Mexico - Fifth Agricultural and Livestock Credit Project

Document of VILE ItOPY The World Bak | FOR OFFICIAL USE ONLY | ma Report No.P-1765-ME REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S. A. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A FIFTH AGRICULTURAL AND LIVESTOCK CREDIT PROJECT February 18, 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 Unit - Peso (Me4$) US$1.00 a Mex$12.50 Mex$i.00 US$ 0.08 Mex$1 million - US$80,000 Fiscal Year - January 1 to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FUR REOTSTHRUCTION AND DEVELOPMENT REPORT AND RECOMMENIATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS O1l A PhDPOSED LDAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A FIFTH AGRICULTURAL AND LIVESTOCK CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S. A. with the guarantee of the United Mexican States for the equivalerLt of US$125 million to help finance a fifth agricultural and livestc'ck development project. The loan would have a term of 20 years, including four years of grace, with interest at 8-1/2 percent per annum. The proceeds of the loan would be on-lent on the same terms, plus a service charge of 1/8 of 1 percentyto Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura (FONDO), the executing agency of the project. PART I - THE EOONOMY 2. Some of the major structural features of the Mexican economy - past, present and future - were analyzed in "The Economy of Mexico: A Basic Report" (192-ME), distributed to the Executive Directors on June 26, 1973; short-run trends in 1973-74 were covered in "tMexico: Current Economic Position and Prospects"t, distributed on September 27, 1974. Another updating mission visited Mexico in July 1975. Its draft findings were discussed with the authorities at the highest level in Mexico in early December. Subsequently, the Mexican budget for 1976 has been presented to the Congress. A further Bank mission visited Mexico in late January to review the govern- ment's fiscal and monetary program for this year. The findings of this mission will be incorporated in an economic report to be distributed to the Executive Directors by March 1976. Country data sheets are contained in Annex I. 3. For the three most recent decades, the Mexican economic system, measured in terms of GD]' growth, has been outstandingly successful. Since 1940, the annual average- growth rate has exceeded 6 percent. And from the mid-1950s to 1972, Mexico was among the few countries in the developing world to combine sustained and rapid growth with monetary and balance of payments stability. Inflation averaged less than 5 percent a year and the dollar value of the peso was maintained at the level fixed in 1954. 4. Rapid and sustained growth was the product of successful policies affecting the mobilization and use of both private and public sector resources. The role of government in promoting economic growth was expressed on the one hand in the dlevelopment of strategic infrastructure and major utility industries and, on the other, in policies which featured price support, import control and agrarian reform measures in the agricultural sector and external protection and the provision of fiscal incentives in the industrial sector. 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 - 5. The relative emphasis of public and private investment was, however, reflected in changes in the structure of output and employment and the expansion of manufacturing industry. Agriculture, nevertheless, continued to be the chief source of employment end in 1970 accounted for 39 percent of the economically active population. 6. In spite of rapid and sustained economic growth over this long period, the combination of a high demographic growth rate - about 3.4 percent per year - and, until fairly recently, primarily import substituting industrial policies, have prevented an adequate absorption of the labor force in productive employment. Industrial growth has been quite substantial - about 8 percent annually since the mid-fifties - but could have been even faster if industrial and trade policies had been primarily focused on exploiting Mexico's unique export opportunities based on its contiguity to a large industrial market in which labor costs are much higher than those in Mexico. It was only in the early seventies that some important steps were taken to develop manufacturing exports on a large scale - the system of drawbacks on domestic taxes paid on exports and the "border industries" regime were introduced at that time, and these have been so highly successful as to suggest that a lot more could still be done. As it is, 40 percent of the labor force is estimated to be still engaged in marginal occupations relatively unproductive and hence poorly paid - or to be openly unemployed. 7. The Mexican strategy for development hass in the past, relied on a combination of public action and private profit. The government has played a highly important role in this process, both in promoting key industries, such as power and petroleum, and in creating a regulatory and institutional framework within which private and social groups could compete and contend, but which was both finm enough and flexible enough to ensure overall continuity and stability. As a formula for growth, this system has served Mexico well; it has however also led to a sharpening of contrasts in income and wealth between people and among regions. This was not entirely an incidental by-product of the process of growth; the share of the government in the economy was kept down quite deliberately for many years, and the scope of redistributive policies was necessarily limited as long as the tax ratios remained under ten percent - among the lowest in the world. The government played a crucial role in the development of private commercial agriculture through irrigation and credit policies and of industry through the provision of infrastructure, education, social legislation and financial policies, but it did not concern itself primarily with the problems of the poorest sections of the population. While the land reform of 1915 was sustained, the absence of abundant fiscal resources made it impossible to develop major programs to improve the economic status of its beneficiaries. The present government, however, came to power on a program of combining past growth policies with much greater efforts in favor of the rural poor, and has launched a number of ambitious initiatives in this direction.  - 3 - 8. The attempts which have been made by the present administration (1970-76) to alleviate the poverty of the countryside and to redress some of the imbalances between rural and urban Mexico have several dimensions. They include a revised Agrarian Reform Law (1971) and a new Federal Water Law (1972), both of which are intended to promote a more equitable distribution of basic agricultural resources. These measures have been complemented by changes in the sectoral allocation of agricultural credit in order to increase the share of low-income farmers and ejidatarios (members of ejidos. which are a form of collective land tenure based on usufruct), and the introduction of higher support prices for basic foodcrops. The Government has also increased outlays for agricultural research, training and extension services, with-particular regard to the needs of peasant farmers0 Perhaps the most significant innovation has been a new program for integrated rural devielopment with which the World Bank has been associated from an early stage0 9. The social arid economic needs of the rural sector have not monopolized government attention; those of urban-industrial development have also been stressed in the form of heavy public investment in basic industries - delayed dulring the 1960's - and an innovative low-income housing program which has been financed with a five percent payroll tax. Productive investment lhas thus been complemented, in the urban as well as the rural economy, by institutional changes and public expenditures designed to improve the living conditions of the poor. This parallel effort has, however, generated several problems of short-run economic management. 10. In 1971, after monetary and balance of payments pressures had emerged during the previous year, the (then new) Government took stringent action to control demand with the effect that the GDP growth rate fell to 3.7 percent by comparison with a decade average of 7.1 percent in the 1960's. In 1972, renewed expansion was stimulated by public expenditure and the GDP growth rate rose to 7.4 percent. There was another year of rapid growth (7.6 percent) in 1973 - but this time-associated with an increase of 21 percent in the GDP deflator which was strongly associated with the impact of exte!rnal inflation. Inflation was not the only novelty; private domestic financial savings, which in the past had helped finance sustained growth increased by only 11 percent, compared with an average annual rate of increasE: of 18 percent in 1965-71; the inflow of private capital was replaced by a net outflow; and private investment - particularly in the industrial sector - slackened, reflecting some uncertainty on the part of the business ccmmunity and a declining interest rate differential vis-a-vis those prevailing on financial savinga instruments in the United States. In the public sector, the fiscal deficit amounted to 5.6 percent of GDP by comparison with an average of 2.7 percent in 1965-71. A major share of the limited expansion of real credit was used to finance part of this deficit while net external borrowing of US$1.2 billion (2.1 percent of GDP) was deployed to finance the rest. These trends were inevitably reflected in the balance of payments, where the current account deficit rose to 3 percent of GDP (by comparison with an average of 2.0 percent in 1965-71).  - 4 - 11. Noting these trends, the authorities had, by mid-1973, put a restrictive monetary and credit policy into effect and complemented this with what was originally intended to be an austere public finance program for FY74. Taken together, these measures were expected to restrict demand and to reduce both inflation and the size of the current account deficit. The results for 1974 indicate that whereas the former objective was achieved, the latter was not. Monetary and credit policies were, on the whole, carried out as planned. The rate of increase of prices thus decelerated from April onwards, and a positive differential between Mexican and foreign interest rates was reestablished by the end of the year, although credit was not allocated as originally intended because the public sector again pre-empted a large part of what was available. Higher than planned public expenditures and lower than expected revenues meant, moreover, that the fiscal deficit was larger than foreseen as were the growth rates of aggregate demand and real imports. The deficit in the balance of payments on current account thus amounted to 4.2 percent of GDP rather than the intended 2.8 percent. Net public external borrowing of more than one year rose to US$2.4 billion. 12. During 1975, the Government's original objective was to achieve sustained economic growth under what were expected to be adverse conditions associated with the world recession. The public finance program called for an increase in public expenditures, which was to be partly financed with a substantial increase in public revenues based on tax reforms, and it was expected that the public sector deficit could be reduiced to 4.3 percent of GDP by comparison with 5.6 percent in 1974. Given this, and assuming only a moderate growth of imports in real terms, a decline in the resource gap and in the current account deficit in the balance of payments were anticipated. With a modest level of public internal borrowing and an expected recovery in quasi-money deposits the intention was to maintain a restrictive monetary policy while allowing a modest increase in real private credit and on this basis to achieve a substantial reduction in inflation. 13. In the light of provisional results for 1975, it is clear that the objectives of this program were not fully realized. The real GDP growth rate is estimated to have been of the order of 4.0 percent, the current account deficit in the balance of payments is estimated at the equivalent of 4.9 percent of GDP and the public sector deficit was equivalent to 9.1 percent of GDP. On a more positive note however, quasi-money growth is estimated at 25 percent over the year, and the annual rate of inflation is estimated at 11.2 percent. It is clear that the world recession had a much greater than expected impact on the economy and was moreover one of the factors that led to the growth of the public deficit because the Government attempted to counter- act the slowdown in economic growth with increased public expenditures. The increase in public sector revenues was somewhat smaller than expected but nevertheless amounted to an increase of about 1.8 percentage points of GDP, which represents an important achievement in resource mobilization. The  - 5 - discrepancy between the original targets of the 1975 economic program and its estimated outcome will have a constraining influence on economic management in 1976 and it is expected that the authorities will make a major effort to control public expenditures and to limit the size of this year's public deficit. It is also expected that money, credit and balance of payments policies will be designed to reduce the resource gap. In recent discussions with Bank staff, the authLorities have stressed their determination to take whatever action may be necessary to reduce inflation, and to restore financial and balance of payments equilibrium, even though they recognize that some of the required measures may have to await the inauguration of a new administration in December 1976. In support of this claim the public finance program for 1976 features greater a priori realism than the budgets of the last two-years. It makes only mode-st assumptions about the growth of revenues and puts more emphasis on. controlling expenditures. The money and credit programs for the year ares, in principle, consistent with these objectives. 14. On December 31, 1974, Mexico's outstanding and disbursed public debt of more than one year was US$7.5 billionl. Net medium- and long-term public borrowing in 1974 of US$2.4 billion reflected heavy reliance on external as well as internal capital to finance the fiscal deficit and some borrowing - as in 1973 - to offset private capital movements. 15. During 1975, net public external borrowing of more than one year will be of the order of US$3.4 billion, which amounted to 4.4 percent of estimated GDP compared with 2.7 percent in 1974. Both in 1974 and 1975 a very large proportion of new borrowing has been in the form of credits from banking institu- tions. Mexico's ability to service a rising level of debt is closely associated with its export growth performance. The behavior of petroleum exports is an important element in export performance. After allowing for the growth of domestic consumption, the rate of growth of crude output and the export surplus will continue to rise through 1980 by which time net exports of crude and petroleum products are conservatively projected at US$1,000 million. Mexico's debt service ratio was 20.5 percent in 1974; the estimate for 1975 is 25.6 percent. The debt service ratio will probably be higher than this in the remainder of the 1970's and early 80's but can be expected to decline to about the present leveL by the mid-80's. The actual level of debt service payments will, of course, depend on the management of the balance of payments. The Bank's share of the public debt outstanding and disbursed at the end of 1974 was approximately 12.9 percent and its share in debt service payments was about 8.5 percent. These shares are expected to fall during the remainder of this decade. 16. Mexico is creditworthy for borrowing on conventional terms provided the Government exercises due restraint in monetary, balance of payments, credit and fiscaI policies and, above all, maintains a favorable climate for export expansion; its recent statements concerning economic  - 6 - payments, credit and fiscal policies and, above all, maintain a favorable climate for export expansion; its recent statements concerning economic policies for 1976 suggest it intends to do so and it is our intention to continue to monitor developments in close contact with the authorities. 17. In order to meet its financing needs to assure continued growth with equity in the future, Mexico will have to strengthen its fiscal effort while supplementing that effort with substantial externa; borrowing on acceptable terms. Given that the country's diversified industrial structure is capable of supplying a good part of its capital goods require- ments, some local cost financing by external agencies is necessary. Bank loans in such sectors as power, transport and industry are traditionally tied to the foreign exchange cost of projects. Some local currency financing is justified in other sectors with characteristically low foreign exchange requirements, especially for high priority and institutionally complex projects like agricultural development in which there are substantial economic and social benefits and which call for strong institutional support by the Bank. PART II - BANK GROUP OPE'ATIONS IN MlEDCaGO Bank and IFC Loans 18. As of December 31, 1975, the Bank has made 41 loans to Mexico for a total of US$2,197.7 million net of cancellations of which 25 loans, amounting to Us$1,239.9 million, were fully disbursed. In addition, the Executive Directors approved two loans of US$4O million for a medium cities water supply projec-t and of US$50 million for a second industrial equipment fund (FDNEI) project in December,1975 and January, 1976 respectively. Disbursements averaged some US$70 million per year during FY66-70 and about US$123 million per year during FY71-75. Some 35 percent of Bank lending to Mexico has been for agriculture and rural development (13 loans for US$781 million), 32 percent for power (11 loans for US$715 million), and 20 percent for transportation projects (11 loans for US$448 million); the remaining 13 percent of Bank lending have been for industry and water supply. The execution of Bank financecl projects has, on the whole, been satisfactory. A number of problems related to the financial management of the power, railways and port sectors, on which I reported to you in earlier 'resident's Reports, have now been resolved or are in the process of resolution. Annex II contains a summary statement of Bank loans as of December 31, 1975, and notes on the execution of ongoing projects. 