Afghanistan - Second Agricultural Credit Project

Report No. 628-AF & Appraisal of a FILE 0uy Second Agricultural Credit Project Afghanistan March 28, 1975 Agricultural Credit and Agroindustries Division Europe, Middle East and North Africa Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. it may not be published, quoted or cited without Bank Girup authorization. The Bank Group does not acept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS US$1 = Afghanis (Af) 55.0 Af 1 = US$0.0182 Af 1 million = US$18,182 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 kilogram = 0.11L2 seer 1 seer = 7.07 kilograms 1 metric ton = 1,000 kg 1 metric ton = 0.98 long ton 1 meter (m) = 1.09 yards 1 kilometer (km) = 0.62 miles 1 hectare (ha) = 2.47 acres 1 hectare = 5.16, jeribs 1 Jerib = 0.194 hectares ABBREVIATIONS AFC = Afghan Fertilizer Company AgBank = Agricultural Development Bank of Afghanistan DAB = Da Afghanistan Bank DAP = Diammonium Phosphate F?D = Food Procurement Department HAVA = Helmand - Arghandab Valley Authority HLDC = Herat Livestock Development Corporation MAI = Ministry of Agriculture and Irrigation MIS = Minor Irrigation Section of MAI PACCA = Programs for Agricultural Cooperatives and Credit in Afghanistan PDA = Paktia Development Authority PTB = Pashtani Terjarity Bank SIDA = Swedish International Development Authority FISCAL YEAR March 21 - March 20  APPRAISAL OF A SECOND AGRICULTURAL CREDIT PROJECT AFGHANISTAN TABLE OF CONTENTS MAIN TEXT Page No. SUMMARY AND CONCLUSIONS ...... ........................... i-ii I. INTRODUCTION ... ..... ..........1 II. THE AGRICULTURE SECTOR ............................., 1 A. General ........................ ........ .......... 1 B. Production ........... . ................ ............ 2 C. Organization and Supporting Services ... ............ 2 D. Constraints to Agricultural Development ......... ... 6 III. THE AGRICULTURAL DEVELOPMENT BANK AND PERFORMANCE UNDER THE FIRST AGRICULTURAL CREDIT PROJECT .............. 7 A. The Agricultural Development Bank (AgBank) ......... 7 B. Performance under the First Agricultural Credit Project ........................................ 8 IV. THE PROJECT ......... . ..... 9 A. Objectives ............. ........... ................. 9 B. Description .... ..................................... 10 C. Cost Estimates ..................................... 14 D. Financing ........ ................. ............... 16 E. Procurement ................................ 17 F. Disbursements ....................................... 18 This appraisal report is based on the findings of an appraisal mission to Afghanistan in August-September 1974 consisting of Messrs. Merghoub, Brandes, Suebsaeng (IDA) and Bilbo and harrison (Consultants). The report has been edited by Ms. Chernock, calculations checked by Ms. Fauntleroy.  TABLE OF CONTENTS (Continued) Page No. V. ORGANIZATION AND MANAGEMENT ........ .............. 19 A. General ............................................ 19 B. On-Lending Policies and Procedures .................. 19 C. On-Lending Terms and Conditions .................... 20 D. Accounts and Audit. .............. .. 21 E. Monitoring and Evaluation.......................... 21 VI. BENEFITS AND JUSTIFICATION . ....22 A. Production, Markets and Prices ........... 22 B. Financial Benefits ........ ........... ............ , 23 C. Economic Benefits . .......... ... ................... . 24 VII. AGREEMENTS REACHED AND RECOMMENDATIONS .................. 25 ANNEXES 1. The Agriculture Sector Appendix Fertilizer Trials in Afghanistan 2. Agricultural Marketing in Afghanistan 3. Agricultural Credit in Afghanistan 4. The Agricultural Development Bank of Afghanistan (AgBank) Appendix The Fertilizer Program Chart WB 9270 5. Afghan Fertilizer Company rAFC) Appendix AFC Fertilizer Warehouse Requirements Chart WB 9272 Chart WB 9271 Chart WB 9273 6. Detailed Project Costs 7. Estimated Cumulative Quarterly Schedule of Disbursements 8. Projected Financial Results 9. Economic Return Calculations MAPS WP 11326 WP 11327  SUMMARY AND CONCLUSIONS i. The proposed project, a continuation of IDA's First Agricultural Credit Project, aims to develop agriculture by extending credit to a large number of farmers, and by further institution-building of the Agricultural Development Bank of Afghanistan (AgBank) and the Afghan Fertilizer Company (AFC), the two main Government agencies servicing agriculture. ii. Despite the beginnings of industrialization, Afghanistan's economy is still based on subsistence agriculture and animal husbandry, which engage about 85% of the population. In any year, the availability of water largely determines the level of agricultural output, and hence the national product. Economic growth over the last decade has barely kept pace with population growth.' The first 3 Five-Year Plans (1957-1972), which emphasized large in- frastructure projects, had little impact on the incomes or living standard of most of the population. There is an urgent need to orient Government pro- grams toward quicker-yielding projects and toward better utilization of pro- duction capacities already created in different sectors of the economy, es- pecially agriculture. The major constraints to agricultural development, besides shortage of irrigation, water supply and inadequate management of scarce resources, are weak extension, inadequate supply of farm requisites, limited availability of institutional credit, shortage of farm labor and power during certain seasons, and an inadequate pricing system which dis- courages higher production levels. iii. The project would increase agricultural productivity and help achieve Government's long hield objectives of self-sufficiency in food grains and increased production of foreign exchange earning crops such as cotton and raisins. It would provide funds (a) to AgBank for credit to 43,000 farmers investing in farm mechanization, on-farm