 40 percent), millet and sorghum (7 percent) and rice (20 percent) as incentives to their in- creased production. The consumer subsidy on rice (which cost the Government about US$30 million in 1973/74) was abolished at the same time. These actions illustrate Government's determination to increase domestic production and reduce reliance on imports of food. 20. Two Bank Group projects (140-SE, 404-SE) have provided medium-term credit through the National Development Bank of Senegal and the cooperative network to help farmers purchase draft animals, animal-drawn equipment and fertilizer. The Terres Neuves Project (254-SE) was a pilot scheme to test the feasibility of settling farmers in the southeast of the country where climatic conditions are more favorable than in the Groundnut Basin. A second project was appraised in 1974 that would build on the results of the first project. A livestock project has been prepared with UNDP assistance for Bank Group consideration in the Eastern Region and is expected to be appraised in May-June 1975. 21. The Casamance project (252-SE) is improving extension and credit services to 5,000 farmers in order to expand rice cultivation by 12,000 ha. Government has indicated its desire to expand the scope of this successful project and a follow-up project will be appraised later this year. The Bank Group has also assisted the private sector by financing through IFC a ferti- lizer factory (SIES), and a small irrigated truck farmer operation producing vegetables for the export market (BUD Senegal).  -8- 22. Regulation of the Senegal River in order to permit irrigated de- velopment is being sought jointly by Senegal, Mauritania and Mali within the Organization for the Development of the Senegal River Basin (OMVS). OMVS, helped by UNDP, has prepared an ambitious, long-range development program that ultimately could permit development of year-round irrigation on 430,000 ha along the river of which about 220,000 ha would be in Senegal. 'The pro- gram would also include power generation and improvement of navigation on the river. Two potential regulatory dams have been studied by OMVS: a multipurpose dam at Maanantali, Mali, and the Delta dam at Diama, Senegal. Aitltough some parts of the O1RIS program as recently conceived mnay be overly ambitious, the overall concept is sound and of very high priority, anoi thie Bank has been actively reviewing witlh oth-ter doniors the merits and feasibility of the entire program since July 1974. Planning for irrigation projects is already starting, and IDA approved the Debi-Lampsar irrigation enineering project in April 1975. It will provide engineering and related sL'idies for 5,000 ha of doujble cropping-, using watevs (1u)ring the diry season from Diamia reservoir potential ;s soon as it bCcorrcs operational, .15s now planned, in about 1CMO. 23. A Bank Group sector mission visited Senegal late in 1974 to assist the Government in assessing the relative merits of its various agricuiltural development options. The mission pointed out that scope for significant increases in productivity and for developing a snall farm structure capable of generating acceptable incomes existed througili harnessing the country's walter resources, primarily the Senegal River Valley, but also those of the Casamance region. How7ever, the development of irrigation potential in Casamance and the Senegal River Basin kno-uld not affect the Groundnut Basin and other arcas of the country whichi i;oust continue to rely on rainfed agricuilture and in w;hich1 the bulk of the population lives. For these areas, the sector mission concluded that, by adopting currently available technology, incomes from a typical rainfed farm can be increased by about 30 percent. Even with this increase, farmers incomes and standards of living will remain low by any criteria. 24. In November 1974, fertilizer prices were increased by one-third but they are still heavily subsidized. Credit 40!-SE provides for annual consulta- tions between IDA and the Government on the level of fertilizer subsidies. The first of these consultations was held during negotiations of the present Sine Saloum Project. The Government confirmed that its policy was to progressively raise prices for fertilizers to market levels as a means of ensuring their effi- cient use. Agreement was reached during negotiations that consultations between the Government and the Association would be held in October-November of each year to discuss the fertilizer price for the following campaign (Section 4.03 of the Credit Agreement).  -9- PART IV: THE PROJECT 25. The Government of Senegal requested the Bank, the Association, and the Caisse Centrale de Cooperation Economique (CCCE) of France to help finance an intensified agriculture development project based on a pilot scheme that the Government and CCCE have financed jointly since 1971. In April 1973, a PMWA mission identified the project for possible Bank financing, after which a Government agricultural agency, Societe de Developpement et de Vulgarisation Agricole (SODEVA), prepared the project using financing provided by the Second IDA Agricultural Credit Project (Credit 404-SE). 26. In July 1974, a Bank/IDA mission appraised the project in the field at the same time as Mr. J. Cantournet appraised it for CCCE. Negotiations were held in Washington April 15-18, 1975. The Senegalese delegation was led by Mr. Ousmane Seck, Minister of Plan-and Cooperation. 