19. As of December 31, 1975, IFC has made 13 investment commitments in Mexico, for a total of US$69.9 million, of which US$36.6 million had been sold, repaid or cancelled. The balance held by the Corporation, US$33.3 million, consists of US$27.6 million in loans and US$5.7 million in equity. A summary statemen-t of IFC investments as of December 31, 1975 is presented in Annex II.  -7- Bank Lending Strategy 20. The main objectives of Bank lending in Mexico have been to: (i) support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) strengthen policies and programs leading to continued economic growth and to more effective management of key sectors of the economy; (iii) help resolve critical adjustment problems that evolve from Mexico's ccontinued economic growth; and (iv) complement Mexico's domestic savings in a framework of internal and external financial stability. In addition, in the light of Mexico's short- and medium-term prospects, we intend, chiring this and the next fiscal years, to pay special attention to projects that wouldi (i) make relatively limited demands on the Government's budget; (ii) help generate public enterprise revenues and savings; (iii) have relatively short gestation periods and strong productive impact; and (iv) have Etrong balance of payments implications, either in the form of additional exports or efficient import substitutions, where Bank participation can play a catalytic fu-nction. 21. Over the last few years, Bank lending to Mexico has evolved to the goals outlined above, as is evident from its sectoral mix and policy emphasis. Thus, a Bank loan of US$70 million for the Las Truchas steel mill (FY74) attempts to further,the country's industrial growth as well as to support the Government's policy of industrial decentralization. Likewise, a fertilizer project, for which the Bank made a loan of US$50 million (FY75), is expected to help promote new poles of development in the resource-rich southeast region and the north central area and to make Mexico independent of imported urea fertilizer in the medium term. Further projects with similar aims are being prepared and will be presented in due course. 22. As regards infrastructure, the Bank has focused on investments in key areas of the country as well as on institutional reforms and sector policies aiming, inter alia, at suitable pricing mechanisms to help generate additional resources for investment financing. While the airport development project (FY74) of US$25 million has been designed in support of the Government's policy of regional integration, the Mexico City water supply project (FY73) of US$90 million has been instrumental in the establishment of a specialized institution for efficient management of water resources in the Mexico Valley, and in the pricing of water at levels more closely related to costs. Likewise, the recently approved Medium Cities Water Supply Project of US$40 milliona seeks to mobilize additional resources for financing the large investment re,quired to meet the increasing demand in that sector, especially among low income groups whose standards of health are thus expected to improve. DI addition, new institutional arrangements have been made to allow a more systematic and economic approach to investment planning for water supply. We are planning to present projects with a similar institutional focus in the railways, ports, roads and the power sector for your consideration in the near future.  - 8 - 23. In view of the difficult structural problems of Mexico's agriculture and the sector's crucial importance to the country's further development, the Bank has made agriculture the leading sector for its lending. Consistent with the overall framework of country and sector objectives, a three-tier approach is being followed. First, Bank support is aimed at expanding and strengthening irrigation and agricultural credit programs so as to meet the demands of a rapidly growing population more adequately and to generate the foreign exchange needed for rising import requirements. Second, to assist the government in its efforts to raise the incomes of the rural poor and improve their standards of living through a combination of directly productive, productive support and social infrastructure investment. Third, to strengthen Mexico's institutional capability to use scarce agricultural resources more efficiently. 24. The Rio Bravo/Rio San Juan Irrigation rehabilitation project (FY75) of US$150 million will thus significantly increase agricultural and livestock production on more than a quarter of a million hectares and benefit more than 100,000 people. The Papaloapan and PIDER integrated rural development projects (FY75) of US$50 and US$110 million, respectively, have their primary focus on improving the living standards and productivity of close to 1.5 million people through integrated, multisectoral development. Another rural development and two irrigation projects are now being prepared for possible Bank financing. In addition, we are exploring the possibilities for a lagoon fisheries project and for tropical agricultural development and research in the Gulf coast; both of these projects are on the frontiers of our involvement in agriculture which would lead to community development in addition to laying the foundation for large-scale exploitation of Mexico's tropical agriculture in the future. 25. The present project is an essential element in the government's attempt to reconcile growth and social equity in its development policies. The project would complement and make more effective the various other measures the government has already taken in agricultural development by improving credit services throughout the country with a special component for small producers at concessional rates. PART III - THE AGRICUITURAL SECTOR Production and Trade 26. Agriculture has long been a critical element of Mexico's economic development. The sector's growth record of more than 5 percent per annum over nearly three decades (1940-1965) is unique among Latin American  -9- countries. In that period, it managed to satisfy the demand of a rapidly growing population and to transform the country from a net importer to a net exporter of agricultural products. Since the late 1960s, however, growth rates have fallen below the growth of domestic demand. Although prolonged adverse climatic conditions played an important role, limited possibilities for expansion in the traditional agricultural areas, a relative reduction in public investment for agriculture during the sixties, and a decapitalization of the sector because of declining profitability seem to be the main causes of sluggish production. 27. Although agriculture contributed only 10 percent to GDP in 1974, the sector is still the largest employer with nearly 40 percent of the labor force. It is also an important foreign exchange earner. Agricultural exports totalled US1.E$1 billion in 1974, nearly 40 percent of total commodity exports. The net surplus of agricultural trade in 1974, however, reached only slightly more than half the 1972 level. The export structure has broadened over recent years and hence become less dependent on a few individual crops than in the past. The most important export products are cotton and sugar, with 22 percent and 16 percent of total agricultural exports, followed by ccffee, tomatoes and livestock. Grains and oilseeds accounted for more tharL two-thirds of total agricultural imports in 1974, a more than fivefold increase over 1972. Imports of milk powder and skins, traditionally the most important import products, increased only moderate- ly. Land Use and ?opulation 28. In relation to its size, Mexico has limited agricultural resources. Mostly because of inadequate rainfall or poor drainage, only 35 million ha are considered potential crop land out of a total area of nearly 200 million ha. However, on the avrerage only 14.5 million ha are actually being harvested of which somewhat more than 4 million ha are in irrigated areas. Although agricultural production has become more diversified, maize and beans remain the subsistence crops for the majority of the peasants and the basic components of the Mexican diet. Maize still accounts for about half the harvested land, beans for 11 percent, sorghum for 7 percent, and wheat sugar cane, and cotton for about 4 percent each. Contrary to the cropping pattern in rainfed agriculture, the irrigated areas - which account for nearly 40 percent of total agricultural production - show a great variety of prodacts, comprising fruits, vegetables and perennial crops besides the basic grains. Half of Mexico's agriculture and forest area is classified as ranges and pastures but they support only a relatively small portion of the rural population.  - 10 - 29. More than 20 million people live in Mexico's rural areas. Agriculture is by far their most important employment and income source. About 4 million families, representing close to 40 percent of Mexican labor force, depend on agriculture for their livelihood. They comprise three distinct groups: 1.5 million ejidatarios, 1.2 million private farmers, and about 1.3 million landless families. The number of landless agricultural workers has been increasing rapidly as a consequence of limited farm land in relation to an annual rural population growth of 2 percent. Income survey figures indicate that nearly half the rural families had incomes of less than US$135 per capita in 1970. The rural production and income distribution is skewed because of excessive land fragnentation in some parts of the country and because of sharp regional contrasts in agro-ecological suitability. It is estimated that about 5 percent of all farms supply approximately half the agricultural market sales, while 80 percent contribute only one-sixth. Similarly, the upper 10 percent of the rural population account for about half the rural income, while half the population has to accommodate to less than a fifth. 30. While until recently agricultural policies were successful in raising production, they did not attend to the pressing problems of rural unemployment, high degrees of income concentration and accelerated rates of rural-urban migration. The far-reaching Agrarian Reform Legislation of 1917, under which more than half of Mexico's total land area was redistributed, was not supported by parallel programs to upgrade supplemen- tary services and to provide the inputs necessary to bring the distributed land to full productive use. The relatively small class of modern agricultural entrepreneurs, on which the country still depends for the foreign exchange needed to indastrialize, and on which the urban population depends for its basic consumption needs, contrasts with a large number of peasants in subsistence agriculture who typically work by traditional methods and barely participate in the market economy. Government Strategy 31. The present government has responded strongly to the need for increasing agricultural production and improving the situation of the rural poor. Increased budget allocations indicate that the government is giving highest priority to the agricultural sector. Whereas agricultural investment accounted for 11 percent of total public investment in 1970, the last year of the previous administration, the authorized agricultural investment budget in 1975 reached 19 percent of total public investment. Irrigation investment has doubled since 1970, although its share in total agricultural investment has declined from 70 to below 65 percent, a reflection of the limited number of irrigation projects which are economically justifiable and of the relative neglect of other government services in  - 11 - the past. Budget allocations for supporting services, intended primarily to help organize low income farmers and utilize their scarce resources more productively, have lately increased dramatically. Compared to 1970, the Ministry of Agrarian Reform received a sixfold, the Ministry of Agriculture a fivefold and the state marketing board (CONASUPO) a tenfold budget increase. Similarly, the PIDER rural development program now accounts for 16 percent of agricultural investment compared to virtually none in 1970. 32. The goverment has also promulgated new legislation aimed at a more rational and equitable resource utilization. The new Federal Agrarian Reform Law, enacted a few weeks after the administration took office, focuses on the transforaation of the ejido into an efficient production unit, and on rapid legal consolidation of the agrarian reform. The Federal Water Law, which was prozmulgated in 1972, provides for an organizational framework to rationalize water management and a ceiling on land holdings in new irrigation districts which will help achieve a more balanced distribution of the benefits from public irrigation programs. The new General Rural Credit Law of 1975 is intended to put the public agricultural banking system on a sound financial basis while orienting it towards the low income farmers. 33. Most important among the institutional measures to implement the government's agricultural policy more effectively are (i) the creation of the National Coordinating Commission for Agriculture to close a critical planning gap and to ensu!re complementarity of government services; (ii) the establishment of a National Water Plan, under 'a tripartite agreement between the Mexican Government, the UNDP and the Bank,to formulate comprehensive long range development plans and adopt key policy decisions for better water management and rationalization, and (iii) creation of a single public banking system for agriculture, National Bank for Rural Credit, to make public credit more respcnsive to the needs of the farmers, particularly low income farmers, reduce ackdnistrative overlap and increase the lending volume to the agricultural sector. 34. Among the many special activities undertaken by the government are the integrated, multisectoral rural development programs in the Papaloapan Basin and in selected micro-regions throughout the country (PIDER), both of which are supported by the Bank. The programs emphasize directly productive investment; the support infrastructure and technical and organizational assistance are designed to make them fully effective. The provision of social infrastructure is intended to transform the rising incomes from the project into improvements in the quality of life of the beneficiaries; an essential condition to make the farmers receptive to technological and social change. Similarly, the government is attempting to  - 12 - redress the trend of adverse terms of trade between agriculture and the other sectors of the economy, in order to stimulate private interest and to enhance farmer participation in its programs. It has increased agri- cultural support prices considerably after a prolonged period of stagna- tion relative to other prices and, to make the price policy effective, it is expanding a system of rural warehouses and building up a network of rural stores with low priced consumer goods and inputs for agricultural production. 35. While the government's financial support has resulted in impressive improvements in the production and service infrastructure of agriculture, it has so far had little apparent impact on agricultural production. The index of crop production for 1973 is, according to statistics of the Bank of Mexico, lower than the average for 1967/69. The results of the winter cycle 1974/75, however, provide a first sign that the efforts of the government may be finally becoming effective. Average production of the major crops increased by about 9 percent over the preceding year, and an increase of nearly 5 percent is expected for the summer crop. In assessing the performance of agricultural production, however, it has to be noted that government programs were only implemented on a large scale from 1973 on. In view of gestation periods of between three and eight years for irrigation investment in Mexico and the gradual rise of production thereafter, as well as a three to four year lag in the supporting services to become effective, the production impact of public investment and service programs will materialize fully only over the next years. PART IV - THE P3DJECT Background 36. The proposed project would be the fourteenth Bank operation for agriculture in Mexico. Previous lending in the sector consisted of seven loans for irrigation, four for agricultural credit and two for integrated rural development. The project was appraised in May 1975, followed by an updating mission in August 1975. A report entitled t'Appraisal of the Fifth Agricultural and Livestock Credit Project"i (Report No. 961-ME dated January 29, 1976) is being circulated separately to the Executive Directors. A loan and project summary is presented in Annex III. Negotiations took place in Washington from January 15 to January 21. The negotiation team was represented by Lic. F. Torres on behalf of the Borrower and by Lic. J. Rodriguez on behalf of the Guarantor. 