development and modern farm inputs (fertilizer, pesticides, improved seeds); (b) to AgBank to consolidate and upgrade its organization and staffing through financing of field allowances of 54 additional staff, 30 fellowships, equipment and vehicles to support its branches, and services; and (c) to AFC for building 24 fertilizer ware- houses of 55,000 tons total capacity throughout the country. iv. The project would cost Af 1 billion (US$18.2 million), of which 63% or Af 632.5 million (US$11.5 million) would be foreign exchange. The IDA credit would finance US$13 million or 70% of total project cost. Government would be the Borrower and would bear the foreign exchange risk. IDA financing would be supplemented by Government funds estimated at Af 43.1 million (US$784,000), AgBank's own resources of Af 179.4 million (US$3.3 million), and individual sub-borrowers funds of Af 73.5 million (US$1.3 million). v. AgBank would be the channel for all project funds. Government would on-lend to AgBank the credit proceeds for AgBank's lending program (US$11.7 million), at 5% interest with a repayment period of 15 years including 5 years grace. Government would make available all other credit funds as equity con- tribution to finance AgBank's supporting services (US$427,000) and AFC's ware- houses (US$784,000). AgBank's subborrowers would benefit from loans with duration of up to 12 years at 8% and 10% interest according to type of investment.  - ii - vi. AgBank, through its supply organization, would procure tractors, attachments and spares under international competitive bidding according to IDA's Guidelines on Procurement. All other equipment and vehicles would be procured by AgBank or subborrowers locally or abroad after having sought quotations from at least 3 sources of supply. AFC warehouse constructions would be procured by AFC with the assistance of AgBank under competitive bid- ding advertised locally and in accordance with local procedures, satisfactory to IDA. vii. The project would contribute significantly to the production targets outlined in the Fourth Five-Year Plan and in the annual 1974-75 Economic Plan. It would allow for self-sufficiency in wheat production, and increase by 6% the current total cotton exports at full development. The total annual for- eign exchange earnings or savings generated at full development would be about US$20 million. About 26,000 new employment opportunities would be generated. The overall economic rate of return would be 34% from total project investments including technical assistance and training services. viii. With the assurances that are discussed in Chapter VII of this Report, the project would be suitable for an IDA credit of US$13 million under standard IDA terms.  APPRAISAL OF A SECOND AGRICULTURAL CREDIT PROJECT AFGHANISTAN I. INTRODUCTION 1.01 The Government of the Republic of Afghanistan has requested an IDA credit of US$13 million to help finance a second agricultural credit project. The proposed project is a continuation of the First Agricultural Credit Proj- ect, and aims to develop agriculture by extending credit to a large number of farmers, and by further institution-building of the Agricultural Development Bank of Afghanistan (AgBank) and the Afghan Fertilizer Company'(AFC), the two main Government agencies servicing agriculture. 1.02 The First Project, signed ou June 24, 1970, was a credit for US$5 million to Government to support AgBank's lending program to finance farmers' investments in farm mechanization, shallow well pumps, and improvement of small irrigation facilities. The project also aimed at institution-building, to enable AgBank to meet farmers' credit needs and to assist the Ministry of Agriculture and Irrigation (MAI) in minor irrigation improvement and ground- water development by providing technical experts and equipment. The First Project was prepared in conjunction with AgBank's reorganization in 1969 and subsequent institution building which was financed by UNDP for which IBRD has acted as the executing agency. The credit under the First Project will be fully disbursed by June 1975. 1.03 Besides the First Agricultural Credit Project, Bank Group lending for agriculture in Afghanistan consists of 2 IDA credits: IDA Credit 248-AF (US$5 million) signed in 1971 for the Khanabad Irrigation Project, which is experiencing some delay because of the cost increase due mainly to the cur- rency appreciation against US Dollar, inflation, and project modification made at the request of the Government; and IDA Credit 375-AF (US$9 million) signed in 1973 for the Livestock Development Project, which became effective in February, 1974. 1.04 The proposed project was prepared by AgBank in conjunction with IDA supervision missions of October 1973 and April 1974. This report is based on the findings of an appraisal mission in August/September 1974, consisting of Messrs. Merghoub, Brandes, Suebsaeng (IDA), Bilbo and Harrison (consultants). II. THE AGRICULTURE SECTOR A. General 2.01 Afghanistan, a landlocked country (Map IBRD 11327), comprises 63 million ha of which about 13 million ha are arable and 5 million ha are cropped. Its rugged topography and extremes of temperature provide a harsh environment for economic development. Despite the beginnings of industriali- zation, Afghanistan's economy is still based on subsistence agriculture and  -2- animal husbandry, which engage the bulk of the population. In any year, the availability of water, largely from melted snow, determines the level of agri- cultural output, and hence the national product. Economic growth over the last decade has barely kept pace with population growth. Public investments in agriculture and other sectors were financed largely by foreign assistance, and to an increasing extent, by the domestic banking system. There is an urgent need to orient Government programs toward quicker-yielding projects and toward better utilization