Rwanda - Cinchona Project

FILE COPY Dtof The World Bank FOR OMCIAL USE ONLY Repot No. P-1887-RW REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF RWANDA FOR A CINCHONA PROJECT June 30, 1976 r T documIt b a resri*ted dbiibuziim an may be _ed by recipients isy In the performance of their offcial duie Its eontets my ad dhewise be dcsed witde Wild Banlk authfoirton. I  Currency Unit : Rwandese Franc (RwF) US$1 : RwF 92.84 RwF1 : US$0.01 RwF 1,000 : US$10.77 RwP 1,000,000 : US$10,771.22 FISCAL YEAR January 1 - December 31 ABBREVIATION OCIR: Office des Cultures Industrielles du Rwanda  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA FOR A CINCHONA PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Rwanda for the equivalent of US$1.8 million on standard IDA terms to help finance a cinchona project. PART I - THE ECONOMY 2. A report entitled "Recent Economic Development and Prospects of Rwanda" (No. 422a-RW) was distributed to the Executive Directors on July 24, 1974. An economic updating mission visited Rwanda in October 1975 and its report is being completed. A summary of the mission's findings is set out below. Country data sheets are attached as Annex I. 3. With an average per capita income of about US$80, Rwanda is one of the poorest countries in the world. It is included in the United Nations list of the "25 least developed countries", and has also been designated "most seriously affected" by recent economic developments. The country became independent in 1962. It is lacking in both administrative and physi- cal infrastructure, and must overcome formidable constraints to its develop- ment. Overwhelmingly a subsistence economy with only an embryonic modern sector, it faces land shortages and a rapid growth in population. The de- velopment of export-based agriculture is limited by the priority of food crop production and Rwanda's inland position (1,700 km away from the near- est port at Mombasa), while the potential for expansion of the industrial sector is constrained by a lack of raw materials, mineral deposits and an appropriately trained labor-force. 4. Despite these handicaps, the present Government, since its ascent to power in July 1973, has made perceptible progress in developing a strategy to lift the economy from its present low level. Some aspects of the country's characteristics are favorable and it is around these that the Government has designed its strategy. The population has a certain unity, deriving from similarities in customs, ways of life and standard of living throughout the country. Income and wealth distribution are remarkably even. There are neither the remnants of a strong traditional hierarchy nor signs of signifi- cant emerging urban-rural polarization. Moreover, the small size of the country reduces the administrative difficulties and at the same time limits serious regionalism. The country also has a natural asset in its relatively fertile soil which, provided that the problem of erosion in Rwanda's hilly terrain can be overcome, can give good yields for a variety of crops. To take advantage of and preserve these admittedly modest assets, the Government has recognized that its development policies must be built around a carefully in- tegrated and balanced strategy reaching the entire population. Although 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.  obliged to pursue export crop development to earn foreign exchange and domes- tic revenues, increases in food crop productivity are at the core of the Government's proposed strategy. 5. Pressure on land, combined with traditional cultivation methods that degrade and erode the soil, make food crop intensification the nation's first priority. The growth rate of the population is 2.8 percent per year, and 60 percent of the population is less than 20 years old. At the same time, all good agricultural land is already occupied and only limited amounts of marginal land remain available. Over the last two years the Government has begun preparatory work on a rural development plan which would focus future efforts on food crop production at the level of the commune - the smallest administrative unit comprising an average of 30,000 inhabitants. In doing so, the Government has recognized that its approach must be directed towards the farmers' needs, with careful integration at both the grass-roots and central levels. The emphasis on food crops would be linked with soil conservation and livestock development, and supported by extension services and necessary in- frastructure such as markets, local roads, and storage facilities enabling the Government to implement an appropriate pricing policy. Infrastructure improvements would rely on local initiative where possible; under the plan, local labor and other resources would also be used to back up economic im- provement with social betterment in the form of simple health facilities, schools and training centers, and village water supply. Much preparatory work on the plan still remains to be done, but with the Government's present strong commitment to a rural development policy, it is likely that further progress can be made. An IDA agricultural sector mission recently visited Rwanda and will provide further assistance to the Government regarding possi- ble alternatives for the implementation of a rural development strategy. 