Peru - Second Agricultural Credit Project

R E S T R I C T E D FILE C pY R e p o r t N o. P 12E This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the. information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE- EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO DE FOMENTO AGROPECUARIO DEL PERU IN LIMA, PERU February 27, 1957  February 27, 1957 REPORT AND RECOFZI'ENDATIONS OF THE PRESIDENT TO THE EYECUTIVE DIRECTIRS ON A PROPOSED SECOND LOAN TO THE BANCO DE FOiviENTO AGROPECJARIO DEL PERU FOR THE 2IhPORT OF AGRICULTURAL FQTUI?viT-NT AND LIVESTOCK 1. I submit herewith the following report and recommendations on a proposed loan in an amount of various currencies equivalent to ';5 million to the Banco de Fomento AgroDecuario del Peru (hereinafter called the "Banco") to finance the import requirements of its agricultural credit program. PART I - HISTORICAL 2. On November 12, 1954 the Bank made a Loan (105 PE) of ii5 million to the Banco to finance the importation of agricultural goods to be distributed 1n Peru through a program of long-term agricultural credit to be undertaken by the Banco in the two year period from October 1954 to September 1956. This program has gone forward smoothly and by the end of September the Banco had fully committed the whole amount of Loan 105 PE. The Banco has requested the Bank to make another loan of '$5 million to cover the foreign exchange cost of a similar program for the next two years. 3. A Bank representative visited Peru in December and reported that the Banco had been operating with efficiency and despatch, that management (both at Headquarters and in the field) was comnetent and that the Banco had proved to be an effective instrument in carrying out the two year program of long-term lending which the Bank had helped to finance. 4. Negotiations began in WAashington on February 18 with Mr. Emilio Foley and Mr. Cesar Cardenas representing the Borrower and Ambassador Fernando Berckemeyer representing the Government of Peru. 5. If the proposed Loan is made it will increase the total amount of Bank Loans to Peru to ,40.9 million equivalent net of cancellations. The Bank has already made the following loans to Peru: Amount (net of cancellations) 57 PE Port Development $ 2,400,000 67 PE Agricultural Development 1,300,000 98 PE " " 1,700,000 105 PE " " 5,000,000 114 PE Irrigation Project 18,000,000 116 PE Construction of cement plant 2,500,000 127 PE Highway Maintenance 5,000,000 T6t96$35.9 million  An amount of $13.9 million was undisbursed as of December 31, 1956. On the same date repayments to the Bank and to Participants amounted to $561,750 and $565,250 respectively. 6. On the basis of presently available information, I would judge that further loans in the amount of about $20 million might be presented to the Executive Directors for projects in Peru during the next twelve months. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. The proposed loan would provide foreign exchange needed for the importation of agricultural machinery, irrigation equipment, live- stock and a small amount of equipment for fisheries. The loan would have the following characteristics: Borrower: Banco de Fomento Agropecuario del Peru Guarantor: The Republic of Peru Amount: The equivalent in various currencies of $5 million. Amortization: 12 semi-annual instalments, August 1st, 1959 to February 1st, 1965. Interest Rate: 5i% per annum including 1% commission. Commitment Charge: 3/4% per annum. Payment Dates: February 1 - August 1 PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 8. Attached is a draft of the Loan Agreement (No. 1) and the Guarantee Agreement (No. 2). Both Agreements are substantially the same as the Agreements for Loan 105 PE. In the new Loan Agreement, Section 5.07 requires that goods financed under the Loan be insured against risks occurring within the territory of the Borrower as well as those incident to their importation. 9. Law 11691 of the Republic of Peru dated January 3, 1952, authorizes the Banco to contract loans of this nature and the Peruvian Government to guarantee the proposed loan without any further Congressional action. PART IV - APPRAISAL OF THE PROPOSED LOAN 10. A detailed appraisal of the project (TO 126) is attached (No. 3).  - 3 - The Borrower 11. As in the case of Loan 105 PE the Borrower would be the Banco, an autonomous credit institution of the Peruvian Government. It is administered by a General Manager under a Board of eleven Directors. Most of the directors were changed in August 1956 following the electian of a new Government. The General AMlanager, howrever, has been continuously in charge since 1953. He has proved to be an able manager and is assisted by an experienced staff. 12. The Banco provides both short-term and long-term loans for agri- culture and plays a unique and increasingly important role in agricultural development. With the help of the Bank's first loan it expanded its long-term lending and improved its financial position. Credit policies of the Banco are satisfactory and have recently been streamlined by the delegation of authority to branch offices. Loan applicat;cns are carefully screened and supervised. 