27. An appraisal report No. 661a-SE, is being circulated separately to the Executive Directors. Annex III provides a loan and credit and project summary, and the attached map (IBRD - 11251) shows the project area. The Project Area 28. The project area covers the heavily populated Sine Saloum region in the southern part of the Groundnut Basin (about 800,000 people). Sine Saloum's 70,000 farms produce 40-60 percent of Senegal's groundnuts and 33 percent of its millet while supporting livestock herds numbering some 470,000 cattle, and 460,000 sheep and goats. Thus Sine Saloum is one of the principal agricultural regions of Senegal in spite of an extended dry season during which agricultural production virtually ceases due to lack of water. In this area, the farm size per family unit averages between 5 to 10 ha, and the annual average income per capita is US$100. Project Description 29. The project would build on the results of the Government's national "Programme Agricole," which has been supported by Credits 140-SE and 404-SE. Begun in the early 1960s, Programme Agricole supplied farmers with a minimum package of fertilizers, seeds and animal-drawn implements for increased pro- duction of groundnuts and millet. Some 80 percent of the farmers now parti- cipate in Programme Agricole and resulting production increases have begun to level off. This evidence indicates that Programme Agricole may have reached the limits of its development potential in Sine Saloum. Further increases in output of groundnuts, cereals, and livestock would be sought under the proposed project by training farmers in the use of intensive farm- ing practices involving complete land clearing, use of oxen for deeper plow- ing, diversification of crops, and advanced animal husbandry techniques. These methods have been successfully demonstrated in the pilot project in the region financed by CCCE and Government.  - 10 - 30. The project would be carried out by SODEVA's extension staff over the five-year period 1975/76 to 1979/80. Under the project, farmers would be trained to clear their fields of stumps and other impediments and to deeply cultivate their soil by plowing every three to four years. To prevent soil erosion from clearing and stump removal over about 50,000 ha of land and to compensate for the potential reduction of fuel and forage supplies, farmers would be encouraged to utilize contour plowing and strip cropping and to plant trees for windbreaks and fuel. Farmers would also be urged to try seed varieties and fertilizer rates recommended by Senegal's research organizations. By project year five, the project's staff would closely supervise about 50 percent of the farmers in the project area and production practices would be intensified on about 20 percent of the culti- vated land. At full maturity the project would also help farmers fatten 16,000 cattle annually by introducing improved husbandry practices and by providing water lifting equipment and a small animal feed mixing plant at Kaolack to be o-.wned and operated by SODEVA. The project would also help reduce calf miortality and raise the calving rate tlhrouglh improved feeding and animal health care. All project farmers would maintain farm records under the close supervision of extension staff, the results to be evaluated by SODEVA on the basis of a one percent sample of project farmers. 31. The extension services and other support inputs provided by SODEVA under the project will allow farmers to reach a higher level of agricultural development which can be sustained by regular Government rural services fol- lowing project completion. Consequently, the project essentially entails capitalizing over the five-year development period the cost of the extension effort required to introduce the new techniques; 34,000 farmers would be trained in these improved techniques and the project benefits would be the incremeintal production they would generate. 32. The project explicitly provides for: (a) strengtheniing SODEVA by providing it with buildings, equipment and staff; (b) constructing and renovating training facilities, and providing courses for extension workers; (c) demonstrating improved cultivation techniques for cereals, groundnuts and cotton; (d) introducing improved animal husbandry practices for draft oxen, beef cattle, and breeding cows; constructing and operating an animal feed plant; (e) sLurplying imiplements and seasonal inputs and providing rmedium-term and seasonal credit; (f) establishing a tree nursery and distributing trees for windbreaks and future fuel supplies, and demonstrating soil conservation techniques;  - 11 - (g) monitoring and evaluating the results of project activities; - and (h) hiring consultants to review grain marketing policies, procedures and facilities. 33. SODEVA has been designated by the Government as the agency with overall responsibility for agricultural development in the Groundnut Basin, and it has already been responsible for the Sine Saloum pilot project. In carrying out the execution of this project, SODEVA will coordinate closely with other organizations providing development services in the Groundnut Basin: Office National de la Cooperation et de l'Assistance pour le Developpement (ONCAD) for the supply of fertilizers and implements to farmers and for marketing of groundnuts; Banque Nationale de Developpement du Senegal (BNDS) for supplying credit to farmers; and Societe de Developpement des Fibres Textiles (SODEFITEX) for extension services and inputs for cotton growers and for cotton marketing. SODEVA is well managed and effective and has already established good working relationships with all of these organi- zations. 