of production capacities already created in dif- ferent sectors of the economy, especially agriculture. In April 1974, the Governmient issued an Annual Economic and Social Development Plan for 1974/75 which sets a 4% growth target for GNP and agricultural production. The current inflation rate is estimated at 7-8%. B. Production 2.02 In 1972/73, agriculture, including livestock, supported at least 85% of the population, contributed about 50% of GNP, and accounted for about 74% of the country's export earnings. Of total exports in 1973/74, dried fruits and nuts accounted for 31%, wool and skins (including karakul pelts) for 20%, fresh fruit for 14%, and cotton for 4% (see Annexes 1 and 2). In 1973/74, major crops were food grains (wheat 2.8 million tons, maize and barley 1.1 mil- lion tons), seed cotton (108,000 tons), sugar beet (57,000 tons) and oilseeds (38,000 tons). Demand for wheat has exceeded domestic production, and during the past 10 years imports have averaged 110,000 tons annually. The slow growth of the agriculture sector (about 2.2% annually during the last 5 years) was due to physical and institutional constraints (paras 2.19 and 2.20). C. Organization and Supporting Services The Ministry ofAgriculture and Irrigation (MAI) 2.03 MAI is the main administrator of agricultural development in Afghanistan. MAI is organized into Departments representing the different subsectors of agriculture (extension, irrigation, plant protection, livestock and research) and into Regional Authorities in charge of specific projects. The Regional Authorities have shown relative success over the years - Helmand- Arghandab Valley Authority (HAVA); Paktia Development Authority (PDA); Proj- ect on Agricultural Credit and Related Services through Cooperatives in Afghanistan (PACCA). However, the Government has recently discontinued the integrated approach of these projects and installed a centralized departmental organization which is facing some difficulties in coordinating and implementing Government programs efficiently in the field. Research 2.04 Research activities are normally the responsibility of MAI's Re- search and Soil Department. M2ore than 20 stations in about 8 agricultural  regions carry out seed selection programs for cereals, feed crops, oliseed, rice, cotton, sugar beets and horticultural crops. Research activity, how- ever, is seriously hindered by shortage of qualified staff, lack of adequate equipment, and budgetary constraints. MAI is currently reviewing the re- search organization set-up to better define its objectives and improve its structure. Extension 2.05 The number of extension agents has expanded rapidly over the past few years, from only 300 agents in 1970 to about 3,000 agents by 1973. Most of those recruited have been young and without experience. In the last 18 months' agricultural extension staff has been reduced to eliminate some of the poorly qualified agents. The need for in-service training is great, but little is being done on a national or regional basis to help the remaining agents to upgrade themselves. Training 2.06 Agricultural training is being conducted on 2 levels - at secondary schools and at the University of Kabul. Three secondary schools, with a total enrollment of about 700 students, graduate a total of about 300 a year, while the annual demand for these graduates in agriculture alone is about 5,000. The University's Faculty of Agriculture graduates about 200 students each year. The study takes 4 years, with specialization in the third and fourth years. Until recently the Faculty had a partnership agreement with the Agriculture Faculty of the University of Wyoming (USA). Farm Input Supply 2.07 In the past, supplies of fertilizer have been erratic and distribu- tion poor. After 2 consecutive years of drought in 1970 and 1971, Government with the financial assistance of USAID (US$19.5 million), created AFC (Annex 5) as a joint stock company but with all its shares owned by AgBank. AFC's objectives are to procure and distribute fertilizer. Most fertilizer is being procured through AFC in bulk lots by international bidding. Some amounts are being procured by Government both by bilateral agreements and from the Mazar-i-Sharif plant, and placed at AFC's disposal, partly as grants, partly as loans (Annex 5, para 11). AFC makes fertilizer available on cash and credit (through AgBank) to farmers through private retailers and through sugar and cotton companies. 2.08 Since creation of AFC, procurement of fertilizer has more than tripled, to about 82,000 tons/year, and fertilizer use has increased, from about 18,000 tons in 1969/70 to approximately 48,000 tons in 1973/74; this latter amount, however, was sufficient for only 5-8% of the irrigated crop- land. Farmers are becoming aware of the 30-80% increase in yield due to applying fertilizer, and with an active distribution and credit policy, fertilizer demand is expected to grow by about 10-15% a year.  -4- 2.09 Government sets the selling price of fertilizer to farmers and the policy is to keep both fertilizer and farm commodity prices relatively stable; recently, this has meant domestic prices remained below world market prices which since 1973 have increased sharply. AFC receives an annual subsidy from Government when the fixed limit price of fertilizer is not sufficient to cover its purchase and delivery costs. 2.10 The cycle between procurement and distribution of fertilizer and repayment of loans by farmers is estimated to be 18-22 months. In the past, AFC provided part of the fertilizer financing for farmers through an arrange- ment with AgBank, but because of the drastic increase in fertilizer prices during the last two years and the expected increases in fertilizer demand, AFC will need all of its resources the balance of the AID credit (US$5.4 mil- lion), AFC deposits with AgBank, and additional Government financing in order to increase procurement. To offset the loss of deposits, AgBank will require additional financing in order to finance fertilizer purchases by farmers through short-term loans (para 4.03). 