6. Faced with the prospect of a doubling of the population by the end of the century, the Government has ultimately little choice but to adopt a policy to limit population growth. Emigration is considered by some as a short run alternative, but the practical possibilities are limited. Although family planning is a sensitive issue, the Government has set up two commis- sions which are gradually examining various aspects of this problem, and senior officials appear to have open minds on the subject. Most of the reservations concern implementation difficulties rather than outright objec- tion. This new attitude is an important element and gives hope that concrete action may ultimately be taken. 7. Rwanda's landlocked position has been particularly disadvantageous in the last two years when the costs of external transport for merchandise from Europe have approximately doubled. Its need to rely on other countries' transport systems leaves little room for action by the Government. Over the last two years, some intiatives have, however, been taken within the limited sphere possible. New roads through Tanzania to the sea and northward to Uganda are being built, while the road southward to Burundi is being improved. On the other hand, higher transport costs constitute a natural protection for some import substituting projects, such as cement, bricks, and peat, and  - 3 - their domestic production now seems more economically justified. The manu- facturing sector is presently very small but the Government plans an expan- sion to take advantage of the quite limited available raw materials. While the development of some industry is essential to support the rural develop- ment effort, it is clear that in the immediate future the manufacturing sector would occupy only a modest role in the economy. 8. The Government has been and will continue to be hampered in the preparation and implementation of a development program by shortages of trained manpower and organizational deficiencies. This weakness has led to extensive use of technical assistants at the higher level, while the middle and lower levels are understaffed both in terms of number and quality. As a result, many basic administrative needs are barely covered. To increase the supply of much needed skills, the Government is taking two lines of action. Firstly, large numbers of Rwandese nationals have been studying abroad over recent years, and there are at present 1,500 Rwandese students at university level. Secondly, the Government is preparing, despite some resistance, a reform of the primary education system which would modify curricula to better meet the needs of a rural economy. The effect of this development is already visible in the medium layers of the Government's administration, which has a group of new civil servants who are well educa- ted and capable. The decision to base rural development on the commune can be expected to put an even greater strain on the Government, but the continued emphasis on appropriate training, to which the Government is committed, will ultimately enable this constraint to be eased. 9. Rwanda's economic history has been one of stagnation in recent years with little real growth of GDP. During the last two years, Rwanda has experienced poor weather and a deterioration in its terms of trade. Climatic conditions in 1974 were the worst in 35 years and food production fell, neces- sitating a small emergency food imports program organized by UNDP. In 1974 the terms of trade deteriorated by 20 percent, mainly as a result of higher international prices for imports, but also of a decline, towards the end of the year, in export prices for coffee, the principal export crop. Weather conditions in 1975 were more normal and permitted production to rise again. During the first half of 1975 coffee prices remained low, but since July have been substantially higher, offsetting the effect of the deteriorating terms of trade earlier in the year. Against this background, national income fell in 1974 by 2 percent, and public savings - largely dependent on coffee earnings - were negative. However, the investment level was maintained and consequently the resource gap widened from an average of US$12.5 million in 1972-1973 (at 1972 constant prices) to US$18 million in 1974 and 1975. Investments in 1974 and 1975 were roughly equivalent to 10 percent of GDP. Financing of the resource gap did not present any major difficulty, as Rwanda receives considerable amounts of external assistance. 10. Most external assistance to Rwanda has in the past been in the form of grants. Aid commitments reached over US$50 million in 1974, in- cluding technical assistance and budgetary support in the form of recurrent  cost financing, and many countries and agencies intend to offer increased assistance to Rwanda in the future. The principal external aid agencies operating in Rwanda are Belgium, Canada, France, Germany, Switzerland, the European Development Fund, UNDP and IDA. In view of the Government's staff constraints and its correspondingly low ability to prepare and implement development projects, a considerable amount of aid to Rwanda has necessarily been in the form of technical assistance. However, appropriate counterparts were not always available and some of the training benefits were lost. Furthermore, technical assistance has tended to produce projects that were not always well suited to the country's needs by making insufficient use of local materials, local manpower and existing institutions. Besides this, the recurrent costs of projects were often high, and their position in the overall development strategy not always clear. To avoid these difficulties in the future, the Government has begun to be more rigorous in its choice of priority projects, and has decided to organize a meeting of aid agencies in the fall of 1976 with a view to ensuring future projects that are more closely related to national priorities and improved coordination among the external agencies themselves. The Bank Group is expected to participate in this meeting. 