Afghanistan - Second Agricultural Credit Project

FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1566a-AF REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF AFGHANISTAN FOR A SECOND AGRICULTURAL CREDIT PROJECT April 3, 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 It may not be published, quoted or cited without Bank Group authorization.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 Unit Afghani (Af) US$1 = Afghanis 55.0 Af 1 U= US$0.182 Af 1 million - US$18, 182 Fiscal Year = March 21 to March 20  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO TRE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF AFGHANISTAN FOR A SECOND AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed dev- elopment credit to the Republic of Afghanistan for the equivalent of US$13 million on standard IDA terms to help finance a second agricultural credit project. The proceeds of the credit would be relent to the Agricultural Dev- elopment Bank of Afghanistan for 15 years, including 5 years of grace, with interest at 5 percent per annum. PART I - THE ECONOMY General 2. A report entitled "Current Economic Position and Prospects of Afghanistan" (SA-29a) dated February 1, 1972, was distributed to the Execu- tive Directors in February 1972 (R72-39 and R72-42). Updating missions visit- ed Afghanistan in September 1972 and July 1973, and most recently in October- November 1974. The findings of this last mission are reflected in the follow- ing analysis. 3. The Republic of Afghanistan was established in July 1973, following a military coup in which King Mohammed Zahir Shah was deposed by his cousin and brother-in-law, Sardar Mohammed Daud Kahn, who had served as Prime Minister from 1953 to 1963. Daud serves as both President and Prime Minister; he also retains the portfolios of Foreign Affairs and Defense. The Govern- ment abrogated the 1964 Constitution and dissolved Parliament and the Supreme Court. The focus of power is now in the office of the president and in a Central Committee. Government Objectives 4. The Republican Government's major objectives were spelled out in President Daud's speech of August 23, 1973. The President indicated that the state sector would be strengthened, and importance would be given to the development of heavy industries based on the country's mineral resources. He also committed the Government to basic economic and social reforms including reforms of the systems of taxation, land tenure and public administ.ation. 5. WThile political objectives have dominated government policies during the past fifteen months, the Government has made a promising beginning in the field of economic development policy in accordance with President Daud's speech of August 1973. New economic legislation is under preparation and some laws have been passed, e.g. a revised customs law and a new foreign and domestic private investment law. Organizational changes aimed at more effec- tive development and policy planning have been initiated (e.g. reorganization  of Ministry of Planning and a new Secretariat for the High Economic Council in the Prime Minister's office). An active policy of mobilizing and diversify- ing assistance flows has been adopted. 6. Strong Government efforts to eradicate corruption and improve tax collection have resulted in an increase in revenues. The Government has also committed itself to keeping the prices of certain essential products stable (e.g. sugar, edible oils, fertilizers and some kinds of textiles) with, as a result, increased claims for subsidies from the budget. Some major elements of the Republican Government's program, however, including taxation, land, and public administration reform have still to be undertaken. Economic Performance and Structure 7. Afghanistan is an extremely poor, landlocked country with severe structural, fiscal, and debt service problems. With a population variously estimated at between 13 and 18 million and a per capita income of below US$100, it is one of the largest of the countries designated as "least devel- oped" by the United Nations. The country's prospects for development have been limited by a rugged physical terrain, arid conditions, and a paucity of physical and skilled liuman resources. Agriculture accounts for over half of GDP and engages perhaps 70 percent of the non-nomadic population. Nomads constitute an estimated 16 percent of the population, and 13 percent of the total population live in the cities. The Basic Data provided in Annex Il highlight some other structural features of the economy: the low degree of monetization; the low share of government revenues in national income; the heavy budgetary dependence on foreign assistance and on central bank financ- ing; the relatively heavy burden of servicing foreign debts; and other weak- nesses in the country's balance of payments position. Recent Developments 8. Afghanistan's economy suffered a major setback when severe droughts in 1970 and 1971 followed by the severe winter of 1971/72, caused declines in wheat, fruit and livestock production, and, especially, heavy losses in the livestock population. Improved weather conditions and increased usage of farm inputs resulted in a good harvest in 1972 and in a record wheat crop in 1973, creating an overall surplus of production over consumption requirements. The harvest in the current year is expected to be about at the 1973 level de- spite lower precipitation. 