2.11 Very little use is made of insecticides, herbicides, fungicides or animal health materials because of the lack of knowledge about their use and their limited availability. The MAI Plant Protection Division has treated the threatened areas so far. AgBank stocks a few chemicals but AFC plans to take on this role along with fertilizer and seed distribution. There is no formal seed program in Afghanistan at the present time. Research farms have developed a limited seed multiplication program, mainly for wheat and cotton. A thorough evaluation of seed requirements is needed in order to develop a formal program. Government is aware of this necessity and MAI is undertaking this evaluation and has started a program but it might be several years before an appropriate program is implemented. Farm Machinery 2.12 Most of the farm machinery is imported. Jangalek Metal Works in Kabul, and the Handicraft Promotion Center in Gardez, both Government-owned companies, are the main manufacturers and suppliers,of locally made farm im- plements - polyculteurs 1/, and water pumps - commonly used by farmers. More than 1,500 agricultural tractors have been sold in Afghanistan over the last 10 years, over half of which have been purchased in the last 3 years. AgBank has been importing tractors since 1966 and some 589 tractors have been sold during the last three years, of which 471 (Massey-Ferguson) were financed under the First Credit. AgBank contracted with Escort Ford of India, through international competitive bidding, for 400 more, 250 of which were financed under the First Credit. Considering the very low level of farm mechanization (only 1 tractor for every 2,900 ha of cultivated land), and the strong demand for tractors, AgBank could distribute over 400 tractor loans a year. In addi- tion, demand for smaller horsepower tractors is being evaluated on the basis 1/ Multipurpose animal-drawn implements.  -5- of demonstrations of two 25 hp Russian tractors. Future consideration should also be given to power tillers for the very small landholder. Their introduc- tion requires close supervision and technical help at the farm level, but such assistance is unavailable at this time. Satisfactory tractor servicing is offered by Government workshops, 2 private tractor companies, and a few in- dividual mechanics. Cooperatives 2.13 The cooperative movement in Afghanistan is still relatively young and very limited. In 1969, the Swedish International Development Authority (SIDA) financed the Project on Agricultural Credit and Related Services through Cooperatives in Afghanistan (PACCA), which was implemented by FAO in Koh-i-Daman/ Quarabagh and in Baghlan. The project involved about 1,000 farmers, provid- ing them with training, credit, and marketing facilities. During its Phase I (1969-74), PACCA trained about 234 agents, mainly extension and cooperative supervisors. However, only 2 cooperatives were legally registered under the lengthy procedures of the Commercial Code and 9 informal groups of farmers were constituted. The absence of a cooperative law makes it difficult to establish cooperatives to which AgBank could extend credit. A draft of such a law is awaiting Government approval. 2.14 A Phase II of PACCA concentrating on S provinces (Balkh, Baghlan, Logar, Kandahar, and Kabul) is under consideration, it would be implemented over 4 years (1974-78), withac Government contribution of US$3.4 million, and SIDA financing of US$2.4 million. The project would support and help organize MAI's newly created Department of Cooperative Development which would in turn provide training, credit, and marketing assistance needed to establish about 14 multipurpose cooperatives and 14 cooperative unions. If successful, PACCA's Phase II would be a formidable tool to modernize farming practices and develop the basis for increased credit distribution. Land Ownership and Tenancy System 2.15 According to the preliminary census of 1969, the average size of holdings is 3.5 ha of cultivated land. Land ownership patterns vary. In some areas, farmers own most of their farmed land, while in other regions a high proportion of the cultivated area is owned by a relatively small number of large landowners. In some villages, land ownership is concentrated in 1 or 2 hands. There are at least 1.5 million agricultural households with 6 or 7 persons/household, but a substantial number of them own either no land or less than 0.5 ha. Although the present tenancy arrangements are not particu- larly progressive, a large number of landowners and tenants are anxious to increase their yields by using more inputs, provided that irrigation water and credit are made available to them. There are no indications that land reform can be introduced soon in Afghanistan. Taxes 2.16 Agriculture provides about 20% of total Government tax revenue. This is substantially lees than the sector's share of GNP, estimated at 50%  in 1972/73. The bulk of agricultural taxes is from export taxes on agricul- tural products (cotton and pelts), which vary between 1% and 7% of the com- modity value (see Annex 2). No agricultural income tax is levied, but there is a land tax, the proceeds fron which are very limited (only 1.3% of Govern- ment tax revenue in 1972/73). Administration of the land tax system is un- satisfactory, largely due to uncertainties over land ownership based on in- complete cadastral surveys. Credit 2.17 The great majority of farmers must rely on private moneylenders and traders who charge interest rates of 24% or more and limit their lending to seasonal needs (Annex 3). Institutional credit for agriculture began with the establishment of AgBank in 1954 (para 3.01). AgBank is the only source of institutional credit, as the commercial banks