Liberia - Third Development Finance Company Project

m I r Fnnv Document of FILE COPY The World Bank International Finance Corporation FOR OFFICIAL USE ONLY Report No. P-1900-LBR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND THE BOARD OF DIRECTORS OF THE CORPORATION ON A PROPOSED THIRD LOAN TO THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT WITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA AND AN INVESTMENT BY THE CORPORATION IN THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT August 20, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS The official monetary unit is the Liberian dollar, with a par value equal to the US dollar. The US dollar is legal tender in Liberia. FISCAL YEAR Government: July 1 - June 30 LBDI: January 1 - December 31 GLOSSARY OF ABBREVIATIONS ADB African Development Bank LBDI Liberian Bank for Development and Investment UNDP United Nations Development Programme USAID United States Agency for International Development IDA International Development Association IFC International Finance Corporation IBRD International Bank for Reconstruction and Development UNIDO United Nations Industrial Development Organization BADEA Arab Bank for Development in Africa GOL Government of Liberia GDP Gross Domestic Product KfW Kreditanstalt fur Wiederaufbau LAMCO Liberian-American-Swedish Minerals Company  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND TO THE BOARD OF DIRECTORS OF THE CORPORATION ON A PROPOSED LOAN BY THE BANK TO THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LBDI) WITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA AND AN INVESTMENT BY THE CORPORATION IN LBDI 1. I submit the following report and recommendation on a proposed third loan to the Liberian Bank for Development and Investment (LBDI), with the guarantee of the Republic of Liberia, for the equivalent of US$7 million to help finance productive sub-projects and to support a technical assistance program for LBDI and the proposed exercise of subscription rights by IFC to a number of shares of $10 par value each up to a total cost of US$306,300. Amortization of the loan would conform substantially to the aggregate of: (a) the amortization schedules i.pplicable to the specific investment projects financed out of the proceeds of the loan, with a maximum period of 15 years from the approval or authorization of the last investment project, and (b) the amortization over 15 years including 2-1/2 years of grace of the technical assistance part of the loan (US$150,000). The interest rate would be 8.9 percent per annum. PART I - THE ECONOMY 2. A basic economic mission visited Liberia in March 1973. Its report "Liberia: Growth with Development - A Basic Economic Report" (No. 462a-LBR dated March 1, 1975) was distributed to the Executive Directors. An updating report entitled "Liberia: Economic Memorandum" (No. 873-LBR dated September 15, 1975) has also been distributed subsequently. Country data sheets are contained in Annex I. Structural Characteristics 3. The growth of Liberia's economy remains heavily dependent on the performance of the enclave sector consisting mainly of: (a) iron ore mines, (b) rubber plantations, and (c) forestry concessions. These enclaves are the main source of export earnings, and contribute a sizeable share of govern- ment revenues and wage employment. Iron ore mining is by far the largest single activity in the enclave sector, accounting for about 34 percent of gross domestic product at factor cost. There are only limited linkages between the enclaves and the rest of the economy; as a result, the benefits of economic growth have been unevenly distributed. Annual repatriation by foreigners of profits and savings is equivalent to about 20 percent of gross domestic product. 4. At the other extreme, traditional agriculture has minimal inter- action with the monetized economy; however, it supports the majority of the population -- perhaps as much as 70 percent. About 4 percent of Liberians have per capitaincome levels above US$3,000,while the majority live at near subsistence level with income of about US$100 per annum. To help redress this imbalance the Government is trying to increase its earnings from the conces- sions and use the resources to diversify the economy with increased partici- pation by Liberians. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- Development Plan 5. In order to achieve these objectives the Government has prepared a four-year Development Plan covering the period July 1, 1976 to June 30, 1980. The Plan was prepared by a planning team financed jointly by the Bank, United Nations Development Program (UNDP), United States Agency for Inter- national Development (USAID>.and the Government (Reference President's Memorandum to the Executive Directors, No. R74-61 dated March 25, 1974). The Plan identifies the basic, long-term objectives of Liberia's socio-economic development as: (a) diversification of production; (b) dispersion of sus- tainable socio-economic activities throughout the country; (c) greater involvement of Liberians in development activities; and (d) equitable distri- bution of the benefits of economic growth so as to ensure an acceptable standard of living for the people throughout the country. The average annual growth of real GDP during the plan period is envisaged at around 6.8 percent. The total development expenditure is projected at US$415 million of which US$251 million is foreign financing and US$164 million domestic financing. Disbursements and firm comaitments account for almost 60 percent of the expected foreign financing. 6. The Development Plan attaches high priority to agriculture as the cornerstone of the Government's diversification strategy. The objective is to diversify and modernize agricultural production, increase productivity, improve associated rural economic activities such as marketing and processing, and provide social and physical infrastructure to improve the quality of life in the rural areas where most Liberians live. Recent Economic Developments 7. During 1973-1975 Liberia, like most other developing countries, was hit by higher import prices and international inflation. While strong world demand for Liberia's major export, iron, brought large gains in export prices in 1974, the 1975 recession in the industrialized countries signifi- cantly reduced the demand for the country's most important export commodities -- iron ore, rubber and timber. With growth performance continuing to be largely a function of enclave activities, growth of real GDP -- which averaged about 5.5 percent a year in the 1965-1970 period dropped to less than 3 percent in 1975. 