9. The value of the Afghani has increased by 30 percent against the US dollar as compared to the average rate during 1972/73. The appreciation of the exchange rate has tended to discourage traditional exports (carpets and astrakhan felts) while, on the other hand, cushioning the impact of the international inflation on domestic prices in Afghanistan. The Government is intervening in the market in an effort to bring down the Afghani/dollar rate.  -3- 10. The international rise in oil prices did not have an immediate di- rect impact on Afghanistan since almost all requirements of oil and oil prod- ucts were met under a bilateral agreement with the USSR under which prices remained unchanged. This agreement has just been re-negotiated and the price of oil has been raised significantly. At the same time, however, the prices of gas exports to the USSR have been increased to such an extent that the net impact on the balance of payments will be positive for Afghanistan. The energy crisis has, however, had a major indirect impact on Afghanistan. The rise in fuel costs has led to an increase of about 10 percent in the already high cost of transporting commodities to and from Karachi. Even more important is the problem created by the rise in fertilizer prices par- ticularly as the Government's agricultural policy has been encouraging more intensive cultivation and higher yields. The consumption of fertilizer in 1973/74 was about 50,000 tons and is expected to rise by 10-20 percent annual- ly. Fertilizer imports in 1973/74 reached 80,000 tons in anticipation of price increases in forthcoming years. In general, the recent rise in inter- national prices has inflated the import bill adding a new burden to Afghanis- tan's balance of payments. On the other hand, the rise in international prices has encouraged domestic import substitution. Development Prospects and Constraints 11. The large undeveloped human, agricultural and mineral resources of Afghanistan provide the basis for a favorable assessment of the country's long- term development potential. However the economic performance in the last two decades, characterized by an average growth rate of GDP not much above the rate of population growth, and by a low level of mobilization of domestic re- sources for development, discourages optimism about future growth prospects. The commitment of the top leadership to development and economic and social reforms gives rise to hope that the potential could be realized more rapidly. Also, the recent offers of aid, notably from the Islamic oil producing coun- tries are likely, in the near future, to increase the external capital flow into the country. 12. The realization of the development potential of the country, however, requires timely and vigorous action to remove a number of obstacles that have severely inhibited the country's economic and social development in the past. Included among these are: (a) inadequacies in project preparation and the resulting shortage of projects to be financed relative to offers of external eco- nomic assistance; (b) inadequacies in public administration and manpower development which lead to inefficiencies in the implementation of policies and projects; (c) shortfalls in domestic resource mobilization and the need for new policy measures (improvement of public enterprises, tax reform, mobilization of private savings); and  - 4 - (d) absence of a well-defined framework for the examination and co- ordination of policies. The government is well aware of these problems and has already taken some actions aiming at eventual solutions. Particular attention is being given to improve the taxation system and the efficiency of public enterprises since, in the past, Afghanistan heavily depended on external assistance for the execution of its development plan. Total budgetary revenues in 1973/74 amounted to $115 million or 9 percent of the estimated GNP, public savings were about $8 million, 0.6 percent of the estimated GNP. The development budget, however, showed a deficit of $60 million of which 70% was financed through external funds. External Debt 13. As of March 20, 1974, the end of the Afghan fiscal year, Afghanis- tan's disbursed external debt amounted to $719.9 million. The major creditors are the USSR (73.4%), the USA (12.4%) and the Federal Republic of Germany (9%). Loans from governments account for 98 percent of all disbursed external public debt. Obligations to IDA amount to 1 percent of disbursed amounts. There were some $243.7 million in undisbursed funds available in March 1974; most of these funds ($163.8 m), however, were part of a frame agreement with the USSR. Meanwhile, Afghanistan has also received aid offers from a number of oil producing countries, notably Iran and Saudi Arabia. No precise figures can be given at this time for the commitments for project aid that may event- ually result from these offers. 