have not been active in agri- culture except for some short-term financing of processing and marketing, particularly for export. Although its activities have been dramatically in- creasing, AgBank could achieve a more significant impact on agricultural credit if weaknesses in its own organization and problems in obtaining satisfactory loan security were solved. Both obstacles have been reduced with the assist- ance of a consultant team working with AgBank (paras 3.02 and 3.03), but the appropriate legal framework for an effective security system still has to be developed. AgBank has recently completed a study proposing loan security legislation, but Government has not yet taken follow-up action. Marketing 2.18 The bazaar is the traditional market which has been operating in villages and towns for centuries. The bazaar combines the functions of both a wholesale and retail market. It operates largely on a free market system with only limited Government interference. Organizationally, the system meets the needs of the present volume and pattern of agricultural production. Gen- erally, however, the bazaar is weak in the area of promoting quality products because it lacks the facilities for quality control, handling, and storage. The Government fixes prices for certain commodities (cotton, sugar beets) and has indirect influence on commodity price levels through its import and export policy, its purchases of wheat, and its pricing of fertilizer and other inputs. Since 1973, Government's pricing policy aimed mainly at keeping domestic food prices at a rather stable level rather than increase them to the high inter- national level presently prevailing (Annex 2). D. Constraints to Agricultural Development 2.19 The major constraints to agricultural development are limited irri- gation water supply; inadequate management of scarce resources; weak extension; inadequate supply and distribution of farm requisites; limited availability of institutional credit; and shortage of farm labor and power during certain seasons, resulting in low crop yields through late planting and/or limited farming of available land.  -7- 2.20 Only a well planned and implemented development strategy taking into account all these constraints will allow the achievement of all the Government's goals of food grain self-sufficiency (particularly for wheat), increased produc- tion and export of cotton and raisins, and self-sufficiency in sugar through increased sugar beet production. The proposed project will help alleviate all of these constraints and with the additional investment proposed, self-suffi- ciency in wheat is an achievable goal. III. THE AGRICULTURAL DEVELOPMENT BANK AND PERFORMANCE UNDER THE FIRST AGRICULTURAL CREDIT PROJECT A. Agricultural Development Bank (AgBank) Background 3.01 AgBank was created in 1954 as the Agricultural and Cottage Industries Bank to fulfill the institutional credit needs for agriculture (Annex 4). It is a joint stock company with virtual Government ownership. After many years of-difficult operations, the bank was reorganized in 1969 under a UNDP/SF technical assistance project for which IBRD is the Executing Agency. A con- sultant firm was retained (Hendrikson Associates, Federal Republic of Germany) and eventually 5 expatriate experts were employed. The current contract which will expire in August 1975 is to be extended for another 3 years (para 4.14). Organization and Management 3.02 As part of reorganization, a revised charter was adopted, and AgBank was expanded and restructured along functional lines (Supply, Credit, Finance, Staff, Administration). The main emphasis in the reorganization has been on the building of effective credit operations. To this end, 11 branches were opened and staffed in 10 provinces and new loan regulations were introduced to make up for previous deficiencies. Security requirements were reviewed and more flexible security instruments, such as promissory notes for small- and medium-size loans, were incorporated. Field inspector services and training programs were established to augment the lending program and upgrade the staff. In order to attract qualified personnel, AgBank employees have been removed from civil servant status and offered better salaries. . 3.03 The organizational development of AgBank has been somewhat limited by the shortage of qualified personnel. The shortage is most evident in the top-and middle-level positions. According to AgBank's own figures, 56 out of 117 authorized top-and middle-level positions are vacant. But inspite of this shortfall, AgBank has done remarkably well in terms of institution building and credit operations (para 3.04). liowever, the staffing of AgBank, although it might have been adequate for its past operations, would have to be strength- ened if balanced growth is to be achieved. Thus, in view of the anticipated expansion in lending programs, it is particularly important that 11 vacant key  positions out of the above 56 vacancies be filled as soon as possible (Annex 4). The early filling of these key positions should not present a great problem since AgBank offers attractive salaries and qualified candidates have applied. Nevertheless, the concerted recruitment and training efforts in- corporated in this project will have to be undertaken to staff AgBank with qualified personnel (paras 4.12-4.14). The Government has been requested to assist in alleviating the acute staffing situation by helping locate qual- ified personnel and expediting the processing of applications (para. 4.12). Activities 3.04 Under the new management, lending activities, which were largely confined to farm mechanization, are now much broader in scope, including loans for on-farm development, marketing, and short-term production. Loan disburse- ment rose from a low of 44 loans for-Af 2.6 million in 1970 to 30,969 loans for Af 398.6 million in 1974. Gross loan portfolio increased from