34. The estimated total cost of the project is US$30.9 million or US$28 million net of taxes and duties (9 percent of gross costs). The foreign exchange component is US$3.9 million, or 14 percent of the total net of taxes. Phy- sical contingencies and expected price increases would amount to 30 percent of base cost estimates, which are based on mid-1975 prices. The proposed Bank loan and IDA Credit of US$14 million would cover the foreign exchange component and US$10.1 million (42 percent) of local costs for a total of 50 percent of the total costs net of taxes and duties. 35. The Bank loan would be made to the Government for a term of 20 years, including a five-year grace period. The IDA Credit would be made to the Government at standard terms. The CCCE would also provide a loan of US$8.9 million to the Government for a term of 20 years, including a five-year grace period, bearing interest at an annual rate of 3.5 percent. The remainder of project costs would be financed by the Government and Banque Nationale de Developpement du Senegal (BNDS). 36. Since SODEVA, which has no revenues of its own, would carry out the project on the Government's behalf, the Bank/IDA and CCCE financing (US$22.9 million), plus the Government's contribution to SODEVA's costs of US$4.2 million, would be passed on to SODEVA as grants. In addition, the Government would provide SODEVA with an interest-free loan for a term of at least six years, in an amount of CFAF 200 million (US$889,000), equivalent to about three months of its expenditures, as working capital for the project. Credit Arrangements 37. BNDS would channel credit to project farmers through cooperatives using, in part, the rollover fund created by two earlier IDA credits (140-SE and 404-SE) and funds borrowed on favorable terms from the Central Bank.  - 12 - Medium-term loans (five years) would finance 100 percent of the cost of implements, and short-term loans (six to nine months) would cover 100 percent of seasonal inputs. The loans would bear interest at 2.0 percent above the Central Bank rate (currently 5.5 percent). The effective interest rate for seasonal loans would be on the order of 12 to 16 percent since the nominal rate is charged on an annual basis while the loans must actually be repaid within six to nine months. Procurement and Disbursement 38. Vehicles, equipment and civil works expenditures would total about US$2.15 million. Contracts for buildings, equipment and vehicles for more than US$50,000, aggregating about US$400,000, would be awarded on the basis of international competitive bidding in accordance with the Bank Group's guide- lines for procurcmrent. Locally manufactured goods would be allowed a prefe- rence of 15% or the level of applicable import duty, whichever is lower, when comparing domestic with foreign bisls. 'Iontracts for ;Tuounts bot.weeen TJStOOO0 and US$50,000 totalling US$1.6 mill-ion, including the bulk of civil works contracts which are small and widely scattered would be awarded on the basis of competi- tive bidding advertised locally and in accordance with local procedures, which are satisfactory to the Bank. The remaining equipment purchases, totalling US$150,000 would include office and house furnishings and equipment for agri- cultural demonstrations that are for small amounts and would be purchased chiefly from local sources. Consultant services, totalling about US$200,000, would be obtained according to the Bank Group's normal procedures. The balance of project costs would be for personnel and management (U}S$24.9 mil1ion), and for farm inputs (US$3.69 million) and would be unsuitable for competitive bidding. 39. The proceeds of the IDA credit and Bank loan would be disbursed over five years to cover 60 percent of: (a) - the costs of buildings, vehicles, equipment and furnishings (US$1.0 million); (b) - the salaries and allowances of staff employed under contract by SODEVA (US$7.5 million); (c) - SODEVA's other project operating costs (US$2.0 million). The IDA Credit and then the Bank loan would be disbursed plri passu with the CCCE loan in the ratio of 60:40 so that the Credit and the two loans would together cover 100% of the costs of the above items. The balance of the IDA Credit and Bank loan would cover 100% of the foreign exchange costs of the consultants (US$160,000), and a contingency reserve of US$3.3 million. Marketing Arrangements 40. ONCAD has a marketing monopoly for groundnuts, whichi it buys through cooperatives and sells to domestic processors of groundnut cake and oil for export, while SODEFITEX has the marketing monopoly for cotton and operates  - 13 - its own ginneries. Government sets producer prices for cotton and groundnuts which, at present levels, provide good incentives to project farmers. Govern- ment has undertaken to fix these prices at levels advantageous to the farmers taking into consideration various criteria such as world market prices and. costs of marketing and processing. At the request of the Government or of the Bank/IDA, annual exchanges of views will take place on the fixing of producer prices for cotton and groundnuts. (See Sections 4.02 and 4.03 of the draft Credit Agreement). Most of the project's production of these two crops would be acported. 