8. However, because of good fiscal management, government finances did not come under pressure. In 1974, revenues grew by 20 percent and, despite increased government spending, an overall budgetary surplus of US$15 million was realized. In 1975, revenues increased by 10 percent over 1974 and recurring expenditures by 12.5 percent, the latter largely reflecting the effects of imported inflation on public expenditure. The following factors enabled the Government to manage its finances despite a deceleration of the economy: (a) the renegotiation of concession agreements that improved Liberia's share of the profits; (b) a further increase in the new contract prices for iron ore (in 1975 prices were on the average 55 percent higher than 1974); and (c) higher maritime revenues from vessel registration under the Liberian flag of convenience.  -3- Balance of Payments 9. Since Liberia uses US dollars as the medium of exchange, balance of payments analyses are at best tenuous. In the 1964-1972 period in terms of value, exports grew 10 percent and imports by 5.9 percent annually. Thereafter, from 1972-1974, following accelerated international inflation, imports rose by 29 percent annually, exceeding the 22 percent annual export growth. Oil imports increased from US$12 million in 1972 to US$56 million in 1974, and US$47 million in 1975. Nevertheless, Liberia achieved a trade surplus of US$96 million in 1974 and ahout US$75 million in 1975. During 1975, Liberia received aid commitments of US$80 million; US$62 million in loans and about US$18 million in grants. The World Bank was the largest donor and the United States the second largest. The other donors were the Federal Republic of Germany, Italy, and the African Development Bank (ADB). 10. Liberia's external public debt outstanding and disbursed was estimated at about US$168 million as of December 31, 1975. The debt service ratio is estimated at 4.8 percent in 1975, as compared to 5.3 percent in 1974 and 7.2 percent in 1972. The ratio is projected to fall further in the next few years as the final portions of the heavy debt incurred in the early 1960s are paid off. The Bank Group share of public debt outstanding and disbursed is presently about 15 percent and is projected to increase to about 30 percent by 1980; as a proportion of public debt servicing liability, the Bank Group share is projected to increase from its present level of about 12 percent to about 35 percent in 1980. Even with an expanded public borrowing program, Liberia's debt service ratio through the 1980s is expected to remain relatively modest unless there is an unexpected deterioration in external conditions. We do not at the present time foresee debt servicing problems, but it should be remembered that Liberia's exports are highly concentrated in a few commodities (mainly iron ore and rubber) with notoriously unstable world market prices. However, given the country's satisfactory performance in economic management and its modest debt service ratio, Liberia should be regarded as creditworthy for the proposed loan. PART II - BANK GROUP OPERATIONS IN LIBERIA 11. The Bank has made 12 loans (including one Third Window loan) for projects in Liberia totalling US$64.2 million; there have been 4 IDA credits totalling US$17 million, and one technical assistance grant of US$200,000 for development planning. IFC has made one equity investment of US$248,490 in the share capital of the Liberian Bank for Development and Investment (LBDI). The Bank loans have been for roads, port expansion, power and LBDI; IDA credits have been for education and agriculture. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of July 31, 1976, and notes on the execution of ongoing projects. 12. The objectives of Bank Group operations are: (a) to help increase the absorptive capacity of the economy and enable Liberians to take greater initiative in developing their own resources for the benefit of their own  - 4 - people; (b) to support policies and programs leading to broader sharing of the fruits of economic progress; (c) to help the Government in broad- ening the economic base; and (d) to assist the Government in mobilizing development resources from other external agencies. 13. The proposed project would assist in the diversification of the economy by helping LBDI meet the foreign costs of its investments during the three-year period of FY77-79. It would also provide assistance for training LBDI's Liberian staff and for further strengthening LBDI's project appraisal and supervision capacity. In line with the priorities establi- shed in the Government's recently published four-year development plan, the Bank Group plans to give increasing emphasis in its lending program over the next few years to the agricultural sector. An agricultural development project, which will be co-financed with USAID, is being appraised and is expected to be submitted to the Executive Directors in the next few months. The project is designed to rehabilitate and develop about 30,000 acres of farm land to improve production of swamp and upland rice, cocoa and coffee in Bong County; it would substantially raise the income of about 10,000 small farm families. A project is being prepared for plant- ing of 42,000 acres and rehabilitation of 18,000 acres of rubber trees, which will benefit about 2,900 families: a]so under preparation is a forestry development project which would initiate a pulpwood plantation program, and help establish a Forest Development Authority. 14. In the social sectors, a third education project is being appraised which may include vocational training, science and technology, education, and education management. Also being considered is a project for the exten- sion of the Monrovia water supply system. PART III - THE INDUSTRIAL, AGRICULTURAL AND FINANCIAL SECTORS The Industrial Sector 15. Manufacturing is a small part of the Liberian economy,accounting for about 5 percent of GDP. The domestic market is small and industries so far have been limited largely to import substitution such as petroleum refining, cement, food and beverages, construction materials, clothing,and and furniture. Real growth in the sector averaged 10 percent per annum from 1964 to 1972. The bulk of the output of the sector is sold domestically; exports of manufactured goods account for a small proportion of output, although processed fish and wood products are increasingly important exports. Ownership is largely foreign, although there is a small but active group of Liberian entrepreneurs engaged in a number of agri-business, manufacturing and service industries. 