Af 85.9 million in 1971 to Af 571.8 million in 1974 or an increase of about 600%. The total turnover of the Supply Department, consisting mainly of tractors and water pumps, rose from Af 54 million in 1972 to Af 179 million in 1973, but dropped to Af 95 million in 1974 because of the unavailability of tractors. During the past 3 years, 589 tractors and 584 water pumps have been sold. Financial Position 3.05 AgBank's major source of funds has been equity contributions, which amounted to Af 506 million in 19.74, or 40% of the capital structure. Part of the equity derives from proceeds of IDA Credit 202-AF transferred from the Government. Long-term liabilities account for less than 10% of total liabilities. AgBank's financial position at the end of fiscal year 1973/74 (March 20) remained liquid, although slightly less so than the previous year. The ratio of liquid assets to current liabilities was 1.02, indicating a li- quid position. Net profit rose from a loss of Af 8 million in 1972 to a gain of Af 25 million in 1974. Revenues were earned from credit and supply opera- tions as well as from interest-earning deposits in other banks. Collection rates have significantly improved since reorganization. The collection rate of loan principal fallen due during the year increased from 53% to 75% between 1972 and 1974; and the overall collection rate of loans made since 1970 has been 92%. During the same period, the interest collection rate rose from 23% to 63%, and the percentage of principal in arrears decreased from 37% to 7.5%, partly because of the large increase in loan disbursement. Over half of all arrearages were from loans made prior to reorganization. B. Performance under the First Agricultural Credit Project 3.06 In conjunction with AgBank's reorganization, a lending program was developed and IDA Credit 202-AF was made in 1970 for US$5 million. Tlhe pri- mary aims were to finance farm mechanization and irrigation rehabilitation as well as to build and strengthen AgBank and MAI. Fully satisfactory dis- bursement results have been achieved for the imported farm equipment component,  -9- where, as of June 1, 1974, 471 tractors and implements have been sold on cred- it. Disbursements for pumpsets and minor irrigation have been hampered, mainly by the poor coordination between MAI's Minor Irrigation Section (MIS) and AgBank, and the failure to establish water users' associations. As of above date, 120 pump loans and only 3 irrigation loans have been made. Dis- bursements for locally made farm equipment have begun only recently as the equipment was neither available nor actively promoted by the extension serv- ices in cotton-producing areas. Fairly rapid disbursements were made for spare parts, vehicles, and office equipment. Disbursements for technical services and fellowships and loan extension services also suffered from the Government's policy of financing such services from grants rather than credit. However, there has been a recent change in this policy and the new flexibility is expected to give AgBank the opportunity to arrange for more training of its staff. On-farm development category was created only recently. About 12 loans have been made thus far under this category. The project list of goods was reviewed in December 1973 and a reallocation of IDA credit proceeds made among project categories; all funds are expected to be disbursed by June 30, 1975. 3.07 The project's institution-building objectives have largely been achieved and impressive improvements were made in the level of AgBank's lend- ing activities and loan collections (paras 3.02 and 3.05). It is too early to evaluate the direct effects of the lending program on farmers' incomes since most loans were made for medium- and long-term investments. The proj- ect's legal covenants have been carried out satisfactorily and quarterly progress reports submitted to IDA have been excellent. IV. THE PROJECT A. Objectives 4.01 The project, a continuation of the First Agricultural Credit Proj- ect, aims during the 3 years of its implementation to support the Government's long held objectives of self-sufficiency in food grains (especially wheat) and sugar (through increased production of sugar beets), and increased produc- tion of foreign-exchange-earning crops such as cotton and raisins. The proj- ect investments would especially help to alleviate limited mechanization to allow for more double cropping, to expand water resources and uses of modern inputs to increase yields as well as to improve the supply of institutional credit. Alleviation of these major constraints to agricultural development would assist in an important way to reach Afghanistan's food production goals and provide for general development of the country's most important sector. 4.02 The project would increase agricultural productivity by making more funds available to AgBank for credit to farmers investing in farm mechanization (tractors, oxen, animal-drawn implements, water pumps, and sprayers); on-farm development; and modern farm inputs (fertilizer, pesticides, improved seeds). In each of these categories the project funds would permit AgBank to continue to expand its lending activities. In supporting farm mechanization the project  - 10 - would allow AgBank to continue its momentum in medium-term lending by providing on credit tractors and equipment needed to increase the productivity of culti- vated areas. The initial success achieved under the First Project in support- ing on-farm development would be reinforced by providing long-term funds for a variety of investments to create new orchards, develop ground and surface water resources, and increase productivity of poultry and dairy farms. 