37. Beginning with a loan of US$25 million in 1965, the Bank has made four loans for livestock and agricultural credit, totalling US$275 mil- lion. The first three loans were disbursed ahead of schedule and the  - 13 - fourth loan was fully disbursed by October 21, 1975, well ahead of the closing date of June 30, 1978. Small farmers participated on a modest scale for the first time under the Fourth Project. The Inter-American Development Bank has approved total financing of US$71 million for agricultural credit in Mexico in parallel with the Bank. Project Objectives and Concept 38. The proposed project would increase the flow of institutional investment credit along with technical services to achieve the twin objectives of: first, expanding Mexico's livestock and agricultural production so as to meet domestic food requirements and improve the balance of-payments and, second, raising the productivity of hitherto neglected ejidatarios and small farmers so as to increase their incomes and integrate them into the market economy. 39. Consistent with these objectives, the proposed project would provide (i) US$165.5 million for a low income producers' subproject (LIFS) tailored to the needs of the traditional small farmers; (ii) US$149.8 million for a medium irLcome-producers' subproject (MSPS); (iii) US$76.5 million for an agroindcbstries subproject; and (iv) US$21.5 million for a program of applied research, training and monitoring. The on-farm investment under the low and medium income producers' subprojects is expected to be as follows: US$126.2 million for annual crops, US$67.9 million for dairy farming, US$46.8 million for dual purpose cattle and US$74.4 million for perennial crops, sugar cane and other livestock. 40. Following the successful though limited experience with the low income-producers' subproject under the Fourth Project, and subsequent government efforts to upgrade the complementary services, LIPS would now account for the major share of on-farm investment under this project. The threshold to qualifr for LIPS has been defined as net family income below 1,000 times the regional daily minimum rural wage, ranging from US$2.00 to US$5.40 at present, which would place the large majority of project beneficiaries below the 40th percentile family income level, estimated at about US$1,750 for 1975. Under LIFS, small farmers would receive a special package of credit at concessional rates of interest combined with technical and organizational assistance. The government has set up a trust fund to reimburse the cost of assistance which participating banks would provide, either directly or on contract from government agencies, and to guarantee, up to specified limits, the recovery of loans made by private credit institutiDns. 41. Under the medium income-producers' subproject, credit would be extended to commercial farmers who want to intro-duce more advanced technology to intensify and increase agricultural production. Borrowing  - 14 - of any farmer under IaPS of this project, however, would be limited to US$200,000, including the outstanding balance on earlier sub-loans to him, so as to exclude large borrowers who have access to alternative sources of financing. (Project Agreement, Schedule 2, Section 5). Credit under the agroindustries subproject would be extended to groups of agricultural producers, including ejida-tarios and small farmers, for the establishment of slaughterhouses, milk plants, feed mills, grain storage, fruit processing, saw mills and the like. 42. The project would also support demonstrations and studies oriented to practical problems connected with project-financed investment and help adapt research findings to region-specific technological packages for ready use by the farmers as well as promote their widespread application, e.g. low cost calf rearing in the semi-arid and temperate dry regions, low cost milk production under artificial pasture in the wet and dry tropics, orchard establishments in the central highlands. The Fondo would also expand its monitoring activities unler the project and arrange for periodic evaluation of specific issues e-nerging from the monitoring process. Further, a limited.number of piLot schemes would be designed and carried out under the project in selected parts of the country to test different types of low cost arrangements for coordinated supply of credit and other services, provision of technical assistance, management of group activities and farmers' participation in the invest- ment operations. Organization and Implementation 43. As in previous projects, the Fondo would be responsible for project implementation. The Fondo was established in 1955 by the Govern- ment as a trust fundwithin the Bank of Mexico to provide the combination of rediscount facilities to the banking system and technical services necessary to make a significant impact on agriculture and livestock development in the country. Lending was to follow commercial criteria and Fondo was directed to operate on a break-even basis. Through the years, Fondo's technical assistance has played a major role in the formulation, appraisal, and supervision of investment plans and its continuance will be crucial for LIPS under the Fifth Project. Fondo now operates 35 state and 80 branch offices with more than 1,000 employees, 604 of whom are technicians. 44. The Fondo has established a reputation for operational soundness, efficient organization and technical competence in providing credit as well as technical assistance. It is expected that Fondo's financing and proraotional functions will now increasingly extend to the ejido sector and help tackle issues likely to arise in the development of farmers' organizations, coordination of credit with input supplies, marketing and  - 15 - other services. While initially only private banks were supported by the Fondo, access to Bank fi.nanced rediscounting facilities was extended successively to all major government-owned agricultural banks. Following the recent reorganization of the public agricultural banking system, the Fondo would deal, under the Fifth Project, besides the private ban1s and the Financiera Nacional Azucarera, mainly with the new Banco Nacional de Credito Rural (BNCR) and its twelve affiliated regional banks. The BNCR, or any other public credit institution which has not participated under the previous projects, would be eligible for disbursement under the project only after Bank approval (Project Agreement, Section 2.05). For the purpose of determining the eligibility of BNCR, the Guarantor would prepare a detailed repor.~t on, inter alia, (i) BNCR's financial accounts, (ii) its operational po:Licies and procedures, (iii) progress made in the establishment of the regional BNCR system and steps taken to rationalize staff and branch networlc, (iv) progress made in the transfer of assets and liabilities of other public credit institutions to BtICR, (v) improvements in collecting loans, including overdue loans, and (vi.) BNCR's organizational structure. Furthermore, the Guarantor would furnish to the Bank, not later than nine months after signing of the loan, an audited financial statement of BNCR. (Guarantee Agreement, Section 3.03). 45. As in the previous projects, all sub-loans would be based on Fondo supervised appraisal of the technical and financial viability of on-farm investments. The participating banks, who generally assume the lending risk, would determine the creditworthiness of the borrower. Sub-loan terms and Fondo rediscount rates would vary according to the income of the beneficiaries and the size of the loan. The interest rate to the borrower under LIPS would be 7.6 percent if he is obtaining institutional credit for the first time and his net annual income does not exceed 250 times the daily regional minimum rural wage. Other low-income borrowers would be charged 9 percent. Private banks would receive a higher discount margin compared to public banks - 3 aLs against 2 percent - in view of government financial support for the latter. In all cases, Fondo would rediscount up to 90 percent of the LIFS sub-loans. Under MIPS, the interest rate to the borrower would be 11.5 percent for sub-loans under US$12,000 each and would increase thereafter, by steps, to 14.5 percent for sub-loans exceeding US$800,000. The sub-loan rediscount would vary from 90 to 70 percent, depending on the size of the sub-loan, and the rediscount rates from 8.75 to 12.75 percent, providing the participating banks with a spread of between 2.75 and 1.75 percent. The proposed interest rates are already in effect, having been raised only in September 1975 by between 1.5 and 2.5 percent. The current rates are reasonable in the context of the interest rate structure in Mexico in general. Markets and Marketing 46. The increased production of basic foodstuffs from the project would find an easy outlet on the domestic market to offset the current  - 16 - imports and an estimated 4.5 percent annual increase in food requirements. Most of the marketing for grains and oilseeds will be handled by CONASUF0, the state marketing board, which has expanded rapidly its storage and distribution network and which has a proven record of administrative efficiency. Sugar will be marketed through UNPASA, the national organization of sugar mills. Increased production will ease recent shortfalls in the domestic sugar supply and help Mexico take advantage of its comparative marketing edge in the United States.. Expanded milk production will substitute for some of the present import requirements; domestic output