16. In the recently approved National Development Plan covering the period 1976 to 1980, the Government indicates that priority within the industrial sector will be given to an increase in the processing of local raw materials such as timber, rubber and agricultural products. The Government also plans to encourage production and assembly industries especially for export.  - 5 - As part of the Government's strategy to promote export oriented processing and assembly in Liberia, it plans to establish an industrial free zone which would offer exporters exemption from import duties and taxes. The Government supports private investment through a liberal incentives policy and its traditional "open door policy" which allows unrestricted capital flows. Incent- ives are granted either under the Incentive Code or -- in the case of iron ore, rubber and forestry concessions -- through concession agreements. The incentives to encourage private investment include the following features: (1) up to 90 percent exemption from import duty and equipment and inputs; (2) full income tax exemption on reinvested profits and 50 percent exemption on other taxes; (3) special tariff protection (ranging from 5 to 25 percent in addition to normal tariffs described in paragraph 17 below); (4) loss carry forward; and (5) accele- rated depreciation. The Government's primary instrument for promoting industrial projects is the Liberian Development Corporation (LDC). Set up in 1961 as an autonomous public corporation, LDC has responsibility for identifying,promoting and establishing viable business enterprises in Liberia. However, due to financial and staff constraints LDC's effectiveness has been rather limited. 17. A 1973 Bank study concluded that the effective tariff protection of industries in Liberia was high with large variations among individual industries. Tariffs have since been revised and fall into the following categories: 75 percent on luxury goods, 40 percent on other consumer goods, 11 percent on raw materials and 5 percent on capital goods. All new indus- tries must obtain a license from the Ministry of Commerce, Industry and Transportation. The licensing decision takes into account existing capacity in the particular industry. To avoid inefficient and high cost production as a result of the combination of licensing and tariff protection, the Government controls prices of products receiving beneffts from investment incentives. Small-Scale Industries 18. Predominant activities among small scale entrepreneurs are carpentry, jewelrv, tailoring and cement block making. Small-scale indus- tries have, however, received little government support and there is a lack of effective government sponsored programs offering managerial and technical assistance. LBDI has recently created a special unit to provide training assistance in accounting and business management for its small borrowers but more general programs are needed. The Government is aware of this need and during negotiations indicated that it would welcome dis- cussions with the Bank with respect to the possibility of initiating a study for establishing a credit guarantee and/or technical assistance scheme for small-scale enterprises. The Agricultural Sector 19. Agriculture, including rubber, forestry and fishing, contributed 16 percent of GDP and 23 percent of exports in 1974; it sustains the live- lihood of about three-quarters of the population. The sector consists of: (1) foreign-owned rubber and timber concessions which are highly productive;  (2) Liberian-owned commercial firms which have entered into rubber and oil palm production as a result of the demonstration effect; and (3) traditional farmers who account for 90 percent of agricultural holdings in Liberia. The traditional sector remains largely outside the monetized economy and produces mostly subsistence crops such as rice and cassava and some cash crops such as coffeee, cocoa and sugar cane. The Government has recently initiated programs to improve the productivity of the sector as well as to increase incomes in the rural areas. The Upper Lofa County Agricultural Development Project, co-sponsored by IDA and USAID, is one of the first of such projects, uneer the above program. 20. Liberia does not have an institutional source of credit designed to assist small farmers. The Government-owned Agricultural Credit Corporation, established in 1957, ceased operations in 1963 due to heavy financial losses. Since then, limited credit facilities have been offered through the Credit Division in the Agricultural Ministry, the cooperatives and credit unions. LBDI's financial support has largely been directed towards commercial farmers although small farmers have received financing provided they were able to meet LBDI's security requirements. The Lofa County project includes a revolving credit fund to be administered by LBDI in conjunction with local cooperatives. LBDI will also offer general banking services in the area. However, recognizing the need for continued agricultural credit facilities, the Government is considering the possibility of establishing an agricultural credit institution which will primarily lend through cooperatives to small farmers who are without adequate security and need supervised credit. On the other hand, LBDI will continue to finance commercial farms and forestry projects. The Financial Sector 21. Given Liberia's use of the US dollars as currency and its relatively open economy, many financial transactions fall outside the domestic financial system. The major rubber, mining and timber concessions as well as the large domestic enterprises can deal directly with banking institutions in Europe and the United States. As a result, the development of a domestic financial system has been limited to essentially LBDI and the commercial banks. Out- standing commercial bank credit totalled US$79 million as of November 1975. Of this amount, 59 percent was for the trade sector and 19 percent for agriculture, while manufacturing accounted for only 1.2 percent. Commercial bank lending rates depend largely on perceived risk and range from 12 percent to 16 percent for corporate clients and up to 24 percent on personal loans. Past investment needs have largely been met from foreign sources but, as Liberia attempts to reduce its dependency on the enclave sectors, domestic resource mobilization will have increased importance. 