4.03 The use of modern farm inputs would be stimulated through an in- crease in the funds available for short-term lending. Funding requirements of both AgBank and AFC are considerably higher than the annual procurement costs since farmers require about one year for repayment of fertilizer loans and fertilizer must be procured, imported, and distributed to warehouses over a period of about 8 months before purchase by farmers. With its increasing levels of fertilizer procurement and the rise in the international prices, AFC is being forced to withdraw its deposits from AgBank, thereby, depriving the latter of its major source of funds for short-term lending. The project would provide the funds necessary to meet AgBank's deficit for fertilizer loans during the project years. This funding would allow more farmers to benefit from the high increases in yields due to fertilizer and achieve higher levels of net income. 4.04 The project would also provide funds for AgBank to consolidate and upgrade its organization and staffing by: (i) financing field allowances of additional staff to be provided by MAI to serve as credit supervisors; (ii) extending fellowshiis to medium- and high-level staff; (iii) purchasing equipment and vehicles to support its branches and the establishment of 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. B. Description Farm Machinery 4.05 Tractors and Attachments. The project would provide for the purchase of about 600 tractors (45-50 hp) with implements such as ploughs, .tillers, trailers, blade terracers, ridgers, etc., and also for spare parts amounting to 10% of the total equipment value. The 600 tractors include 150 procured through international competitive bidding under the First Credit Project  - 1 1 - (para 2.12). The tractors would be sold on credit to farmers or groups of farmers who cultivate jointly about 40 ha of irrigated land. Ilowever, farmers or groups of farmers who show reasonable evidence of at least 1,000 hours work/year would also be eligible. The 1,000 hours work/year could be based on custom work or a combination of the latter with work on own land. The average tractor cost with implements is estimated at Af 500,000 (US$9,100) including price contingency. Most of the tractors would be sold in Kandahar, helmand, Ghazni, and Herat Provinces, where double cropping on medium- and large-size farms is seriously hindered by lack of labor and power during the planting and harvesting seasons (Annex 1, paras 62-67). The demand for the proposed tractors is very strong, as AgBank has consistently sold about 400 each year (Annex 1, para 49). 4.06 Polyculteurs, Oxen, and Sprayers. The project would continue to finance polyculteurs, which have given most satisfactory cropping results over the traditional wooden-plow (kholba) when used on irrigated land of about 3.5 ha. The polyculteur, which consists of an oxendrawn implement with exchangea- ble attachments including a plough, ridger cultivator and harrow, is locally made and costs about Af 3,000 (US$55). The number to be financed, 240, is limited by the failure of extension services to more actively promote this equipment. Government will assure that extension services would make a particular effort to promote the use of this farm equipment, especially in areas where programs of cotton and wheat seed multiplication are being im- plemented. The project would finance about 240 pairs of oxen at an average cost of Af 18,500 (US$340) and about 300 sprayers at an average cost of Af 2,500 (US$45). 4.07 Shallow-Well Pumps and Water Wheels. As a continuation of the program initiated under the First Credit, the proposed project would finance about 270 water pumps with engines of about 20 hp on farms cultivating about 17 ha. The average investment cost for a pump with engine would be Af 80,000 (US$1,455). The demand for this equipment varies according to rainfall; it averages about 90 pumps a year. To expedite the appraisal of loan applica- tions for water pumps, assurances were obtained that AgBank would create and staff, within one month after the effective date of the Credit Agreement, a Groundwater Technical Unit composed of at least 1 groundwater/pump expert and about 6 supporting staff. Qualified personnel are available in Afghanistan for these positions. During negotiations, assurances were ob- tained from AgBank that it would create this Technical Unit. AgBank would. also finance under the project about 10 0 locally made waterwheels, mainly in Farah and Herat Provinces. The waterwheels would be utilized to irrigate small farms averaging 1 ha, and would cost about Af 12,000 (US$218). On-farm Development 4.08 On-farm development loans would be made for the establishment and improvement of about 430 vineyards and orchards, especially apple, apricot, pomegranate, walnut and almond. The main investment components would include land preparation, digging of the tree holes, purchase of root stocks and grafted trees, construction of surrounding walls, water supply, and necessary inputs. Ihe average investment cost/5-ha farm would be about Af 81,600  - 12 - (US$1,480) for the establishment period. On-farm development loans would also include some financing of riiscellaneous investments (animal stocks, farm buildings and equipment) relatecd to bee-keeping, poultry, karakul and dairy farms which AgBank has successfully financed under the First Agricultural Credit Project. Fertilizer and Other Farm Inputs 4.09 In view of recent experience, AgBank expects to increase its lending program for farm inputs by at least 10% annually. Additional financing for the fertilizer program is particularly required in order to keep the momentum of the expanding program, for which AgBank has now become the sponsor. The project would include financing for AgBank's lending program for fertilizer, pesticides and improved seed to about 41,000 farmers cultivating about 143,000 ha of irrigated land. Inputs would be supplied to farmers from AFC via re- tailers, cooperatives, cotton and sugar companies after approval by AgBank of short-term loans (Annex 5) averaging about Af 12,000 (US$218). 