will, however, remain short of demand until 1982. Fruits, fresh and processed, continue to have excellent market prospects both domestically and in the United States. The outlook for feeder cattle exports is also good in view of the many American farmers along the border depending on imports from Mexico for their fattening operations, and substantially lower costs of cattle raising in Mexico compared to the southern United States. Project Costs and Financing 47. The project costs, including contingencies, are estimated at US$413.3 million of which US$165.5 million would be for low-income producers, US$149.8 million for medium-income producers, US$76.5 million for agro- industries, and US$21.5 million for training, demonstration and monitoring. The proposed loan of US$125 million would finance the entire foreign exchange costs of the project (US$125 million, or 30 percent of total project cost). The balance would be contributed by the Fondo, the participating banks, and the producers in percentage terms as indicated below: Participat- Components Producers ing Banks FONDO IBRD Total A. Livestock/Crop Develop- ment Low Income Producers' Subproject 5.0 9.5 49.6 35.9 100 Medium Income Producers' Subproject 20.0 20.0 35.0 25.0 100 B. Agro-industries 20.0 20.0 35.0 25.0 100 C. Training, Demonstrations and Monitoring - - 58.0 42.0 100 Share of Total Project Cost 13.0 14.8 42.0 30.2 100 The poorer farmers under LIPS (para. 45) would contribute at least 3 percent and the others at least 5 percent of the project cost. The contribution could  - 17 - be provided in labor and material for which usually cash wages are paid under existing cooperative arrangements. The farmer contributions under MIPS are specified as an average; the minimum for individual sub-loans could be 15 percent. (Project Agreement, Schedule 2, Section 5). Procurement and Disbursement 48. As under the previous loans for agricultural credit in Mexico, procurement under the project would be through normal commercial channels. It would not be practicable to arrange for bulk procurement and international competitive bidding procedures, since the items to be purchased by the many sub-borrowers are relatively small and ordinarily do not lend themselves to standardization. However, at least three quotations would have to be obtained for the procurement of machinery and equipment for agro-industrial units wherever the cost of a single item of equipment, or an assembly delivered by a single manufacturer, exceeds US$150,000. Further, the Fondo would make available to sub-borrowers a list of suppliers of agro- industrial machinery fn)m the Bank member countries and Switzerland (Project Agreement, Schedule 2, Section 3). 49. The Bank wouLd disburse against 42 percent of Fondo rediscounts of project subloans and Fondo's expenditures for training, demonstration and monitoring. The Baik loan would be disbursed over a four-year period with an estimated US$43 million in the first, US$60 miLlion in the second, US$17 million in the thiLrd, and Us$5 million in the fourth year. Economic Justification 50. The proposed project would partly meet the demand for agricultural investment credit which will emerge from the expanded public investment and service programs in agriculture, the incentives provided by the govern- ment's price support poLicies, and the expected improvement in the absorptive capacity of the reorganized public agricultural system. The economic rate of return of -on-farm invrestment (low and medium income producers subprojects accounting for 77.4 percent of the loan) is estimated at about 27 percent, depending on distribution of funds among different investment activities which are calculated to yield between 20 and 36 percent according to representative farm models. The agroindustries subproject (15.4 percent of the loan) has an estimated economic rate of return of about 30 percent with a range of 16 percent to 42 percent. The rates of return would remain satisfactory even if costs would increase and sales receipts decrease by 10 percent each. While the outlays for applied research, training and monitoring will also have a highly beneficial impact, a quantification has not been attempted. 51. The thrust of the project is on increased production. The additional production of' basic foodgrains and milk would help meet the rising demand of Mexico's growing population and save foreign exchange through import substitution while increased production of live cattle, fruits,  - 18 - etc. should help add to foreign exchange receipts. Consistent with the general production objective, the project would focus on raising productivity and hence incomes of small famrers. Family income after full development is expected to more than double in all-cases, except for dual purpose cattle in the wet tropics. Of the more than 46,000 families (about 250,000 people) who would directly benefit from the project, some 37,000 families (about 200,000 people) would belong to low income strata and, furthermore, many would receive institutional investment credit for the first time. The project would also help reduce unemployment and underemployment throueh the creation of 5,000 man-days equivalent per year in addition to the labor requireim-nts during the investment period of the subloans. 52. Apart from the increase in tax revenues from increased production on the farms and in the processing units, the project would also result in important benefits in terms of institutional development. The Fondo, which was supported by earlier projects to help build up a system of providing commercial producers with a combination of credit and technical assistance, will be enabled through this project not only to maintain and expand these services to the medium-income farmers but also to extend them to the low- income farmers in many parts of the country. Apart from demonstrating the bankability of small farmer-oriented investment operations and helping private and public banking institutions evolve the right techniques of financing such enterprises, the project would help in the complex task of organizing sniall farmers into viable units of joint economic activity. PART V - LEGAL INSThMIENTS AND AUTHORITY 53. The draft Loan Agreement between the Bank and Nacional Financie- ra, S. A., the draft Guarantee Agreement between United M4exican States and the Bank, the draft Project Agreement between the Bank and Banco de Mexico, S. A., the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loans are being distributed to the Executive Directors separately. 54. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 55. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments February 18, 1976  a | s d 4~~~~~~ 4 j cO- g_ z ;43t ~~~ot I, x M J<fhIL%g;aS\baX; i _' AM Ba - f-j i , 'i Z1:g15tt 1; gIi, j f ''' 4 iD "' '11l: k~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1  ANNEX I POgo 2 of 4 MEXI0D: E-oomit Dovepoe,fg D.M-aSh-et A.tuol Poet. Proloted 1960 1965 1970 1975 1980 1960 1965 1970 1974 . 1975 1980 1985 1965 1970 1975~ 1980 1985 1960 1970 1980 _______________________________ ~~~3-Yoa- A-eCCoe t 1967-69 Pri.es & E..h..ge Rates A--rCA. A-1,a G-oth RtoOsa As7. of CDY 00D-otesic Prodoct 15.663.9 22,312.2 30,763.9 39,418.9 40,995.7 51,324.2 69,329.8 7.3 6.6 5.9 4.6 6.2 91. 10.0 Ct-ioo =r. Terotof STde(- 2. - 356.1 20.1 112;8 183.9 - - - .- 10. 2 Cro.. Dosotic lo.a 15,680.2 22,269.3 30,766.6 39,062.9 40,975.6 51.437.0 69,513.7 7.3 6.7 5.9 4.7 62 100.0 10.0 100 .0 Imporos hod. NI'S) ~~~~~1,822.3 2.125.9 3,003.2 3.874.5 3,990.5 4,712.3 7,403.1 3.1 7.2 5.8 3.4 9.5 i1.6 9.0 9.2 Ecoo1 n679co.lt3 -197. -2.656.2 3.014.6 2.926.9 4.452-.2 7,731.9 3.3 6.1 2.0Z. . 1. 4 8.8.6 8.7 R.--rc Cop 142.0 146.0 347.0 859.9 1,063.6 260.1 - 326.8 0.5 18.8 25.1 -5.5 - .9 1. .5 C-oao.ptloo 12,906.6 17,807.6 25,032.3 32,157.2 33,963.1 41,842.9 54,974.3 6. 7.1 6. 4.3 5.6 82.3 01.4 81.3 Iov- -aot 2,916.6 4,611.6 6,081.3 7,765.5 8,076.1 9,854.2 14,212.6 9.6 5.7 58 4.1 7.6 18.6 o9.8 19.2 l00ot0 oioa2,773.6 4.464,7 5,734.3 6,905.5 7,012.5 9,594.2 14,539.4 10.0 -5.1 4. 6.5 8.7 17.7 18.6 1. afotlS..108, 2,703.8 4,281.8 5,289.4 6,297.1 6,267.8 8,565.0 13,417.7 9.6 4.3 3. 6.4 9.4 1.2 177 16.7 G.od 0 oda aod NM' A-Ia Sata t Ca.-.est PrIce. 4_ A. of TOt.1 Food ~~~~ ~ ~~~~ ~ ~~~17.6 25.4 91.8 700.0 500.0 298.0 402.3 7.6 29.3 40.4 -16.6 8.2 1.1 2.6 7.2 Potrole- ..d Fr-doots 34.0 23.9 42.8 362.0 71.0 - - 6.8 12.4 10.7 - - 2.2 1. - 0t1,- Coods 917.6 1,236.0 2,217.6 4,884.9 5,79. 9,940. 22,11202.2 6.1 12.4 21.2 11.4 17.4 59,5 67. 72.4 K.osfattr-d So.-i o- 572.3 792.3 944.3 1,'701.2 1,9927.0 3,4891. 7,502.9 6.2 3.6 15.3 121.6 16.6 37 .1 28.6 25.4 To.oI lopoot 1,541.7 2,077.6 3.296,5 7,648.5 8,297.0 13,720.2 30,147.6 6.2 9.7 20.3 10.6 17.1 180.0 100.0 100.0 Selecte,:d.Agrlc-1so-1 Goods 306.5 441.3 338.6 609.3 536.0 1,372.5 2,555.3 17.7 -5.2 9.6 20.7 13.2 22.4 12.3 10.6 Fetrolooo ood Frodoccs ~~~~20.6 40.1 38.:4 1024.00 500.00 1,026.1l 2.037,5 14.2 -0.9 67.1 15.5 14.7 1.5 1.4 7.9 Sole.,oed NIosrala ~~~~ ~~92.5 77.9 91.5 21. 1100 214.211 432.8 40 33 . 