22. In 1972, a Banking Commission, with IMF assistance, studied the financial system; the Government has begun to take action on its recom- mendations. As a result the National Bank of Liberia was created as a central bank with responsibility for overall banking supervision, clearing  - 7 - house operations, credit to the Government and banks, and the supply of currency. A review of the interest rate structure in Liberia is also underway. At present, minimum interest rates have been fixed at 5 percent on savings deposits and 6-1/2 percent on time deposits. The ceiling on lending rates is set at 25 percent by the Usury Law. PART IV - THE PROJECT 23. A report entitled "Appraisal of the Liberian Bank for Development and Investment" No. 1155-LBR, dated August 6, 1976) is being distributed separately. The project was appraised in February 1976. A loan and project summary is attached as Annex III. Negotiations were held in Washington, D.C. from July 1 to July 7, 1976. Mr, George Cooper, the financial counselor, Embassy of Liberia, and Mr. Elias Saleeby, President of LBDI, represented the Guarantor and the Borrower, respectively, in the negotiations. 24. LBDI has received two Bank loans totalling US$5 million. The progress in making subloans for productive investments has been satisfactory with both loans. The first loan has been fully committed; the second loan is expected to be fully committed before the end. of 1976. The proposed third loan will-help LBDI finance the foreign costs of its investments during the period 1977 to mid-1979 in productive enterprises in manufacturing, agriculture, transportations, tourism and services. Continued Bank support is particularly important since LBDI remains the primary source of develop- ment financing in Liberia, especially for Liberian entrepreneurs. The project also provides for technical assistance to strengthen the institution's operational capability. LBDI - The Borrower 25. Established in 1965 with the help of IFC, LBDI has an authorized and fully paid-in share capital of US$1 million. Class 'A' shares (51 percent) are restricted to the Government, Liberian citizens and corporations, and international institutions and must always outnumber Class"'B' shares. The Government and IFC hold 25 percent each, and private Liberian investors hold 1 percent of the share capital. Class 'B' shares are held by various financial institutions, the Firestone Plantation Company and two mining companies; they account for the balance of 49 percent. 26. LBDI is the main institution providing medium and long-term finance for productive enterprises in Liberia. In addition to granting medium and long-term loans, making equity investments, and providing guarantees, LBDI encourages and facilitates the participation of other sources of capital in the enterprises it finances. 27. IFC has invested considerable effort in recent years in assisting LBDI through a representative on LBDI's Board. IFC's representative has played an active role in providing technical assistance and advising manage- ment in the development of LBDI's policies and operations.  -8- Management and Organization 28. LBDI has a Board of eight members: three representing Liberian interests, one representing IFC and four representing Class 'B' shareholders. The Chairman of the Board is the Minister of Finance. Loans and investments exceeding US$150,000 must be approved by the Board. Loans and investments of less than US$150,000 are approved by an Executive Committee consisting of the Minister of Finance, as ex-officio member, and two members representing each class of shareholders. LBDI's President, who chairs the Committee, is a non-voting member. The Committee meets more frequently than the full Board and discusses all matters prior to Board presentation. The President of LBDI is authorized to approve investments of up to US$25,000 with a global limit of 10 percent of LBDI's aggregate approvals each year. 29. In September 1973, Mr. Elias Saleeby, a Liberian previously employed in the Bank's DFC Department, took over as President of LBDI. He has proven to be effective in improving internal procedures as well as in taking new initiatives for the company. He is assisted by a well-qualified expatriate General Manager who has been with the institution since 1970. The General Manager's contract expired in May 1976, but he has agreed to stay on until a suitable Liberian replacement is appointed. 30. LBDI has a total professional staff of 16, 12 of whom are Liberian while the remaining 4 are Peace Corps volunteers. A program of staff development and training for the next three to four-year period is under preparation by LBDI. A technical assistance component of US$150,000 is included in the proposed loan to help finance the foreign cost of the training program which will help upgrade the quality of its existing Liberian staff. The company's basic organization comprises two departments -- Projects and Comptrollers. Projects Department has improved considerably in recent years while efforts are presently being made to strengthen its supervision capacity. Policies 31. LBDI follows sound investment policies. Its current operating policies, contained in its Policy Statement as of March 31, 1976, set financing limits which restrict its exposure in any single enterprise to 30 percent of LBDI's net worth plus 5 percent of its subordinated debt. Its total equity investments are limited to its net worth and individual equity investments are not to exceed 10 percent of LBDI's net worth. Combined loan and equity investments in a single enterprise would normally not exceed 50 percent of the enterprise's total assets and LBDI's equity investment would normally not exceed 25 percent of the enterprise's paid-in capital. Public sector projects may be financed up to 30 percent of LBDI's total commitments at any time.  - 9 - 32. The interest rate charged by LBDI is 11-1/2 percent, including a 1-1/2 percent service charge. It also charges a commitment fee of 1 percent on the undrawn balance, a one-time commission fee of 1 percent of the approved amount and an additional penalty charge of 5 percent of outstanding balances in arrears for more than three months. As a matter of policy, LBDI passes on to its clients the foreign exchange risk on all its external borrowings, including the proposed Bank loan. LBDI presently enjoys a sound financial position (paragraph 36). However, LBDI's cost of borrowing has recently increased and this trend is likely to continue over the next few years. Also, the rate of inflation in Liberia is expected to remain in excess of 8 percent in the near future. In view of these con- ditions LBDI proposes to review its lending rate each year on the basis of criteria to be established in consultation with the Bank; it is understood that its lending rate will not be reduced below 11-1/2 percent without the prior approval of the Bank. (This restriction would not apply to sub-loans which might in future be financed from soft funds which stipulate lower re- lending rates). 33. LBDI has been doing well in terms of providing small loans (US$10,000 or less each) to Liberian enterprises since more than 50 percent of LBDI's approvals by number are for loans of less than US$10,000. However, several promising projects were not financed due to the inability of the small entrepreneurs to provide collateral sufficient to meet LBDI's requirement. LBDI requires collateral of at least 150 percent of the loan amount in order to ensure the sponsor's commitment to the project as well as provide security. A relaxation of collateral requirements for small-scale industries has been considered but a preferential system of collateral would be difficult for LBDI to administer. A useful alternative would be for the Government to guarantee loans made by LBDI to viable small-scale enterprises. This matter is to be further discussed between the Government and the Bank with a view to exploring the possibility of establishing a scheme to guarantee loans to small-scale entrepreneurs (paragraph 18). Record of Operation 34. LBDI's operations have increased rapidly in recent years. During 1974 and 1975, 95 loans were approved totaling US$7.5 million. In general, LBDI's financing activities have supported relatively small Liberian enterprises. As previously noted, more than 50 percent of LBDI's approvals by number have been for loans of less than US$10,000. The weighted average maturity of the loans has been six years. About 80 percent of the projects are Liberian controlled, in contrast to the general pattern of lending and industrial ownership in Liberia. Over half of the projects and 42 percent of the amount-involved rubber production, timber and wood processing and other agri-business. Portfolio 35. As of December 31, 1975, LBDI's loan and equity portfolio comprised 130 loans totaling US$7.1 million and 9 equity investments for US$150,000. The loan portfolio of US$7.1 million represents an increase of US$3.3 million, or 87 percent, over the previous year. Despite this  - 10 - rapid expansion, the quality of the portfolio remains sound. Only 5.5 percent of the total loan portfolio amount was affected by arrears of more than three months as compared to 5 percent at the end of 1974 and 10 percent in 1973. LBDI is taking appropriate action to recover the arrears; meanwhile, it has made adequate provisions for probable losses. Provisions as of December 31, 1975 were US$172,000, or about 2 percent of the out- standing portfolio. Financial Results 36. In 1974, net profits amounted to US$84,000 and enabled LBDI to declare its first dividend. Net profits in 1975 increased considerably to US$302,000, or about 23 percent of average net worth, and a 6.5 percent dividend was declared. The increase in net profits has been the result of the company's expanded level of operations and its increased commitment charge, guarantee fee, and penalty fee (0.25 percent, 1.0 percent and 4.0 percent respectively) which compensated for its higher cost of borrowing. LBDI's gross income in 1975 amounted to 10.3 percent of average total assets while financial expenses were 4.1 percent. Administrative expenses fell from 3 percent of average total assets in 1974 to 2.5 percent in 1975. 37. LBDI's financial position is sound. Total assets rose to US$12 million by the end of 1975, an increase of US$4.1 million over the previous year. The growth was due largely to increases of US$3.3 million in loan and equity investments. LBDI's long-term debt showed a corresponding increase of US$2.9 million to US$8.3 million. According to the second loan agreement between the Bank and LBDI, the company's debt/equity ratio is limited to 7:1 with debt defined to include the redeemed (Government promissory notes converted to cash loan by the Government) or discounted (by LBDI) portion of promissory notes from the Government. At the end of 1975, this ratio stood at 6.3:1. LBDI has taken steps to increase its paid-in capital by US$2 million, in order to raise the borrowing capacity. 38. LBDI has undertaken a borrowing of US$500,000 from the Government to cover part of LBDI's commitment in a Government-sponsored hotel project. The terms and conditions of this borrowing have not been formalized. LBDI indicated that it will reach agreement with the Government on the terms and conditions of the borrowing by April 30, 1977. Projected Operations and Resources 39. LBDI has a sizeable pipeline of investment projects at various stages of preparation. At least US$4 million in loans and US$200,000 in equity investments are expected to be approved in 1976. Loan approvals are projected to increase by at least US$1 million each year thereafter while approvals of new equity investments are expected to remain constant at about US$200,000 each year. 40. During the period of three and one-half years, beginning 1976 to mid 1979, LBDI's expected commitments in terms of loans and equity invest- ments amount to US$17.2 million. Loan commitments alone are estimated at US$16.5 million, of which US$11.6 million or 70 percent would be for financing imports. As of December 31, 1975, LBDI had an uncommitted balance of US$3.6 million remaining from the last IBRD and ADB loans. The resulting foreign resource gap is estimated at US$8 million.  41. Although LBDI is seeking assistance from other external sources such as the African Development Bank and the Arab Bank for Development in Africa, there are no immediate prospects of raising substantial funds from these sources. A Bank loan of US$7 million (which includes US$0.15 million for technical assistance) is proposed which would cover 85 percent of LBDI's foreign resource gap during the period under consideration. It should not prove difficult for LBDI to raise the relatively small balance required to close the gap from other sources. 