14. In recent years, over 65 percent of public investment in Afghanistan has been externally financed with gross aid inflows ranging from about $40 to $80 million annuallv. Even though most of the borrowing over the past 20 years was on quite soft terms, a heavy debt burden has resulted from the emphasis on long-gestation infrastructure projects with little export-generat- ing or import-saving impact. Thus, the growth of the debt-servicing capacity has not been commensurate with that of the debt-servicing obligations. With fairly rapidly increasing exports, the debt service ratio is now expected to remain roughly unchanged at the present level of 19 percent as compared with an average of about 20 percent for the period 1969/70-1972/73. Given the country's debt burden, its poverty and its development stage, Afghanistan does not have the capacity for sustaining external borrowing on conventional terms and needs substantial capital inflow on concessionary terms. It also requires special consideration from external lenders in financing the local costs of development projects. PART II - BANK GROUP OPERATIONS IN AFGHANISTAN 15. IDA has provided eight development credits totalling US$40 million (net of cancellations) to Afghanistan. IFC invested $0.3 million in the Industrial Development Bank of Afghanistan in July 1973 and the Executive Directors approved a loan of $1.3 million for the Kabul Spinning Mills, Inc.  - 5 - in December 1974. Annex II contains a summary statement of IDA credits and IFC investments as of February 28, 1975, and notes on the execution of the ongoing projects. 16. Bank Group lending in Afghanistan began only in 1964, with an edu- cation project, but by agreement between the Government and the Association, a major portion of the credit was cancelled in 1969. A resident mission was established in Kabul in that year, and since that time, with a considerable input of staff time and effort on project preparation, the Bank Group has provided development assistance to Afghanistan at an average level of about $7 million annually. Between FY69 and FY72, the Association made three credits totalling $15 million in the agriculture and transportation sectors. In FY73, three more credits were made for livestock, industrial development bank and aviation projects. In FY74, the Association committed $11.5 million, and in the coming years, assistance is expected to be maintained, to the ex- tent possible, at an annual average level exceeding the FY74 level. 17. We have experienced difficulties in making disbursements under IDA credits made since 1971. The main reasons for this have been substantial delays in fulfilling effectiveness conditions, slow progress with selecting consultants, minor project changes and, in the case of the Industrial Devel- opment Bank project, the need for security arrangements and a lack of sub- projects. In most cases these problems have been corrected satisfactorily but delays incurred have aggravated the effect of very heavy inflation on project costs, in particular, in the case of the irrigation and livestock projects. The progress of the latter two projects and consequently their disbursement schedule depends on the result of current government efforts to find a satisfactory solution to the problem of substantial cost increases. Disbursements under the aviation and highways credits made in this period should now proceed on a normal schedule since the construction works for the aviation project (Cr. 374-AF) are scheduled to start in May 1975, and the selection of consultants under the highway credit (Cr. 449-AF), which became effective only in June 1974, is now under way. Progress under Credit 380-AF for the Industrial Development Bank (IDBA) will depend on the Government's efforts to encourage new industrial investments in the country and grant necessary incentives. In general, it should be expected that future IDA financed projects be started without undue delays and proceed at a more normal pace. In close cooperation with IDA staff the Government is trying to remove potential obstacles to good project implementation already at the project preparation stage. The Government has also gained experience during imple- mentation of several projects and continues its efforts to increase the ad- ministrative capabilities of the project authorities concerned and streamline its procedures. 18. The Bank Group's lending strategy recognizes that special efforts are required to help Afghanistan. Its landlocked position, its extreme poverty and difficult economic problems, the structure of its political and economic framework, and shortage of physical and trained manpower resources pose severe limitations on absorptive capacity and development. Considera- ble staff time is, therefore, required in identifying, preparing and imple- menting future projects. We hope to establish a basis for financing two or  - 6 - three projects each year, which, in addition to their developmental and institution-building impact, would assist in expanding production, increasing the foreign exchange earning capacity, enlarging government resources for development and improving the absorptive capacity. To that end, technical assistance will continue to be an integral feature of most future projects. 