11. Rwanda's external debt is low. External public debt, outstanding and disbursed, amounted at the end of 1974 to US$13.0 million, of which IDA credits represented US$8.2 million. Service payments on this debt amounted to US$0.5 million in 1974, or about 1.2 percent of export earnings, of which payments to IDA represented 6 percent. Nonetheless, because of Rwanda's poverty, assistance should continue to be on the most concessional terms and should cover a high proportion of total project cost, including local cost. PART II - BANK GROUP OPERATIONS IN RWANDA 12. Bank Group assistance started in 1970 and has so far focused primarily on the improvement of the road network, on which the country is almost entirely dependent for the movement of its domestic and foreign trade. Rwanda has received six IDA credits totaling US$39.9 million, of which four were for roads, one for agriculture, and one for education. There have been no Bank loans. An IFC loan of US$535,000 for a tea factory was approved in 1975. Annex II contains a summary statement of IDA credits and IFC invest- ments as of May 31, 1976 and notes on the execution of ongoing projects. 13. Problems have arisen in the course of execution of several proj- ects, particularly with respect to the First Highway Project (Credit 196-RW). Severe cost overruns occurred, which led in 1975 to a supplemental IDA credit of US$9.5 million, of which US$0.8 million would be used to help finance cost increases under the Highway Maintenance Project (Credit 299-RW) of 1972. The Saudi Fund for Development agreed to co-finance part of the cost overrun of the First Highway Project with a loan of US$5.0 million. The implementation of the Agricultural Development Project (Credit 439-RW) began in September  1974, about a year behind schedule because of delays in selecting a suit- able consulting firm to assist in project execution. Plans for settlement of the project area could not be carried out as anticipated since farmers had already occupied part of the area before project inception. Following an in-depth review in November 1975, the project is now being revised, taking into account the development of an irrigation and drainage project in the same area financed by Canada. 14. In future, we intend to continue to pay close attention to the execution of ongoing projects. Because of the lack of skilled manpower and expertise in Rwanda, this will require substantial input of Bank Group staff and expatriate experts. As technical assistance is being provided by various sources, we also intend to pursue our efforts to improve cooperation and coordination among the aid agencies active in Rwanda. With respect to new operations, we intend to place primary emphasis on agriculture while continuing our support to the highway and education sectors. This is in accordance with Government priorities. A Rural Development Project has been appraised, and is expected to be negotiated in the next few months. PART III - THE AGRICULTURAL SECTOR 15. Agriculture is the most important sector of the economy, account- ing in 1974 for about 65 percent of GDP, as well as providing the main source of income for 95 percent of the population and 77 percent of export earnings. Yet despite the importance of agriculture and the Government's commitment to rural development, the share of agriculture in total investments has been relatively modest and has consisted primarily of projects for tea development. This was mainly due to the limited human and organizational capacity of the Government to prepare and implement projects that would reach large numbers of farmers. 16. The almost universal pattern for agriculture is the small family farm. Most farms average little over one hectare and the pressure on land now limits farm size close to the subsistence minimum, given present cul- tural techniques. There are only limited variations in farm size from re- gion to region and a larger farm is usually indicative of poorer quality soil. The egalitarian distribution of land has created a very even income distribution. Almost the entire rural population falls into the Bank's poverty target group; in 1974, annual income per farm household averaged about US$250. 17. About 90 percent of cultivated land is under subsistence crops such as beans, peas, potatoes, sorghum and sweet potatoes or under bananas which are used or sold for traditional beer brewing. Most farmers use a small part of their plots for an export crop, generally coffee, but also tea, pyrethrum or cinchona in suitable growing areas. A substantial land area - less suited to cultivation - is devoted to pasture. Livestock plays a major role in the rural economy; the national herd was estimated at around 700,000 cattle in 1974, in addition to a large number of goats and sheep.  -6- 18. Nutritional standards in Rwanda are poor. The population as a whole receives only 80 to 85 percent of the minimum daily requirement of calories, and 90 to 95 percent of that of protein. The deficiency in animal protein and fats is much higher and more widespread. As a result, diseases related to undernutrition or malnutrition are common. Moreover, food supplies in all areas of the country are often disrupted by temporary local shortages, even though adjacent regions might be simultaneously in surplus. The Govern- ment has recognized that an increase in food production is essential, but that this must be accompanied by improvements in marketing, storage and transport facilities. 