42 1. . . . Moo,, fac toros 101~~ ~~~~~~.5 206.8 358.4 1,212.2 1,10.0 3.505, 11247.0 15.3 116 2. 43 2.3 7.1 31 2. Otoho God, 178.3 396.0 570.8 754.2 635.0 921.8 1,292.8 17. 76 22 77 70 131 08 7. oloo-F-ctor S-r...e 572.5 792.3 1,397.7 3,038:9 3,124,5 5,923.2 13.912,3 6.3 12.0 17.5 163. 189.6 42o.1 50.0 450.7 Toto opt 1,358,9 1,934.4 2,745,3 5,950.6 6,085.5 12.962,9 31,477.7 7,5 7.1 17.3 163 9. 100 100 580 Trade indices A--r.o 1967-69 - l00 Eoprt Prito indo. 83.10 92.77 105.55 176.54 206.50 298.71 417.03 2.2 2.6 14.4 7,7 6.9 lo.p-rt Proc I.d-o 80.71 97.70 105.28 197.39 207.92 291.16 407.12 3.9 1.5 14.6 7.0 7.2 Toro of T-ode 102.96 914.96 100.25 89.43 99.31 102:.59 102.4 16 11 -. . REport Vo.1 69.80 86.90 109.81 167.80 129.24 190.'30 331.01 4.5 9.8 3.3 8,0 11,7 V.t-o Added by S-m A-1 Daa -t 1967-69 Pet & EURaa P"-1o7 2,160.2 3,417.6 4,025.1 .. ..4.4 3,4 ,, . . 17.3, 130,0 Seoindar 4,353.2 6,7117.2 10,415.5 . . .. 9.1 9.2 .. . . 27.6 33.5 Torflary 11 8,~~~~~~~~~659.9 12,115.0 16, 645.:2 .. .. . . .0 60 .5* 53I I T.,al (11P5 15,772.6 22,249.8 31,081,8 .,. , . , 7.0 59g 4,7 6.2 10. 00.0 100.0 P.bl.c S--to Fi-.ooc (C.-alid-td Pblict S-ctor A. 7. of Tot.1l loto1 RS.c.ipt .. 2,882.0 4,026.4 4,590,1 5,607.3 8,35.4 12,765,1 .. 6.9 6.8 9,5 7.6 100.0 100.0 100.0 Cortoot Eopodi t.re .. 2,397.5 3,185.0 3,913.0 4.8083,7 5,5117,5 9,455.6 . 5.9 -8.9 2.5 11.4 . 803. 2 602.21 Rosoorcoc for loleatmoot .. ~~~~~~ ~~~~~~~~715.8 765.0 3,369.1 5,269,7 .. 11.7 -1.9 34. . . 16. 38.2 loves bond .. ~~~~~~~~~~~~~1,485.8 1,766.1 2,6440 3,469.4 3,575.0 5.175,0 .. 35 14 0. . . 16 4. Dofici, 1,001.3 924.7 2,14248.2 2.704,4 205.9 - 94.7 . -1,6 23.9 -40,3 - . 34. 2.3 Pu,bl-c E.p-od1l.- "I ooon.. 13 1/ 12)2/ . . .. .. Dot.llo .. Publij 10010- - ns-o- -o--g- ode 0 l ol 14 17) . . .,At 1967-69 P 4 F E 0 . O T.t.1 Ato1,,to - . 5 8 . . . . ., ..~~~~~~ 1965-73 1974-80 1965-73 1974-80 (lh-c Efc...i. Sorv . 36 318 . Ad.,. aod Odoh . 38 32 . . . . odsr 756 .. 37.4 _1,o .. 010 0 00 .I . . Agorioolyt.l 253 . 2 .7 Trosp-rt & C-o. 485 .. 22.5 1 ,,.dd ....c..... 1960 1965 1970 1975 1980 100101 504 .. 24.9 ,Cloldd Ir- 3-lot vo- c dot,,) 1965 1970 1975 1980 1985 Adiboi.t-tioo . &Dof.... 49 .. 2.4 Total 2,017 100.0 A-otgo ImO 2.59 3.16 3.04 4.24 3.20 I.Por- Elo-dliy .59 1.09 1.18 8.52 1.52 M-r41001 N8001...1 S.-tg. 1.,. .24 .12 .20 .20 .27 Lob-r For, ..d 3/ Toto1 L.rb;r F.-c V.oI. Added oar W-k-o (1967-69 Pric.. 4 C.. 8t.00) C,tp.l po- -kt- in Millions As 7. of Tota1 1960-1970 7. of A-or.oo 1960 1970 1960 1978 Ct_ tb 80t0 1960 1970 1960 1978 Gr-hi R.ot A6t1~~~~~~~1 0000 ~~~~~~~5.4 5.1 50.2 39.2 -0.6 511.2 789.2 34.7 33.8 44.4 21 3.0 19.6 23.1 3.5 2,073.0 3,471.0 140.6 145.2 5 3 Sot'10c00 C/ ~~~~ ~~~~ ~~~~~3.2 4.9 29.0 37.7 4.2 2.706,0 3.396,2 183,6 142.0 2.3 Tot-I 18.7 13.8 100.0 100.0 2.0 1,474.1 2,390.9 100.0 100.0 4.8 l-t oppl.tablo !/ incods laropooc ol or _egligibl. 31 1960 Book 0001i.t0 ft- Ce.... figore.; 1970 C-osoi Oolts 4/ -cud.s -.11 ...at.d Latin A..rica .od C-ibb... Fr-g-.o I  ANNEX I Page 3 of 4 BALANCE OF PAYMETS. . EXTERNAL ASSISTANCE AND DEBT (ounts in millions of U.S. dollars at currcnt prices) A c t u a I Pr.lL., P r o I e c t e d 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 SUIMIARY BALANCE OF PAYMENTS E.ports (i..1. NFS) 2.745.3 2.995.', 3,609.4 4,553.7 5,590.5 6.085.5 7,092.3 8,169.9 9,483.5 11,005.2 12,967.9 Isports (incl. NFS) 3,296.5 3,263.01 3,852.9 5,214.4 7,648.1 8,297.0 8,267.3 9,241.3 10,490.0 11,956.3 13,/20.2 Resource Balance (M) - 551.2 - 267.1. - 243.5 - 660.7 -1,697.6 -2,211.5 -1.175.0 -1,071.4 -1.006.5 - 951.1 - 757.3 Interest (net) 215.4 - 244.i - 264.4 - 574.3 - 890.8 -1,235.9 -1,486.1 -1,702.4 -1,934.3 -2,185.5 -2,453.? Diredt Investaent Inco-e - 479.6 - 493.; - 593.3 - 433.6 5 576.0 - 585.0 - 643.5 - 707.9 - 801.3 - 907.1 -1.026.8 Workers Remitt-nces 122.7 111.! 126.7 140.4 158.1 162.5 183.6 204.2 228.7 256.1 286.9 Current Transfers (net) 55.5 57. 64.3 74,5 109.0 110.0 125.0 140.0 156.8 175.6 196.7 Balance on Current Account -1,068.0 - 837.1 - 910.2 -1.453.7 -2,897.3 -3,759.9 -2,996.0 -3,137.5 -3,356.6 -3,612.0 -3,753.7 Private Direct I.vestmcnt 323.0 307.C0 301.0 480.9 556.8 585.0 611.4 696.7 788.7 892.8 1,010.6 Public KiLT Loans Dlsb.rsemeots 781.6 794.0 1,061.1 1,886.2 2,959.6 3,609.1 4,007.0 4,491.4 5,801.2 6,222.4 ),058.7 - Repayments - 474.8 - 496.0 - 590.8 - 779.0 - 545.4 - 854.3 -1.142.4 -1.548.6 -2.714.8 -3,059,2 -3.834.5 Net Disbursements 306.8 298.8 470.3 1,107.2 2,414.2 2.754.8 2,864.6 2,942.8 3,086.4 3,163.2 3,224.2 Capital Transactions .l.i. 540.2 432.1 343.9 595.2 642.0 600.0 - 100.0 - 200.0 - 300.0 - 300.0 - 300.0 Changes in net reserves - 102.0 - 200.0 - 205.0 - 122.3 - 36.9 320.0 - 180.0 - 202.0 - 208.5 - 244.9 - 294.6 (- indicates increase) A c t u 1 Pr-lin. GRANTS AND LOAN 1OHHISIHiST DEBT AiD DEBT SERVICE 1971 1972 1973 1974 Official Crants & Grant-like - - - - Public Debt Out. 6 Disbursed 3,516.6 4,010.2 5,117.4 7,531.6 Public MbLT Loans 1BRD 146.8 75.0 277.0 270.0 289.0 Inter-st on Public Debt 227.3 258.6 360.3 566.8 IDA - - - - - Repayments on Public Debt 496.0 590.8 779.0 545.4 Other Multilat.ral 112.3 63.2 73.2 89.5 102.0 Total Public Debt Service 723.3 849.4 1,139.3 1,112.B Govern.ents 80.3 54.4 65.5 477.1 129.1 Other Debt Service (net) 17.4 5.8 23.1 139.6 Suppliers 69.7 77.3 65.3 55.6 61.4 Total Debt Service (net) 740.7 855.2 1,162.4 1,252.4 Financial Institutions 434.4 638.7 627.5 1,829.2 1,979.3 Bonds - 44.8 61.5 - 50.0 Burden on Ecport Earnings (.) Public Loans n...i. - - -- - 223,0 Public Debt Semvice 23.3 22.7 24.3 18.7 Total Public M6LT Loans 843.4 953.4 1,170.0 2,271.4 2,833.8 Total Debt Service (TIS) 23.8 227.9 24.8 20.5 TDS + Direct Invest. Income 39.7 38.8 34.0 29.9 Oucttanding & Disbursed on Dec. 31. 1974 EXTERNAL DEBT Million S Percent Average Teern of Public Debt Public MKLT Loans Int. as % Prior Year D06D 7.0 7.3 9.0 11.1 IBRD 973.2 12.9 Assort. as 7 Prior Year DObD 16.3 16.8 19.4 10.7 IDA - - Other Iultilateral 412.9 S.5 IBRD Debt Out. b Disbursed Goveenments 583.8 7.8 as 2 Total Public D06D 18.8 18.0 15.8 12.9 Suppliers 272.0 3.6 as % Public Debt Service 8.3 8.5 7.7 8.5 Financial Institutions 4,542.6 60.3 Bonds 531.4 7.0 IDA Debt Out. b Disbursed Public Debts n.e,t. 215,7 2.9 IDA as 7. Total Public DObD Total Public MALT Debt 7,531.6 100.0 as t Public Debt Service not applicable - nil or negligible  ANjNEX I Psge 4 of 4 MESaco: SOURCES AND SECTORAL ALLOCATION OF PUBLIC EXTERNAL DEBT CONTRACTED 1969-1974 (Thoosands of US Dollars) Suppliers Private Publicly Other I or,cinl Ivemn: T.n t,rI V- uer Banks Issued Private Orgastaiosof Bonds ' ta Aeri-lture. Forestry and F-shing 1979 ~ 28238 54 067 0 -53 1 6.3 -AgesSltu- 0 15,000 0 0 23,100 7, 38,100) -Agr-clture, Livestock 0 10,129 0 0 410,477 U 420,t,06 -Fishing 19,793 1,109 0 0 0 0 20),96!2 -Ocean, Coa.stal Fishing 0 2.000 U 0 0 0 7.000 -Oth-r 0 0 0 0 111,490 U 111,4610 Mining,_and Qarcrysoc 2.8 582.601 2000 10 5 0 1717 728,50h 7.7 -Coal1 513 0 0- 0O 0 0 513 -Crude Petroleum, Cas 2,395 400,680 20,000 105,750 0 2,828 531,b53 -Metal Orc lining 72 163,500 0 5 0 11,134 176,706 -Other 0 16,421 0 0 0 3,213 10,634 Manufacturing 29_4 611.631 0 226,897Z 9.0 232.731 1374,001 14.6 -Food Manufacturing 2,396 0 0 0' 0 1,317 3,713 -Textile Ma...afactaring 115 24,614 0 0 0 637 25,366 -Paper 254 0 0 0 0 416 670 -Printing 1.338 416 0 0 0 0 1,754 - t3,cinicals ~~~~~~~6,707 6,300 0 0 0 12,054 25,061 F ertili,,crs, Pesticides 0 26,000 0 0 0 0 26,000 -Petroleum Refining; Gas; Oil 83,701 232,034 0 90,897 0 6.719 413,351 -Plastics 136 5 0 0 0 0 136 -Glaus 0 255 5 0 0 0 255 T ron -ud Ste.l 8,909 254,447 0 96,000 0 157,528 516,864 -Motal Machmi.-y i6 26.866 0 0 0 34,490 61,372 -Metal Products NEL 0 169 0 0 0 0 169 -SN-Electrical Msihi-ury 68,890 0 0 0 0 1,692 70,582 -Basic Metals 0 30,066 0 0 0 4,160 34,226 -Transport Eqacpnent 121,114 10,368 0 0 0 11.018 142,500 -Other 166 96 0 40,000 9,000 2,700 51,962 El-etric Power and Water Supply 49_359 809.297 30.000 22,2 35,2 20Q,146 1,6,5 17.7 -Electricity, Gas, Water Production 0 65,000 0 65,000 0 0 130,000 -Electricity, G.s, Stea= 49,359 744,297 30.000 157,428 250.000 203,146 1,434,230 Wajeur, (iN--Agric.) 0 0 0 0 103,823 0 103,823 f..r,,n, 0 5 0 2 4402 0 44,029 0.5 Trnsport ."d Conn-uscatcns 75_396 511.1087 32.486 10,5 27,312 19,1 1,204,46 1'.8 -Tra-speri, Storage and Cmnoia0n 48,000 0 15,000 47,512 0 110,512 -Lamid Tran,p.rt 40,771 380,366 32,486 88,580 186,800 127,734 856,737 - cen,Castal TraSport 1,468 13,3104 0 0 20,000 2,709 37,481 -Air Transport 2,445 61,639 0 2,770 25,000 61,373 152,227 C-- tosu i -aro - Other 30,712 7.778 0 0 0 8,099 46,589 Finascial cil -donetarv Institutions 29 1,099,518 27 322 55 000 45,010 21,591 1,'48,460 1. F--PnsialI55iz.~n 29 931,018 27,322 55,000 45,000 21,591 1,079,960 -Mo-Lt-y Institutions 0 168,500 0 0 0 0 168,5130 3134-m Iccir tses 8.1 ~ 284.933 01 94 17,0 LA 503,655 5.3 -c-im Per .o.al Ser-i-e 0 101,000 000-0101,000 -Pub1,L Ad--nmsratio (Defence) 4,620 15S,413 0 31,948 174,000 4,393 370,374 -Education, Adlninitratior, 1,265 26.451 0 0 0 0 29,716 -Medical and Dental 873 0 0 0 0 0 873 -Military 1,468 0 0 0 0 0 1,468 R.Edi-, T.V. 86 0 0 0 0 0 86 -Costrc-tion 0 69 0 0 0 69 138 Sector Not Specified. Mu1tisector, etc. 509 381.379 96.856 10.2 118161 31.914 73,2 7.7 S- Sctor Not Specified 171 83,620 0 27,141 0 29,846 140,278 -Multisect.r 0 120,326 0 34,061 80,263 0 234,650 - Secor Sot Identified 338 177,433 96,856 40,000 35,935 2,068 352,630 -General Purpose 0 0 0 0 1,963 0 1,963 Oth- N,pouus. 