19. A water supply project for Kabul city, for which a detailed master plan has been completed by WHO and an appraisal report is being prepared, is expected to be ready for consideration by the Executive Directors in the next few months. A feasibility study has been initiated with UNDP financing and the Bank acting as Executing Agency for a proposed power project which is ex- pected to be ready for consideration by the Executive Directors early in FY76. These two projects, besides satisfying the country's development needs, are designed to effect much needed institutional and financial re- forms in the sub-sectors involved. Based on the UNESCO/IBRD Cooperative Program's report on the education sector in Afghanistan completed in March 1974, the Government is finalizing its objectives in the sector, and prelimi- nary discussions with the Bank were held in February 1975 in order to explore the possibility of future assistance in the field of education. A feasibil- ity study for a second livestock development project is being finalized for lending in FY76. Further lending to the Industrial Development Bank of Afghanistan is expected to become necessary in FY76 or FY77. PART III - THE AGRICULTURAL SECTOR 20. Agriculture is the key sector in the economy of Afghanistan. Over 85 percent of the population depends upon it for their livelihood, and it accounts for over 50 percent of GDP and 74 percent of exports. Afghanistan's harsh climate, rugged topography, and poor natural resources endowment im- pose serious obstacles to development of this sector. The continental cli- mate, with its hot, dry summers and cold winters, limits the growing season and necessitates extensive irrigation. Rugged mountains and deserts account for about 80 percent of Afghanistan's 635,000 sq. km., and much of the remain- ing land is unsuitable for agriculture without irrigation. Traditional farm- ers rely upon either seasonal diversion of river water or ancient, underground canal systems, and many farmers leave up to half of their land fallow for lack of an assured water supply. Afghanistan's dependence upon water supply chiefly from melted snow and inadequate irrigation systems makes its agricul- ture vulnerable to drought such as the ones experienced in 1970 and 1971, during which production in the sector declined by over 20 percent. Such periods followed by characteristically cold winters cause particular hard- ships for the predominantly rural population. Slow growth of the sector (about 2.2 percent annually during the last 5 years) was due to these physi- cal constraints and the institutional problems as described below. 21. Wheat is by far the most important crop in Afghanistan. Approxi- mately 60 percent of the cultivated land is planted with wheat annually. In 1973/74, the country produced 2.8 million tons of wheat as compared to 2.5  - 7 - million tons in 1972/73. The production of maize and barley has remained constant since 1969/70 at around 1.05 million tons. The production of fruits and vegetables increased slightly in 1973/74 to 820,000 tons and 680,000 tons from 800,000 and 658,000 tons respectively in 1972/73. A small production increase was also made in rice in 1973/74 from 400,000 tons in 1972/73 to 414,000 tons. Other crops including sugarbeet and oilseeds are produced in much smaller quantities. Of total exports in 1973/74, dried fruits and nuts accounted for 31 percent, wool and skins (including karakul pelts) for 20 percent, fresh fruit for 14 percent and cotton for 4 percent. 22. The agricultural sector in Afghanistan faces a number of institu- tional constraints the Government has been making steady efforts to relieve. These include insufficient but improving credit facilities, inadequate exten- sion services, and limited supply and distribution of seeds, fertilizers and other essential farm inputs. The reorganization and strengthening of the Agricultural Development Bank (AgBank) in 1969 in preparation of the First Agricultural Credit Project, were the first major steps to improve credit services. The poor supply and distribution network of fertilizer which was partly responsible for the strong impact of the two-year drought in 1971 and 1972, has been improved by the establishment of the Afghan Fertilizer Company (AFC) by the Government in October 1973. Two institutions, dealing with na- tional livestock policy and project execution, have been established as a result of the IDA Livestock Credit Project in 1973. The number of extension agents has expanded rapidly over the last few years, but the quality of the agents still needs to be greatly improved. In the field of farm machinery, the Agricultural Development Bank has assured the import of tractors and implements. Except for some water pumps and polyculteurs.multipurpose animal drawn implements, most of the farm machinery is imported. The Ministry of Agriculture and Irrigation (MAI), the main administrator of agricultural development in Afghanistan, has been making efforts to improve the existing training and research programs in the agricultural sector, the training and the research schemes. However, shortage of qualified staff still remains one of the most important deterrents of the agricultural development. Three exist- ing agricultural secondary schools and Kabul University's agricultural faculty can provide 300 and 200 graduates, respectively, every year, which are far below the actual requirement. The shortage has also hampered the research activities such as seed selection programs for cereals, feed crops and cotton. A new government attempt to modernize farming practices and expand credit distribution is the creation of a Department of Cooperative Development within MAI. The cooperative movement in Afghanistan is still relatively young and very limited, but with the assistance from the Swedish International Develop- ment Authority, the Government is promoting a project to establish about 14 multipurpose cooperatives and 14 other cooperative unions in different regions with training as an integral part of the project.  - 8 - PART IV - THE PROJECT Project History 23. In early 1973, Afghanistan requested IDA to assist in financing a Second Agricultural Development Bank Project to continue the First Agricul- tural Development Bank Project for which an IDA credit of US$5 million was made in 1970. The proposed second project was identified and prepared by AgBank in conjunction with IDA missions in October 1973 and April 1974. The project was appraised in August and September 1974 and negotiations were held in Washington from February 27, 1975 to March 7, 1975. The Afghan delegation was headed by His Excellency M.E. Abdullah Malikyar, Ambassador to the U.S.A. The Project 24. The proposed project would he a continuation of the First Agricul- tural Credit Project which has contributed to a significant expansion of operations and strengthened AgBank management through its UNDP-financed and Bank-executed management assistance. The project would support the Govern- ment's objectives of attaining self-sufficiency in food grains and sugar, and increased production of foreign exchange earning crops such as cotton and raisins. It would help to raise the very low level of farm mechanization, allow for more double cropping, expand water resources and uses of fertilizer and other modern farm inputs to increase yields and improve the supply of institutional credit. The investments made possible under the project would thus assist Afghanistan to reach its food production goals and make an import- ant contribution to the general development of the country's most important sector. The Credit and Project Summary in Annex III describes the major features of the proposed project. The Appraisal Report (Report No. 628-AF) entitled "Appraisal of a Second Agricultural Credit Project" is being distri- buted separately to the Executive Directors. 25. The project would increase agricultural productivity by making more funds available to AgBank for credit to farmers investing in farm mechaniza- tion (tractors, oxen, animal-drawn implements, water pumps, and sprayers); on-farm development; and modern farm inputs (fertilizer, pesticides, im- proved seeds). In each of these categories the project funds would permit AgBank to continue to expand its lending activities. The use of modern farm inputs would be stimulated through an increase in the funds available to AgBank for short-term lending. Funding requirements of both AgBank and AFC are considerably higher than the annual procurement since farmers require about one year for repayment of fertilizer loans and fertilizer must be pro- cured, imported, and distributed to warehouses over a period of about 8 months before purchase by farmers. The provision of funds to AgBank through the proposed credit would allow more farmers to benefit from the high increases in yields due to fertilizer use and achieve higher levels of net income. 26. The Project would also provide funds for AgBank to consolidate and upgrade its organization and staffing by:  - 9 - (i) financing field allowances of additional staff to be provided by MAI to serve as credit supervisors; (ii) extending fellowships to medium- and high-level staff; (iii) purchasing equipment and vehicles to support its branches and the establishment of a Groundwater Technical Unit to be set up for appraisal of groundwater irrigation loans. In addition, the Project would provide funds for AFC to build fertilizer ware- houses throughout the country. Project Costs and Financing 27. The estimated total cost of the proposed project is $18.2 million excluding customs duties and taxes, of which $11.5 million or 63 percent would be the foreign exchange component. The proposed IDA credit of $13 million would finance the full foreign exchange costs and $1.5 million of the local costs, and would amount to 70 percent of the total cost. The Government would be the borrower and would bear the exchange risk. The remaining funds needed to finance the project would come from AgBank's own funds ($3.2 mil- lion), from the Government ($0.7 million) and from sub-borrowers ($1.3 mil- lion). Organization and Execution 28. AgBank would act as a channel for project funds (IDA and Govern- ment) while AFC would supervise construction of fertilizer warehouses. AgBank gained considerable experience through implementing the First Agricultural Credit Project and assisting Herat Livestock Development Corporation in im- plementing the Livestock Credit Project of FY74. AgBank has made good progress in filling its vacant positions. However, in order to ensure a successful implementation of the project, appointment of qualified personnel to the four senior management positions which are most urgently required, has been made a condition of effectiveness of the credit (see Section 5.01(d) of the Development Credit Agreement of this project). Seven more positions which are also important for project implementation will be filled by the end of March, 1976 (see Section 3.06 of the Development Credit Agreement). AgBank has also taken the necessary steps to extend for a further three years the contract