42. LBDI's local resource requirements during the forecast period are estimated at US$0.7 million for equity and US$4.9 million for loan commitments. At present, LBDI has US$160,000 in local resources. Additional funds are expected to be raised from increase in equity, redemption of Government notes, and internal cash generation including loan collections; these sources are expected to fully cover LBDI's local expenditures during the period. 43. To sum up, LBDI's total commitments during the period from January 1, 1976 to mid-1979 are estimated at US$17.2 million, and are expected to be met from the following sources: Commitments Sources Local Foreign Total ---------(in $ million)- LBDI/Government 5.60 5.60 (of which proposed IFC investment) (0.31) (0.31) Uncommitted balance of past IBRD/ADB loans 3.60 3.60 Proposed IBRD loan 6.851/ 6.851/ Others 1.15 1.15 Total 5.60 11.60 17.20 1/ Plus US$150,000 for technical assistance program. Terms and Conditions of Proposed Bank Loan 44. Interest on the Bank loan would be 8.9 percent per annum; the standard commitment fee would apply. The Bank loan would be committed over three years and disbursed over four years. Disbursement would be at the rate of: (i) 100 percent of the foreign exchange costs of directly imported goods and services, (ii) 75 percent of the invoiced price of goods produced outside Liberia but purchased locally, (iii) 60 percent of expenditures for civil works, representing the estimated foreign exchange component and (iv) 100 percent of foreign expenditures for consultants and fellowships for training LBDI's staff. The amortization of the Bank loan will conform substantially to the aggregate of the amortization schedules of LBDI's sub-loans and the amortization over 15 years, including 2-1/2 years of grace, of the technical assistance part of the loan. LBDI's sub-loans would have a maximum maturity of 15 years. In view of LBDI's improved appraisal capa- bility, the "free limit" under which LBDI has authority to approve individual  - 12 - sub-loans would be raised from the present level of US$100,000 to US$150,000; the aggregate "free limit" would be increased from US$1 million to US$2 million. Sub-borrowers would bear the foreign exchange risk. Procurement would be through normal commercial channels. Project Benefits and Risks 45. LBDI calculates the economic rate of return on investments estimated to cost more than US$50,000; for such past investments the economic rate of return has averaged 35 percent and a similar rate of return can be expected on future investments envisioned in the period 1977-79. Project risks are no greater than can normally be expected with operations of this type. PART V - IFC INVESTMENT 46. An TFC investment of US$306,300 in the share capital of LBDI is proposed as IFC's participation in LBDI's share capital increase from US$1 million to US$3 million, bringing IFC's share holding in LBDI, after a stock dividend to be issued in conjunction with the capital increase, up from US$248,490 (representing 24.8 percent of existing share capital) to US$616,910 (representing 20.6 percent of share capital after the capital increase). The Government and IFC would continue to hold an equal number of shares and would remain the two largest shareholders. IFC now holds 24,849 shares which were subscribed pursuant to Board Resolution No. 65/13 adopted on August 10, 1965. 47. The US$2 million proposed capital increase, which is necessary to support LBDI's continued growth, will consist of a US$250,000 stock dividend to existing shareholders (about 60 percent of 1975 year-end retained earnings) and a US$1,750,000 rights issue at par. LBDI expects the whole issue to be subscribed. IFC's subscription would be contingent on firm commitments for at least US$1,300,000 of the proposed rights issue. 48. IFC's participation is considered necessary to complete the capital increase successfully. Moreover, IFC's participation would permit IFC to keep parity with the Government in the shareholdings of LBDI and thereby help to maintain LBDI's commercial character and IFC's role in assisting the Company. Since LBDI has good prospects and an important role to play in financing Liberian development, continued active support by IFC is desirable. On the basis of LBDI's projections, net profit is expected to range from 14-19 percent on average equity in 1976-80. Although LBDI currently expects to raise its 6-1/2 percent dividend to 8-1/2 per- cent by 1980, expected profitability would permit a still higher dividend rate, which LBDI will consider. 49. Annexed to the appraisal report is an outline of relevant laws of the Republic of Liberia affecting the investment by IFC.  - 13 - PART VI - LEGAL INSTRUMENTS AND AUTHORITY 50. The draft Loan Agreement between the Bank and the Liberian Bank for Development and Investment (LBDI), the draft Guarantee Agreement between Liberia and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, the text of a resolution approving the proposed loan and the text of a resolution approving the proposed IFC investment are being distributed separately. 51. In accordance with Article III, Section 3 (ii), of the Articles of Agreement of the Corporation, notice of the proposed investment has been given to the Government of Liberia. 52. Liberia has signed and ratified the ICSID Convention; however, there are no contracts between Liberia and any foreign private investor in the context of this investment which might give rise to an investment dispute. 53. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and that the proposed investment would comply with the Articles of Agreement of the Corporation. PART VII - RECOMMENDATION 54. I recommend that: (a) the Executive Directors approve the proposed loan, and that (b) the Board of Directors of the Corporation approve the pro- posed investment. Robert S. McNamara President Attachments: August 20, 1976   ANNEX I PageTIf 4s pagea LIBERIA- SOCIAL IPUICATORS DATA 3)4ET LAND AREA (THOU KM25 LIBERIA REFERENCE COUNTRIES (19701 TOTAL 111.4 MOST RECENT AGRIC. . 1960 1970 ESTIMATE GHANA IVORY COAST JAMAICA** GNP PER CAPITA (US$3 180.0 290.0 11.0 340.0 340.0 710.0 POPULATION AND VITAL STATISTICS POPULATION (MID-YR. MILLIONS 1.0 1.3 1.5 8.6 5.4 1.9 POPULATION DENSITY PER SOUARE KM. 9.0 12.0 14.