4.10 Based on projected financial statements of AFC and AgBank after full utilization of Government and USAID financing, AgBank is expected to exper- ience a financial shortfall of about US$6 million in 1975/76 and about US$600,000 for each of the two years thereafter (Annexes 4 and 5). Unless met, this shortfall would prevent AgBank from extending the credit required for farmers to buy fertilizer. The project proposes to provide the deficit fi- nancing reimbursing AgBank for part of the fertilizer lending. The project financing for farm inputs would constitute a permanent working capital fund within AgBank to roll over and reuse each year. The fund, including AgBank's contribution, would amount to Af 434.6 million (US$7.9 million) the first year, and increase in size by Af 43.5 million (US$793,000) and Af 47.8 million (US$835,000) the second and third years respectively, to provide for a 10% increase in annual demand. 4.11 AFC is able to secure sufficient financing to procure and distribute quantities of fertilizer equivalent to a 10% increase in demand over the next three years. AFC's future financial resources will include complete utiliza- tion of the USAID credit as well as Government equity financing. In addition, AFC will need temporary financing in years 2 and 3 of the project to maintai. appropriate stocks and procurement activities. Government will ensure AFC has sufficient fertilizer supplies to meet farmers' demand. AgBank Supporting Services 4.12 Staffing and Fellowships. Eleven medium- and high-level key posi- tions are vacant in AgBank (para 3.03 and Annex 4). During negotiations, assurance was obtained from Government that these positions would be filled by March 31, 1976. A condition of effectiveness would be that AgBank has appointed qualified personnel to four of those management positions. The  - 13 - Government would also assign approximately 20 qualified university graduates a year to AgBank from the University of Kabul's Faculties of Economics and Agriculture. In addition, AgBank. needs agricultural extension agents to give technical support to its short- and medium-term lending program. Gov- ernment would second 15 to 20 extension agents from MAI to AgBank annually to serve as credit supervisors. The project would provide financing to AgBank to cover field allowances for this staff, while the Government would continue to pay tneir basic salaries. During negotiations, assurances were obtained from Uovernment to this effect. 4e13 Irn order for AgBank to effectively absorb the expected increase in its lending programs, the professional qualifications of its staff should be upgraded and its management techniques improved. To this effect, the project would finance about 10 fellowships a year for training abroad of medium- and high-level staff. The training would be for 6 to 12 months in banking, account- ing, procurement and supply, agricultural economics, and general administration. In addition, the Government would make arrangements for provision of 8 fellow- ships a year to AgBank. Assurances were obtained from Government to this effect. - 14 A marnagement consultant team is undertaking management and training activities within AgBank (para 3.01). Their contract terminates on August 31, 1975, but Government has taken the necessary steps to extend it for a further 3 years. The new contract would involve 3 experts, 2 of whom would operate otn an advisory basis and 1 in a managerial capacity. Their main duties would be to facilitate further managerial development and training within AgBank. The new contract would be financed by UNDP with IBRD acting as the executing agency. 4.15 Equipment and Vehicles (Annex 6). Essential equipment and vehicles would be provided for AgBank's branches and its Groundwater Technical Unit (para 4.07). The equipment and vehicles are needed to increase AgBank's operational efficiency in an environment where communications and coordination are major constraints. AEC Supporting Services 4.16 The project would provide AFC with about 55,000 tons additional storage capacity to be constructed in 1,000 ton and 2,500 ton flat storage units in about 24 locations (Annex 5, Appendix). About 35,000 of these addi- tional tons would be for primary warehouses, and 20,000 tons for secondary distribution warehouses. The latter would largely replace the unsuitable rented facilities 1prev-ously provided by wholesalers. The distribution of fertilizer by private wholesalers has been suspended since spring 1974 and their facilities will be used for storing other commodities. The warehouses would be construated of concrete with metal roof, and provide for bagged storage as requirec by AFC's fertilizer distribution system (drawing and specifications in Anriex 5). The additional storage would allow AFC to reduce _ts loss percertage from what it would otherwise have been, and streamline -ts labor forc and transportatiorL. This would result in timely distribution cf fertiltzer ;c <Taraers. AFC will purchase,within 6 months after signing,  - 14 - the land required for 6 warehouses and within 12 months the land required for the remaining 16 warehouses. Government will assist AFC if the required land is not available. During negotiations, assurances were obtained from AFC and Government to that effect. C. Cost Estimates 4.17 Total project cost is estimated at Af 1 billion (US$18.2 million equivalent), of which 63% or Af 632.5 (US$11.5 million) would be foreign ex- change. Detailed unit cost estimates are presented in Annex 6 and summarized below:  - 15 - Foreign Af Million - US$ '000 Exchange Investment I-iem Local Foreign Total Local Foreign Total ComPonent A. Lending Program 1. Farm Meu1'tanizatiorn and Implements (a) Tractors,, spares and attachments 45.0 135.0 180.0 818 2,455 3,273 75 (b) Water punps and waterwheels 9.3 17.2 26.5 169 313 482 65 (c) Sprayers 0.2 0.6 0.8 3 12 15 80 (d) Oxen and poly- culteurs 4-6 0_84 9 93 1