with the consultant team which has undertaken management and training activities under a UNDP technical assistance project for which IDA is the Executing Agency. The Government would second 15-20 extension agents annually during the project period from the Ministry of Agriculture to AgBank to serve as credit supervisors. The Government would also assign to AgBank approxi- mately 20 qualified university graduates a year from the University of Kabul, Faculties of Economics and Agriculture. As mentioned in para 26, the credit would provide financing to cover field allowances for these agents for whom the Government would continue to pay the basic salaries. The project would also finance 8 fellowships per year for training abroad of AgBank staff. These measures aim at improving further the effectiveness of AgBank in carry- ing out its increasing lending program.  - 10 - 29. Agricultural Development Bank (AgBank). AgBank was created by the Government in 1954 to fulfill the institutional credit needs for agriculture, with a virtual ownership of the Government. After many years of difficult operations, the bank was reorganized in 1969 under a UNDP/SF technical assist- ance project for which the Bank is the Executing Agency. Despite its short- age of qualified staff, its lending activities, which were largely confined to farm mechanization, have greatly increased and are now much broader in scope, including loans for on-farm development, marketing and short-term pro- duction. Its financial position at the end of 1974 remains sound. 30. Afghanistan Fertilizer Company (AFC). Following USAID support for fertilizer importation, AFC was established by the Government in October 1973. AFC is a joint stock company, but with all its shares owned by AgBank. It has more than 200 retailers under its network and is the only major fertilizer dis- tributor in Afghanistan. In 1973/74 it distributed about 50,000 tons of fer- tilizer annually. AFC has 26,500 tons of warehouse capacity at present, but relies on hired trucks and personnel for transportation. Its financial posi- tion is highly liquid at the moment. However, the position will become tighter with the Government's domestic sales price control and the rapid rise in fertilizer prices in the international markets which have more than doubled since January 1973. 31. The Government would on-lend to AgBank $11 .7 million of the credit proceeds for AgBank's lending program, at 5 percent interest with a repayment period of 15 years including 5 years grace. AgBank's sub-borrowers would benefit from various types of loans with a duration of up to 12 years. For medium-term loans of 5-6 years, the interest rate would be 8 percent with up to one year of grace period. The same interest rate would be applied to long- term loans of up to 12 years with a grace period of up to 4 years. Short- term loans for fertilizer, seed and pesticide would be made at 10 percent in- terest with up to 12-month repayment period. The Government would make avail- able to AgBank $0.5 million of the proposed credit as equity contribution to finance AgBank's supporting services. It would also make available $0.8 mil- lion of the proposed credit as equity contribution to finance 50 percent of the cost of AFC's fertilizer warehouses to be constructed under the project. 32. Up to March 20, 1974, AgBank has recovered 89 percent of principal amount fallen due from all loans made since its establishment in 1954; and for loans made since 1970, 92 percent has been recovered. Particular atten- tion would be paid by AgBank to close supervision of its sub-loans with an emphasis on collection of sub-loan repayments. It would strengthen its staff and facilities and develop a staff work program responsive to particular sit- uations in various areas of the country. In view of the particular nature of the farm input programs, and the amounts of credit extended each year to a large number of borrowers, the Government would continue to cover losses of principal incurred by AgBank on loans more than one year overdue. The Govern- ment would continue to assist AgBank in recovering its sub-loans in default through local government offices.  Procurement 33. AgBank would undertake, as in the First Agricultural Credit Project, the procurement of tractors, attachments, and spares, on a bulked basis, through international competitive bidding according to IDA's Guidelines for Procurement. To encourage development of efficient dealer services, AgBank would require bidders to give full particulars as to after-sales service arrangements; suppliers not meeting satisfactory service conditions would be disqualified. An initial stock of tractor spares equal to about 10 percent of the CIF value of all tractors and implements would be imported at the same time as the tractors. As need arises for additional parts for IDA-financed tractors, import licenses would be issued to AgBank for annual importation of parts for at least 7 years following the final IDA disbursement for trac- tors. 34. Vehicles and equipment for AgBank supporting services, pump sets, and sprayers, which would cost less, in the aggregate, than US$100,000 annu- ally, would be procured by AgBank locally or abroad after quotations have been invited from at least three sources of supply. Farmers would procure oxen, animal drawn implements and other locally made farm equipment and fer- tilizer through local commercial channels. Fertilizer supply is assured by AFC. 35. Engineering of AFC warehouse construction would be made by a local architect to be selected by AFC and AgBank on terms and conditions satisfac- tory to IDA. Construction of warehouses would be procured by AFC with the assistance of the selected architect and AgBank under competitive bidding advertized locally and in accordance with local procedures which are satis- factory to the Bank. A margin of preference of 7-1/2 percent for domestic contractors would be granted. 