0 5,438 010,000 0 0 15,438 0.2 -Adm-. Budget Su,pport 0 26 0 .0 0 0 26 D- Dbt Be~lief 0 5,412 0 0 0 0 5.412 00-ho Lebt ecraiain0 0 0 10,000 0 0 10.3000 lOPO1eilim n5A000 724,585 10,5 196,535 1/ 160L700 12,9 1LA18,873 14.0 .'.0TA1 455,120 5,038,207 309,722 1,056,110 1,729,092 839,929 9,428.680 2/ Pi,c-nt of TOtL1 4.8 53.5 3.3 11.2 18.3 8.9 I/ Incl,udes 111,500 from Prisately Placed Bonds. 2/ oles nut include US223,001 thousands Di -nclosified debts..  ANNEX IT Page 1 ,47 t THE STATJS OF BANK GROUP OPERATIONS IN MEXICO A. STATEMENT OF BANK LOANS as at December 31, 1975) US$ Million Loan Amount Less Number Year Bo3rower Purpose Cancellations Undisbursed loans fully disbursed 1,239.9 527 1968 Nacional Financiera, S.A. Irrigation 25.0 1.7 695 1970 Nacional Financiera, S.A. Roads 21.8 3.o 793 1972 Nacional Financiera, S.A. Tourism 22.0 8.7 820 1972 Nacional Financiera, S.A. Ports 20.0 3.7 82L 1972 Nacional Financiera, S.A. Industry 35.o 12.2 825 1972 Ferrocarriles Nacionales de Mexico and Nacional Financiera, S.A. Railways 75.0 18.o 909 1973 Nacional :F'nanciera, S.A. Water Supply 90.0 61.7 93hi 1973 Siderurgica Lazaro Carde- nas - Lats Truchas, S.A. and Nacional Financiera, S.A. Steel 70.0 12.4 968 1974 Nacional IFinanciera, S.A. Roads 90.0 38.7 969 1974 Nacional Financiera, S.A. Irrigation 77.0 60.7 970 1974 I Nacional Firianciera, S.A. Irrigation 47.0 45.8 1022 197h Nacional Pinanciera, S.A. Airports 25.0 23.6 l053 1974 Nacional Financiera, S.A. Integrated Rlral Development 50.o 50.o 1110 1975 Nacional. Financiera, S.A. Integrated Rural Development 110.0 1lil.n 1111 1975 Nacional Financiera, S.A. Irrigation 150.0 1io.eo 1112 1975 Guanomex and Nacional Financiera, S.A. Industry 50.0 4.( TOTAL 2,197.7 7ZU.4 Of which has been repaid 354.1 Total now outstanding 1^3.6 Amount sold 75.9 of which has been repaid 53.-3 22.6 Total now held by Bank 1,821.0 Total undisbursed 720.L a/ No IDA Credits have been made to Mexico.  ANNEX II Page 2 of 6 B. STATENT OF IFC INVESTMENTS (as at Deceaber 31, 1975) US$ Million Year Obligor Type of Business Loan Equity Total 1958/59 Industrias Perfect CircLe, Industrial Equipment 0.8 - 0.8 S.A. I/ 1958 Bristol de Mexico, S.A. / A/C Engine Overhaul 0.5 _ 0.5 1961 Acero Solar, S.A. l// Twist Drills 0.3 - 0.3 1962/65/ Compafiia Fundidora Fierro y Steel 2.3 21.4 23.7 66/68 Acero de Monterrey, S.A. 1963 Tubos de Acero de Mexico, Steel 0.9 0.1 1.0 S.A. 1/ 1963 Quimica del Rey, S.A. / Sodium Sulphate 0.8 - 0.8 1964/66 Industria del Hierro, S.A. Construction Equipment - 2.0 2.0 1970 Minera del Norte, S.A. Iron Ore Mining 1.5 - 1.5 1971 Celanese Mexicana, S.A. Textiles 12.0 - 12.0 1972 Promotora de Papel Periodico, Pulp and Paper j j S.A. de C.V. 1973 Cemento Veracruz Cement 10.5 - 10.5 197)4 Cancun Aristos Hotel Tourisrn 1.0 0.2 1.2 1975 Mexinox, S.A. Steel 12.0 3.6 15.6 Total Gross Commitments 42.6 27.3 69.9 Less cancellations, ternr.tnations, repayment and sales 15.0 21.6 36.6 Total conrnitments now held by IFC 27.6 5.7 33.3 Total Undisbursed 12.0 2.9 14.9 j Investnients wlich have been fully cancelled, terminated, written off, sold, redeemed or repaid. ]2/ US$25,000.  ANNEX II Page 3 of 6 C. PJIJECTS IN EXECEJTION 2! Ln. No. 527 Fourth Irrigation Project: $25 Million Loan of January 26, 1968; Effec;tive Date: March 1, 1969; Closing Date: June 30, 1976 Civil works to be executed under the project were completed by the end of 1975. The loan is expected to be fully disbursed by the present closing date of June 30, 1976. Annual net agricultural production values, valued in terms of 1967 prices (appraisal date) are already at a level equal to 87% of those projected at appraisal for full development. Ln. No. 695 Fourth Road Project: $21.8 Million Loan of June 26, 1970; Effective Date: October 1, 1970; Closing Date: December 31, 1976 Seven project roads have been completed and opened to traffic. The remaining four roads are expected to be completed at various dates up to the end of 1976, or about two years behind schedule. This delay was caused by the lag in bud- getary appropriations for project works and by increased quantities of works. There have been cost increases on five of the project roads for these same reasons, and also because of design revisions and sharp price increases since late 1973. Ln. No. 793 Zihuatanejo Tourism Project: $22 Million Loan of January 22, 1972; Effective Drite: March 30, 1973; Closing Date: December 31, 1976 Most project-related construction in the Ixtapa tourism zone was completed by end 1975. A Trust Fund was recently organized for the provision of urban infrastructure in the town of Zihuatanejo and the necessary works have been under- taken since December 1974. It is now estimated that all works related to this project will be completed early in 1976. By that time over 500 hotel rooms will be available in the tourism area and another 400 hotel rooms are expected to be in service by the end of 1976. Ln. No. 820 Ports Project: $20 Million Loan of May 17, 1972; Effective Date: August 17, 1972; Closing Date: June 30, 1976 Progress in execution of the project continues to be satisfactory. Appraisal of a second ports project, based largely on studies carried out as a part of this project, is under way. Port tariffs have recently been increased but further increases will be needed within a year to put the port system on a sound financial basis and provide a contribu- tion to the financing of the port investments proposed in the next few years including those in the project being appraised. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered and the action being taken to remedy them. They should be read in that sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weak- nesses in project execution.  ANNEX II Page 4 of 6 Ln. No. 824 Industrial Equipment Fund (FONEI) Project: $35 Million Loan of June 1972; Effective Date: October 12, 1972; -Closing Date: December 31, 1975 After a slow start due to organizational problems, all funds under the project were committed by June 1975. Ln. No. 825 Second Railway Project: $75 Million Loan of June 2, 1972; Effective Date: August 17, 1972; Closing Date: December 31, 1975 Progress in implementation of the Investment Plan, procure- ment and disbursements is satisfactory. Freight traffic carried in 1974 is considerably higher than in 1973, and early 1975 statistics indicate a continuation of this trend. Locomotive utilization has significantly improved but freight car utiliza- tion has deteriorated due to higher turn-around time. Tariffs have been increased by an average of 44% for freight from January 1975 and by an average of 22%6 for passenger services from February 1975. While the financial position of the freight service will improve substantially with this tariff increase, the situation remains unsatisfactory for passenger services. Therefore, further passenger fare increases and rationalization of passenger trains would be necessary to comply with the agreements under Loan 825-ME. This is under active discussion with the government. Ln. No. 834 Fourth Power Sector Program: $125 Million Loan of June 23, 1972; Effective Date: April 13, 1973; Closing Date: June 30, 1975 The construction program has been delayed by over a year except for frequency unification, which is ahead of schedule. Recently, the borrower has tried to improve its overall con- struction performance by strengthening its construction management and the results of the last six months have been encouraging. The sector's financial performance is unsatisfactory and the government is considering remedial measures to improve it. Ln. No. 909 Mexico City Water Supply Project: $90 Million Loan of June 18 1973; Effective Date: Aipril 30, 1974; Closing Date December 31, 1977 Physical execution of the project is progressing satisfac- torily. However, disbursements from the loan account have been delayed due to delays in the resolution of administrative arrangements between the Mexico Valley Water Commission (the executing agency) and the Federal Government. It is expected that disbursements from the loan account will soon increase substantially, reflecting the progress of the project. A sales contract between the Water Commission and the State  AlNNEX II Page 5 of 6 of MextLco, which is a condition for disbursanent of funds aggregating over $40 million, has receltlv been signed. In. No. 934 Las Truchas Steel Project: $70 Million Loan of September 12, 1972; EYfective Date: October 29, 1973; Closing Date: Decemb-r 31, 1977 D ecution of the project and procurement of the equipment financed by the loan are progressing as scheduled. Ln. No. 968 Seventh Highway Project: $90 Million Loan of Mlarch 1, 1974; Effective Date: May 29, 1974; Closing Date: December ,31,