*o 36.0 16.0 170.0 PER SO. KM. AGRICULTURAL LAND 27.0 /a ... 62.0 30.0 VITAL STATISTICS CRUDE BIRTH RATE PER THOUSAND) 44.4 42.8 43.6 49.8 46.1 38.5 CRUDE DEATH RATE PER THOUSAND 27.9 23.5 20.7 24.4 23.3 8.6 INFANT MORTALITY RATE I/THOU) . 137.3 159.2 156.0 . 32.2 LIFE EXPECTANCY AT BIRTH IYRS) 36.5 41.0 43.5 41.5 41.0 67.8 GROSS REPRODUCTION RATE . 2.6 2.7 3.2 3.1 2.7 POPULATION GROWTH RATE 12) TOTAL 3.3* 3*.* 2.3* 2.6 3.4 Lf 1.4 /a URBAN .. 8.6 /a 5.0 8.7 a~ 6.2 URBAN POPULATION It OF TOTALS). 26.2 27.6/d 29.0 28.0 37.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 37.2(4 40.7 41.6 46.9 42.5 4549 15 TO 44 YEARS 588a 56.0 5. 95 5*8*. 65 YEARS AND OVER 4 .0 7a 3.3 3.4 3.6 2.7 5.6 AGE DEPENDENCY RATIO 0.7 o.e O.8 1.0 0.8 . ECONOMIC DEPENDENCY RATIO 1.0/a.b 1.0( *La 1.4 o.qA/ 1.7 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .... 10.9 . 49.8 USERS (2 OF MARRIED WOMEN)20 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS 41 0.0 /a 580.0 . 3300.0 2600.0 600.0/t LABOR FORCE IN AGRICULTURE (25 a81.0 7a 72.0 . 54.0 82.0 33.0 UNEMPLOYED (2 OF LABOR FORCE) . 20.0( .b 5.0 /a 6.0 14.0 INCOME DISTRIBUTION 2 OF PRIVATE INCOME REC*D BY- HIGHEST 52 OF HOUSEHOLDS . 61.7. .. HIGHEST 202 OF HOUSEHOLDS .. 2.6/c LOWEST 202 OF HOUSEHOLDS . 5.3 a .... LOWEST 402 OF HOUJSEHOLDS . 10.9/6 . .. DISTRIBUTION OF LAND OWNERSHIP 2 OWNED BY TOP 102 OP OWNERS ... .. . X OWNED BY SMALLEST 102 OWMERS . .. .. HEALTH AND NUTRITION POPULATION PER PHYSICIAN 12~.00.00 10450.0O. 12950.0 Ab 12140.0 2630.0 POPULATION PER NURSING PERSON 71 ~0/ oc 4140.0o. 1070.0 7n 2480.0( 1 720.O0/b POPULATICN PE OPTLBD730.0 530.0 ..760.0 68 a/ 240.0 PER CAPITA SUPPLY OF- CALORIES IS OF REQUIREMENTS) 86.0 88.0 9404 96.0 108.0 103.0 PROTEIN (GRAMS PIR DAY) 35.0 36.0 39:.09 46.0 60.0 56.0 -OF WHICH ANIMAL AND PULSE . 10.0 /d I ../ 10.0(4 180d 29.0 A DEATH RATE I/THOU) AGES 1-4 29.0/a .. 1.0 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 38.0 43.0 52.0045.( 760 110 SCNAYSCHOOL 2.0 12.0 15. (490 10/. Sol.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 12.0 15.0 13.0 12.0 VOCATIONAL ENROLLMENT (2 OP SECONDARY) 12.0 5.0 4.0 Lo 23.0 7.0 9.0 ADULT LITERACY RATE (2) 9.0 /a 15.0 . 25.0 20.0 86.0/d HOUS ING PERSONS PER ROOM (AVERAGES 1.7/d .. OCCUPIED DWELLINGS WITHOUT PIPED WATER (2) . .4 .. 70.0/e ACCESS TO ELECTRICITY (2 OF ALL DW~ELLINGS) . .. .. 27.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (). .. CONSUMPTION RADIO RECEIVERS (PER THOU POPS 77.0 132.0 .. 8.0 17.0 376.0 PASSENGER CARS (PER THOU POPS 1.0 11.0 19.0(4 4.0 10.0 38.0 ELECTRICITY (KWH/YR PER CAP) 101.0 330.0 15.0 338.0 120.0 825.0 NEWSPRINT (KG/YR PER CAP) . 0.1 0.1 0.4 0.2 4-.3 36E NOTES AND DEFINITIONS ON REVERSE  ANNI1X I Paeg 2 of 4 pog.. AI.isia othermise vot.d, date for 1960 refer to any year betwee 1959 and 1961, for 1970 between 1969 ond 1970, aod far Moo t Re...et Eatimate btresen 1973 ad 1975. *e Due to Isaigretion, growth rt.t is higher than rate of natural increase. as Jameite has boon selected as an objective country since its GNP par capit is between two and Lhree tee. that of Mabria; it. econmic structure depends heaily on the mining ...ctar; both coutries arm encouraging foreign . tnvss.t.; and L.lbotis'.e mplcy-net policy objective ie to rah th.e.trrent leve of janie...as manpower training. LIBREIA 1960 / 1962; /b Ratio of population under 15 and 65 end over to total labor farce; /c 1964, /d 1956 hoc.oelod., city of Mourovia only. 1970 / R tiot Of population under 15 end 65 and ovr to total 106cr force; /b lloeploy.d and portially employed; /c Population. 1975 Rank Econ,n,i Report. Hligher incame calculated as reeldua1; incladee ooP.triotes; /d 1964-66. MOST RECENT ESTIMATE: /s 1970-7:; /b 1969-71 averege; /c 1972; /d 1971. GHANA 1970 / Registered only, lb Registered. not all practicing in the country, /c 1966-68. /d 6-15 and 16-21 yeats of age - respectively. IVORY COAST 1970 / 1965-70, /b Ratio of population under 15 and 65 aod ower to total labor force; /c G-vreact only, /d 1964-66; T. 12-18 years of ege, /f Due to ioaig-tiaon. the gra.th rate is higher than the rate Of .aturel ices JAMAICA 1970 /a -u emigration, the growth rate is lower than the rtat Of -rot.rl Ices, Lb P.rsoseel to gove-nst serices only; /c 1964-66; /d 1966; /e I1side only; /f Data hose.d on official definition which locl.dee those ailling te wtork hot sot actively s..eking employmnst. R7, Aoguat 3, 1976 DFtNIgTIONS OF SOCIAL INDICATORS Lend Ares (thou ks,21 Ponomn e"uoigDr - Populotion divided by nombpr of practicing Total -Total surfece ~Ocprtietg land are.aend inland peters. POale and sasgauaenre, treaind" or cartified nurses, and AaES.i M-Mot recant estimate of egricultural ares used temporarily orauiliary peronnel with training or experienco. permanently for crops, pastures, market & kitchen gardens or to lie opltn thoital bed - Population divided by umbor of hospital bode falie,. ava!"1MiabeEi ubi and prioste ge..era1 and speciali.ed hospital and rehabilitation caniners; e..cludee n.rsing bhnco and estahlishmanta for GNP per cspita (UIS$j - iMP par capita estimates or market prices, cus todial and prevntive care. calculated by same conversion mathod as World Bank Atlan (1973-75 Per capita aPpnly off clories (7 of requirements) - Comaputed iron amrgy baaie; 1960, 1970 end 1975 dote. equi-lant of net fod upp ico avilable in .-u,try per' capita Per day; e-ilablo aoppliee comprise domscetic production, I.Portta Is.55 enprto, aouai nd v4ital tistc and changes in amok; net suppliec exclude animal feed, seeds, quanti- mouato id-y. nlin - Ao of July first: if not available, ties soed in fund processing and l-ancs in diatribution; requitonenta avergSe Of two end-year estinutco; 1960, 1970 and 1975 data. -tre estimated by FAO based on physiological oseda far qornel activity and health considering environuente1 tanperoture, body tjeighta, age and Popultion ensit - pr osuaroh - Mid-Yesr pupul,tin Per square bilo- son distributi-nofc population, and a11wiog 10% for wadste at honas- mete (10 becsre. of total eeoc bold lo-e. Popultiondenoty -pat qsore kn, of erir, land - Computed as abov fo- ic aiaspl f p,rotein (-mn p-er day) - Protein content of per egriultual iod oly. car.P1pitanetotp1pl,y, of food per day; net supply of food is defined aso ebove. requirements for all countries established by USDA Econmaic Vital arstistics ~~~~~~~~~~Resamch lerI.e. provide for a nisinso allowance of 60 grams of total Crude brth raern thousand - boous1 live births per th ..od of mid- Proteinbpeer day, and 20 grams of animal and pulse protein, of which yosr Population; toe-year arithmetic averoga- anding is 1960 end 1970, 10 gruna should he ..imal pr.t.in; these standards ors leosr than, those endfiwe-year avearage ending in 1975 for moat recent cstimate. of 75 greas of total protein and 23 greas of animal protein as sn Crude death resnttown ouldah e huedo i~eraerage for the ,,rld, proposed by fAQ in the Third World Pond Rurvey. populaion; en-yer arithieic averges ending in 1960 and 1970, and it ti -~fron nfate rtenspl ffo fiv-year avrage eding in 19C75 for most recent estimate. . Oiriedfrom aimals and pui.ingraaP.rday. Infest motalityrfte 1/thous Anua-I deaths of infanta under one year of "oeth raefto) es14-Anuldah prtoao i g ru age per thosaand live birloS. 