19. Rapid population growth dictates an increase in the production of food crops, but in view of the shortage of land this must primarily occur through intensification. Present productivity in agriculture is low, even though the fertile soil (when properly cared for) would permit increased yields. Farming is mostly traditional and is carried out by hand using only the simplest of tools, mainly the hoe. Soil conservation measures are insuf- ficient, even on the steepest slopes. Crop rotation is irregular, and im- proved seed varieties are only sparsely utilized. Finally, agriculture and livestock are little integrated. 20. While the Government has adopted food crop intensification as its basic development objective, it is not neglecting export crops and in- deed sees higher productivity in subsistence agriculture as a vehicle for ultimately releasing land to export crops. To stimulate coffee cultivation the Government has paid higher producer prices during the last three years. Other export crops such as tea, pyrethrum and cinchona have been introduced more recently and have been well received by farmers. Although produc- tion is as yet small, output of these crops tripled between 1970 and 1975. Sugar cane production was also begun very recently with favorable results. 21. The Government's objectives for agriculture are to be realized through a change of emphasis in project design. Whereas previously projects generally focused on a particular crop or activity and projects designed under this strategy are still being executed, new projects will attach greater importance to the overall development of rural areas. The avail- ability of non-agricultural services such as health and educational facil- ities, roads, markets and water supply will be important considerations in project design, as well as the necessary agricultural services. The devolve- ment of certain development responsibilities to the commune is a key element in executing this strategy, since it is to serve as the focus of different ministries' efforts at the grassroots level. 22. The Ministry of Agriculture and Livestock provides extension serv- ices to farmers for coffee and food crop cultivation, soil conservation and animal husbandry. Cashcrop cultivation such as coffee, tea and cinchona is promoted by the Office des Cultures Industrielles du Rwanda (OCIR), a govern- ment agency organized under the Ministry of Agriculture in 1964. OCIR is governed by a Board of Directors, consisting mainly of government officials, which is chaired by the Minister of Agriculture; the day-to-day operations  are supervised by the Director General. OCIR is not a commercial institu- tion but has its own budget and limited financial autonomy to facilitate its operations. OCIR is parttcularly entrusted with the promotLion of coffee production by smallholders and has developed price policies which provide farmers with an adequate and stable remuneration. To this end, OCIR admin- isters a Coffee Price Stabilization Fund and a Coffee Promotion Fund which are both held by the National Bank of Rwanda. Coffee is exported through a separate commercial firm, while another firm is being established to export most of Rwanda's tea production. Smallholder cinchona production, which is still small as it started only some years ago, is currently being exported by OCIR. OCIR's operational expenditures are recovered from export duties levied by the Government. OCIR's financial position is sound; at the end of 1974, its net assets (excluding the Coffee Price Stabilization and Promotion Funds) amounted to about US$2.0 million and net income in 1974 was about US$200,000. Two other major governmental agencies have been formed to implement two larger projects for food crop and livestock development, one assisted by the European Development Bank and another by IDA (the Agricultural Development Project in the Mutara region, see paragraph 13); the Government provides a wide range of agricultural and other rural services through a number of smaller projects and settlement schemes. 23. Investment in agriculture in 1974 was about US$6 million or about a quarter of total fixed investment. Some investments in other sectors naturally assisted the rural areas also. Only a small proportion of agricul- tural investment could be financed by the Government directly, and a major role was played by external assistance agencies and various semi-private or religious organizations. The Government's recurrent expenditure for agricul- ture amounts to about US$2 million; other operations are directly financed by OCIR and the other parastatals, and by external assistance within the framework of projects. For the future, financing from external agencies is likely to continue to cover a substantial proportion of local and recurrent costs. However, while financing for agricultural development may be sufficiently available, the human and organizational constraints may prove a serious impediment to increasing investments. PART IV - THE PROJECT 24. A report entitled "Rwanda - Appraisal of the Cinchona Project" (No. 1047a-RW), dated June 30, 1976, is being circulated to the Executive Directors separately. A credit and project summary is provided in Annex III. 25. The project would be the Bank Group's second agricultural opera- tion in Rwanda. It was originally part of a larger project, which also in- cluded coffee improvement and rehabilitation of degraded soils. This project was appraised in October 1974 and discussed with the Government in May 1975. Subsequently, the Government expressed reservations about the justification and high costs of the latter components and finally requested in December 1975 that the project be confined to cinchona