36. Out of the 400 tractors contracted under the first agricultural credit according to IDA's Guidelines, 150, costing about $783,000 would be financed by AgBank under the proposed credit in order to avoid straining AgBank's financial resources; this could require some retroactive financing to the extent payment for these tractors is completed before the signing of the proposed credit. Disbursements 37. IDA credit disbursements would extend over 3-1/2 years as follows: (a) The CIF value of tractors, attachments and spares, pumpsets, sprayers, vehicles and equipment for AgBank supporting services, the foreign exchange cost of fellowships; and 100 percent of credit supervisors' field allowances as certified in contracts, invoices or other appropriate supporting evidence produced by AgBank;  - 12 - (b) Seventy-one percent of sub-loan disbursements made by AgBank for fertilizer, pesticides and seed in the first year and 71 percent of the incremental subloan disburse- ments thereafter; (c) Seventy-five percent of sub-loan disbursements made by AgBank to farmers for onfanm development and purchase of locally made farm equipment; (d) Seventy percent of the total cost of imported equipment purchased locally; and (e) Fifty percent of architect's fees and AFC warehouse con- struction costs, upon receipt of appropriate documentation of payments made. Benefits 38. About 43,000 farmers occupying farm land of about 173,000 ha would benefit from the project. Most beneficiaries would be farmers on about 3.5 ha of irrigated land. The rate of return for investments on tractors would be 15 percent, water pumps 28 percent, almond orchard 21 percent, animal-drawn implements 44 percent and sprayer and fertilizer 54 percent. Net income and financial rate of return would be sufficiently high to make the proposed in- vestments attractive. 39. The project is expected to generate an incremental production of about 6 percent of the average annual production of corn and feed grain, 4 percent of the average annual production of wheat and cotton. As a result of the expected increase in export products, the foreign exchange yield at full development would be about $20 million, largely provided by import savings on wheat. The overall return to the economy is estimated at 34 percent from total project investment. Additional benefits would result from substantial- ly increased employment opportunities through increased cropping intensity and expanded cultivated acreage. PART V - LEGAL INSTRUMENTS AND AUTHORITY 40. The draft Development Credit Agreement between the Republic of Afghanistan and the Association, the draft Project Agreement between the Association, AgBank and AFC, the recommendation of the committee provided for in Article V, Section 1(D) of the Articles of Agreement, and the text of a draft resolution approving the proposed credit are being distributed to the Executive Directors separately. 41. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  - 13 - PART VI - RECOMMENDATION 42. I recommend that the Executive Directors approve the proposed dev - elopment credit. Robert S. McNamara President Washington, D.C. April 3, 1975  Annex 1 Pags 1 of 3 pages OUKYitY DATi - APF0ANLSILLU ARIA POPULAflTON NIs 63500 st LI,. F dlton (mid-1972) 100 Per kh2ao arable lad SOCIAL INSICAT0RS 5DCLJL INDIC^YObS ~~kaferance Cour tries Afg-nnir.tn Nupal Sudan Arab Repr. ____ 1970 i970 1970 ONI PER CAPITA US$ (ATLAS BASIS) /5 30 / 0O /n 120 320A DEW1;KAPhLC Crud ttr-th r,t. ;pr, thousand) 50 b.C h5 .c L9 1 8bc Crude death rat. (per thousand) 26 Ar 23 lsi 18 15 n InWant ortalJty rate (Per thouand lies btrthe) 102 gc2 d 93 d Life expectancy at birth (years) 38 /, h1 /5,c La 5h Oross reproduction rte /2 3- b,c 3.0 1d 3.8 3 5 Population growth rateL 2 1.8 28 33 FopolAtion gro4th rate - urban 2 3 fi S5 5 5 Age atrootore (percont) 0-11 L3 ..L2 05 LS b6 15-6e j4 5SS 52 51 65 ned 3 3S 3 3 Deneodenay ratio iA 1. 1.5 5 1 4 Urban population as perrast of total 1F i . .. 12 /5 h4 Lfh Frily planntng: No. of acceptors curmalative (thous. dl No. of u-ers ( of merried ms) - FJtPLOYMTN Tota r tre (thousarnds) .. 1,6c a 5,200 Li 5,100 Lc 2,000 /n.h Pernentaga employed in griculture 67/s 91 /c 80 iL 67 /.ck Perontage unemployed e INCOME DISThIBTJrION Percea t of ational income reoneied by highest 5t Prrern of national incons re's-lad by higheat 20% Percent of rational income re.oived by lonest 20% Pnr.wnt of mational inco-e received by l-ent 40% DTRIBUIION OF LtND OEBNRSHIP S o-nnd by top 105 or renrs t wnad by -eilmet 10% or of er. hEALTBi AD NUTliITION Population per physician 32.000 /1 20,450 /5 19,770 /e 15,940 3,850 Population per nursing person 22,;60 fl n 22,120 La 35,600 to 1,950 ,4460 Population per hospital bhd 8,4L00 6,890 In 6,750 1,011