41. Much of the project's cereal production will be for subsistence consumption; however, withdrawal of the consumer subsidy for imported cereals has greatly improved the prospects for marketing surpluses. Consequently, it may be necessary to expand marketing, storage and processing facilities to handle the domestic cereal crop. The project would provide for consultants to be retained by SODEVA to study these questions and propose appropriate measures. Although it is Government's present policy that ONCAD should have a marketing monopoly for cereals, the Government has undertaken to ensure adequate marketing of cereals and, to that end, to utilize as and when needed all available marketing channels. (See Section 4.05 of the draft Credit Agreement.) At the request of the Government or of the Bank/IDA, annual exchanges of views will take place on the level of cereal prices and on the system for marketing cereals. (See Sections 4.03 and 4.05 of the draft Credit Agreement.) The Government has also agreed that, if subsidies on the retail price of imported cereals are reintroduced, it would inform the Bank/ IDA which may request consultations with the Government. (See Section 4.04 of the draft Credit Agreement.) 42. Livestock products would be sold in urban centers through local traders; the price of livestock and livestock products are expected to remain high in the foreseeable future because of the losses suffered by breeding herds during recent droughts. Economic Benefits and Rate of Return 43. At full development, the project would produce an additional annual output of 27,000 tons of groundnuts, 31,000 tons of cereals, 1,000 tons of cotton, 1,600 tons of milk, 1,500 tons of beef and 6,000 calves. At the end of the fifth year, the net value in 1974 terms of this incremental production would amount to about US$8.5 million and would also entail a contribution of about US$7.5 million to Senegal's net foreign exchange earnings. The economic rate of return of the project is estimated at nearly 25 percent over 10 years. Project cost increases or benefit decreases of 25 percent would lower the rate of return to 13 percent and 12 percent respectively. The project is expected, therefore, to have a satisfactory rate of return. 44. Project benefits would help raise the standard of living in the project areas. About 80 percent of the beneficiaries have pre-project incomes between US$60 and US$90 per capita, which under the project would be increased  - 14 - to about US$115, this would be above the average for rural areas but equiv- alent only to about one-third of national per capita GDP. In addition to its satisfactory rate of return and production increases and the directly quanti- fiable benefits derived from increased production, the project would help reduce the threat of soil erosion, and the resulting long term losses in pro- ductive capacity, whichi accompanies increasing population pressure. It could demonistrate efficient farming techniques that could be adopted by many of Senegal's farmers to increase their incomes and would create a nucleus of some 34,000 farmers who could be expected to expand the application of these tecnniques on their own farms and serve as an example for other farmers. It could also help develop in SODEVA an experienced extension service capable of expanding the scope of the proposed project to include even more farmers, or of carrying out future development projects in Sine Saloum or other regions. PART V: LEGAL INSTRUMENTS AND AUThORITY 45. The draft Development Credit Agreement and Loan Agreement between the Republic of Senegal and the Association and the Bank, respectively, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association and in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the texts of draft resolu- tions approving the proposed credit and loan are being distributed to the Executive Directors separately. 46. The draft Development Credit and Loan Agreements provide that the effectiveness of the credit and loan is conditional upon notification to the Association and the Bank by the Caisse Centrale that its conditions of effec- tivciness have been fulfilled; upon notification to the Association and the rjank by the Governr,ment that it and SODEVA have entered into an agreement satisfactory to the Association and the Bank under which SODEVA is charged wit'n the responsibilities for carrying out the project; and also upon recep- tion from the Government by SODEVA of an interest-free loan for a term of at least six years, in an amount of CFA francs 200,000,000 as working capital for the project. Other matters of particular interest are discussed in paragraphs 40 and 41 above. 47. I am satisfied that the proposed credit and loan would comply with the Articles of Agreement of the Association and of the Bank.  - 15 - PART VI: RECOMMENDATION 48. I recommend that the Executive Directors approve the proposed credit and loan. Robert S. McNamara President Attachments Washington, D.C. May 8, 1975   ANNEX I Page I. or 3 pages OOUNTY DATA - SENEGA1 AREA POPULATION ENifSITy 196,192 hal2 LTF2 iTllion (aid-1971) Per ke2of arable land SOCIAL INDICATORS Refaree Countries Sene.gal Chana Ivo- Cat ulia ____ 197 1970 970! 19t70 GND PEIR CAPITA US$ (ATLAS BASIS) /I . 260/e 300L 310/ 380/ 9CMOCRAPIRC Crude birth rate (par thousand) 13 46 /b 17/b i6 7Kb 37 / Crude da-th rats (par thousad) 13 b 3/ 8/5 2 8 1 Iantac wrtality rota (par thousand live birth,) ..156 ...106 Life expac.taecy at birth (years) 37 /8 1 L 147 /b LI /b 56 Oreen.r-pruduntion rota .. 3.0 /b 3.2 3.1