development. Negotiations  - 8 - were held in Washington in June 1976. The Rwandese delegation was led by the Mlnister of Finance and Economy, H.E. Denis Ntirugirimbabazi. The Project Area 26. The project would be carried out in the prefectures of Cyangugu, Kibuye and Gikongoro, located in the southwest of Rwanda (see map). Alti- tudes range between 1,400 and 3,000 m; average rainfall is 1,300 mm per year, with the dry season occurring between July and September. Many of the cultivable areas are on slopes. Soils are fertile where adequately protected against erosion but in the highlands sails are degraded and are of limited agricultural value. Cinchona, which is obtained from the bark of cinchona trees and used for the production of quinine, is grown on about 600 ha of foreign owned plantations; in addition, about 200 ha have thus far been planted by smallholders. OCIR, which is responsible for smallholder commercial crop production, including cinchona (see paragraph 22), provides farmers with agricultural inputs and extension services, and operates nur- series and two buying centers in the project area. The Project 27. The project, to be executed over a period of five years, would assist smallholders in improving and increasing the production of cinchona. Detailed features would be as follows: a) Cinchona development The project would provide agricultural inputs, such as seedlings, lime, fertilizer, pesticides and spraying tools to smallholders against nominal fees; in addition, extension services would advise smallholders on the planting, maintenance and harvesting of 900 ha of cinchona trees. Cin- chona would be planted either on slopes or in boundary rows, thus limiting the reduction in areas used for other crops. Nurseries would be established under the project with a capacity of 4 million plants per year. To permit the participation of as many smallholders as possible, the Government has agreed that individual planting areas would not exceed 0.25 ha (Section 3.05 of the Draft Development Credit Agreement). Where available, the Government would also provide the smallholders with land for cinchona cultivation. b) Extension staff OCIR's extension staff would be strengthened with 15 additional ex- tension agents. An agronomist with experience in cinchona growing would be internationally recruited and appointed not later than December 31, 1976 (Section 3.02(a) of the draft Development Credit Agreement) on terms and conditions satisfactory to IDA. He would function as Cinchona Development Officer and would be assisted by an agronomist recruited locally. The proj- ect would provide the extension staff with office space, stores, staff housing and transport means. Staff training for project purposes would be provided in Rwanda and in neighboring countries.  -9- c) Marketing Four additional buying centers would be built in the project area and operated by OCIR to purchase cinchona from smallholders. OCIR would be responsible for exports. d) Technical Assistance The project would provide for consultants' services as needed to assist during project execution when difficulties occur that cannot be handled satisfactorily by the project staff. Consultants' services could also be used for broader purposes, such as specific advice to the Government on the prepa- ration and execution of agricultural projects in general, and to advise on sector policies. The specific areas in which said consultants' services would be needed are to be agreed between the Government and IDA (Section 3.02 (b) of the Draft Development Credit Agreement). Project Implementation and Evaluation 28. The Ministry of Agriculture and Livestock would have overall super- vision of project implementation and would be responsible for the recruit- ment of foreign experts. The project would be executed by OCIR. The Chief of OCIR's Cinchona Division would function as Project Manager and the Cin- chona Development Officer would be his deputy. The locally recruited agro- nomist would replace the Cinchona Development Officer during project imple- mentation or at project completion as appropriate. The Cinchona Development Officer would monitor the progress of the project, taking into account the number of participating smallholders, the size of the cinchona plantings on new or previously cultivated land, the growth of new seedlings and ultimately the yields of cinchona trees. Ecology 29. Project activities would have a beneficial effect on the ecology of the project area. The planting of cinchona trees would help reduce soil erosion and also contribute to improving and maintaining soil fertility. Project Cost and Financing 30. The total cost of the project, net of taxes and duties amounting to about US$140,000, is estimated at US$2.0 million with a foreign exchange component of US$1.2 million. The proposed IDA credit would cover 90 per- cent of the total project cost net of taxes and duties, including $600,000 of the local costs. The need for external financing to cover local as well as foreign costs was noted in paragraph 11. The Government would finance the balance of the local cost estimated at about US$200,000. The financing plan would be as follows:  - 10 - RWF US$ (Million) (Million) % IDA 167 1.8 90 Government 17 0.2 10 Project costs net 184 2.0 100 of taxes and duties Procurement 31. Contracts for agricultural inputs (about US$260,000) exceeding US$30,000 equivalent would be awarded following international competitive bidding in accordance with Bank Group guidelines. Equipment and vehicles (about US$270,000) would be procured after advertising in the local press and in adjacent countries or the solicitation of