13. The Banco is the only source of long-term credit available to Peruvian agriculturalists on reasonable terms. In the past two years it has demonstrated its ability to be an effective instrument for granting agricultural credits. Due to a drought of exceptional severity in many parts of the country in 1956, the amount of arrears in its short- term loan portfolio is high. The Banco expects most of these arrears to be paid over the next three years. Reserves against this type of risk are being increased. Justification of the Projeet 14. A continued expansion of agriculture is necessary to keep pace with the needs of Peru's growing economy and population. WYheat and meat are being imported in large quantities and there is an unfulfilled demand for more and better milk products. 15. By its program of long-term lending, the Banco is assisting agriculturalists to make basic improvements needed to increase efficiency and to expand production. 16. The major part of the Banco's operations is in the coast lands where conditions for comrmercial agriculture are most favorable and farmers can make best use of mechanized equipment. In this region the Banco is preparing to neet the demands for farm equipment to begin cultivation of the new lands to be irrigated by the second stage of the Quiroz-Piura project which was financed by the Bank's Loan No. 11 PE. In the highlands the Banco is helping to improve wool production and undertaking pioneer credit work among the Indian population on small subsistence farms. In the Amazon regions credit operations of the Banco encourage the cultivation of coffee, cocoa and other tropical products and the opening up of new land for cattle raising.  - 4 - 17. Since the resources otherwise available to the Banco are required for short-term credit needs of agriculture, the ability of the Banco to continue carrying out a program of long-term lending depends directly upon its receipt of a loan such as the one proposed. The program will increase agricultural production throughout Peru and foster the economic development of the country as a whole. Economic Situation 18. An appraisal of Peru's current economic position and prospects is contained in the Economic Report circulated to the Executive Directors on February 25 (R57-16). The general picture is one of steady growth based on the exploitation of natural resources and a high and sustained level of capital formation. A favorable climate for private investment, both foreign and domestic, and public investments in basic transportation and irrigation works have been important factors contributing to this growth. 19. The rew Government has inherited a difficult financial position. A large increase in wages and salaries authorized by the previous administration just before the elections has substantially increased labor costs to both government and private industry. Commitments undertaken during the final year and a half of the previous administration led to a large Central-Bank-financed budget deficit and also doubled the external public debt. Since most of the increase in external debt was for relatively short-term suppliers credits, service payments during the next few years will be heavy. 20. The Peruvian authorities appear determined to implement policies of monetary and fiscal restraint. The Government plans to keep expenditures within the limits set by its available non-inflationary resources. M'onetary measures have already been taken to restrict the growth of bank credit and offset the expansionary effects of recent inflationary budget financing. 21. In view of the expected growth in output and in exports, presently scheduled debt service should be manageable and leave a small margin for new debt with service obligations falling due before 1961. Given proper fiscal and monetary policies and the exercise of restraint in incurring medium-term debts, Peru's ability to assume new long-term debt service obligations falling due from 1961 onward would be considerably larger because the Toquepala copper project's export earnings then begin to materialize and service payments on existing debts decline rapidly. Method of Procurement 22. As in the previous case, the goods to be purchased under the Loan are to be imported and distributed through commercial channels  with the exception of livestock. The Banco itself will import livestock for the distribution to farmers since it is in a better position to arrange for shipment and to select the breeds suited to Peruvian conditions. Prospect of Fulfillment of Obligations 23. The management of the Banco is competent. Given its experience with Loan 105 PE, it should have no difficulty in carrying out the continuation of the program of long-term agricultural credit to be financed by the proposed loan. Rates charged by the Banco are adequate to cover costs of administering the program and, at the present levels of exchange rates, to provide funds to purchase the exchange needed to service the loan. The foreign exchange needed to service the loan should be within Peru's ability to provide. The Government has informed the Banco that it will assume any part of foreign exchange risk incident to the operation not undertaken by the Banco's borrowers. PART V - COi.;PLIhMCE ';ITH AR'TICLES OF AGREEMlENT 24. I am satisfied that the proposed Loan will comply with the requirements of the Articles of Agreement of the Bank. The report of the Committee provided for in Article III Section IV (iii) of the Articles of Agreement is attached (No. L). PART VI - RECC i.,rF .TIONS 25. I recommend that the Bank at this time make a loan to the Banco de Fomento Agropecuario del Peru in an amount in currencies equivalent to $5 million for a total term of eight years with interest (including commission) at 521 per cent per annum and on such terms as are specified in the form of the Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). Eugene R. Black Washington, D.C. February 27, 1957