1- ers, toh ch ren in this age group; suggested aanindicator of Life egpectancy st birth (yr.) -Average oumbor of years of life renamig malnutrition. at birth; usually five-year everagos coding im 1960, 1970 and 1975 for developing countriea. Educa tion Gross reproduction ra!tx - Average muobr of live daughter a wtma ill Adjusted enrollment ratio - pri-ay School - tEroilnent of all ages Sa hear in her Omoum1 raproductivo period tf she e.perienceo present age- 2orcentago of primary .ch.osI-ge population; includes children aegd spec ific fertility rates, usually fiws-ysr "ecregas ending in 1960, 6-11 yearo but adjusted for different I-r.th. of primary eduation; 1970 end 1975 for dlveloping countries, for co0tries weith universal educaton, enrollment nay emceed lOOX Population arosth rateCII- total - Compound annual growth rates of ,dd- since s-m pupils ore below or above the official achnel age. 9tsa population fo _9060, 1960-70 and 1970-75. Ad!uated enolmet ratio - secondarv school - Computed as chews; population growtb rat CI rbas - Computed like growth rate of tetal scnay dueion requires at leas.t fou years of epproved primary P,paaim dif feret deiiin fubnaesnyafc opr-instruction; provides general, vocational or teacher training bility of data amon countries, instructions for pupils of 12 to 17 years of age; correspondence Urban populetiona ofl0 total) - Ratio of urbas to total population; couroas are generally eecludcd. different definitions of urban area. ocy affect comparability of data YeArs of schooling provided (first and second 1eve1ol - Total years of among countries, schooling, at secondary level, voctional instruction nay be per- AO srctr (prcenl - Children (0-14 years), storking-ge (15-64 years), tially or conpiotely encludad. and risd(5 ers and over) so perc..otages of eid-yea pplto. Vocational enrollment(.oL ecnar Vocational institutions ARe dependency rsti o- Ratio of population under 15 and 65 and over to inclodo technical, industrial or other progrmsn which operate those of ages 15 trough 6.indspendemtly or so departamnta, of secondary institutions. Econoicdeenac y ai Rtd fpplainune 5en 5so vr Adult lit-rcy rate Literate adults (able to read end -rite) aa totelbr force in age group 15-6 years. percentagc of total adult population aged 15 years and over. Family planning - a'ccetors (cuulsivthou) - Cumulative neaber of acceptors of birth.control devices under auspices of national family .iim1fJ0 plnigpormsneicPtin.Prsnu put room favar.ge - Avarage numbsr of persons por room in p=Mlynlanno- users Cl f mrried woman) - Percent ages of married occupied conventiona~l dwelling. in urban ereas; dwellings exclude wasn" of child-bearing age (15-44 yost,) who use birth-control devices non-permaent structureo end umoccupied ports. to allImarried wo.e. in sane aeg group. occupied delnswtotpiped watr (7.) - Occupied coavantlonal delings in rban and rural arme. without iuside or ostaide piped Enslesment * ve~~~~~~~~~~~~~wter facilities as percentage of all occupied dweilings. Total labor farmo (ftbmon - Iconcaically active persons, including 'A.cs toeetiiy (% of all dwelling.)j - Covetional dwellings Armed forces end unmlydhtocuIghueie,suet,ec, .th electricit in living qnartera as percent cf total dwetllings in deiitions invriouo countries ore not sporable. urban sod rura areas. Laborforce In a atue(7.)- Aricultu"ral1 labor force (in farming, Ruerd duelin,;cnneted to electricitv MI - Computed a.sabove for forestry, hunting and fishing). as prcentage of tctal labor force. rus dwlinsonly. Ulnemployed Cl of labof farce) -Ullonploye d arc usualy defined .s persoons who are able and willing to toke s job, out of e Job on a given day, cOn5toption rmauined out of.aJob, and seobkg work for a specified minimsum period Radi.ogreceivers 'per thou pop) - All types ci receivers for radio broad. not eaceeding one week; nay not be conpareble betwee countries due to cat to genral public per thooeand of population; aecludea different definitions of oaplayed and source of data, e.g., *eploy- unlicensed receivrer in counttries cod in years, when registration of monat Office statistics, sonpIn survey, conpulsory unemployment inaursoce. redic eets was in effect; data for recent years may not be conmperabte sice most countries abolished licensing. intone distribution - Percentsge of private income (both in cash end hind) Passenger cats (per thou poo) - Passeng-r cars comprise Rotor care received by richest 5%, richest 207., pooreat 207., and poorest 407. of aeating less than eight persona; e.. ludena etulancee, hearses and households, military rehiclas. Elec tricity (bob/yr per cap) - Aonoal comosomption of indusatrial, con- Dintribution of lend pnruhid - eccageo an werbcelhis eial, public and Private electricity in kilosatt honre per capita, 107. and poorest IO9of isdowes generally besed on Production data, without allowance for b"ase In grids but allWing for imports and experts of electricity. Health sad nutrition NewPrint (ha/yr7 pe rcap) - Par capita annual conaweptiq. in kilograso p ulto pephysician - Population divided by nober of precticiog estimated fron domes,tic production plus net impgprta of newsprint. physicians qualified from a medicsl ochool at uni-ersity level.  10 ON DATA ~Page 3 of 4 pages Actual Poetd 16 90- 17 NATIONAL ACCOUNTS i 262 f 1965 i M- 1970 DX D-6 19714 19679_ 3-Yer Averae at 1%? 1969 Prices & Exchange Rates Average Annual Growth Rates As Percent of GDY Gross Domestic Prodcmt 9. 37.6 ~ 453 2 4?: 4. 5.5 3.6 38 9.4 1014.6 Gains from Terms of Trade .#a1 ~ 1417.2 324 1406 6.7 14: - -.3. .Ik