competitive offers from suppliers represented locally. As no foreign contractors are likely to be interested in the limited amount of civil works for staff housing, office space and stores, these works would be carried out by local contractors following local competitive bidding or on force account by the Ministry of Public Works and Equipment. Contracts for goods and services costing less than US$30,000 equivalent would be let in accordance with Government pro- curement procedures, which are satisfactory. Disbursements 32. The proceeds of the credit would be disbursed over a period of five years against: (a) 100 percent of foreign expenditures or 90 percent of total expenditures for equipment, vehicles, and farm inputs, including fertilizer, pesticides and implements; as well as for technical assistance, consultants and staff training, and (b) 90 percent of total expenditures for civil works, salaries of local staff and operating and maintenance costs of units employed under the project. Cost Recovery 33. Revenues from cinchona bark would start accruing four years after plantation. The burden of initial investment and operating costs of the project would be borne by OCIR and the Government. Currently, the Govern- ment applies export taxes and levies on cinchona totalling RwF 63 per kilo, of which RwF 18 per kilo is allocated to OCIR to cover its operational ex- penses. On the basis of 1975 price levels for cinchona and assuming an 8 percent discount rate, the Government would recover with these taxes 53 percent of the project cost over a 24-year period. The Government is deter- mined to recover the full project cost(including subsidies to farmers and operational expenditures)but, as cinchona prices on the world market fluc- tuate considerably, the Government needs to maintain flexibility in deter- mining the level of taxes and levies. If an additional tax averaging RwF 40 per kilo over the same period were levied, the Government would re- cover 90 percent of the project cost. The increase in farmers' income has been estimated on the assumption that an additional tax averaging RwF 40 would be introduced. If the Government were to impose an additional tax of  - it - only RwF 20, the cost recovery factor would still be about 80 percent, The Government has agreed to review the level of taxeS period-tcally to ensure the ultimate recovery of subsidies and project Costs while maintaining ade- quate incentives for smallholder production (Section 4.03 of the draft De- velopment Credit Agreement). Economic Benefits and Risks 34. About 3,600 farmer families would benefit from the project. Many farmers have already accepted cinchona as a rewarding cash crop. During the five full productive years of the ten-year cultivation cycle of ctnchona trees, a farmer would earn about US$118 additional income per year, if he planted 0.25 ha at once (see paragraph 27(a)). Spread over the full culti- vation cycle, this would mean a 25 percent increase over the farmer's current annual income. If planting were staggered over several years, this additional income would be divided over a longer period. Additional benefits would result from the use of debarked trees as firewood, which is in short supply. 35. At full development by 1987, the incremental production of cinchona under the project would be 450 tons, thus increasing Rwanda's total production to about 1,000 tons and its share of the world market from about 4 percent at present to about 10 percent. Although the world market for quinine is small and dominated by seven firms with major plantations in Zaire and Indonesia, demand for cinchona is expected to increase further. On the basis of current estimates, Rwanda would have no difficulties in selling its total production on the world market (currently it is sold entirely to pharmaceutical companies in Europe). The Government is planning to process cinchona locally and to this end is negotiating with a foreign firm to establish a processing plant in Rwanda. The project would have a favorable effect on Rwanda's balance of payments and over the first ten years would yield a net inflow of foreign exchange amounting to about US$4.0 million. 36. The economic rate of return has been estimated at 15 percent on the basis of costs and prices for cinchona remaining constant at 1976 levels. The main risks would be that yields might be below the level expected or that prices might decline. If prices declined by 20 percent, the rate of return would still be 11 percent. If output were 10 percent less and costs 10 percent higher than antlcipated, the rate of return would also be 11 per- cent. 37. The project risks are no greater than can normally be expected with operations of this type. The risks for farmers would be reduced by continuing food crop cultivation in conjunction with cinchona growing, by staggering cinchona planting over several years and by the Government sub- sidizing farm inputs and services.  - 12 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 38. The draft Development Credit Agreement between the Republic of Rwanda and the Association, the Recommendation of the Committee provided for under Article V, Section I (d) of the Articles of Agreement and the text of a draft resolution approving the proposed cradit are being distrt- buted to the Executive Directors separately. 39. Features of the draft Development Credit Agreement of special interest are referred to in paragraphs 27 and 33. 40. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 41. 1 recommend that the Executive Directors approve the proposed Development Credit. Robert S. 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