Somalia - Development Bank Project

D _cmet of The World Bank FOR OmCIL USE ONLY 1qwt No. 5667 PROJECT CONPLETION REPORT SOALIA - SOMALI DEVELOPMENT BANK (SDB) (CREDIT 698-SO) May 24, 1985 Eastern and Southern Africa Projects Department Tndustrial Development and Finance Division Th*sdocuamt hs a retrictd distri_bdo ad rmy be wed by rec_piets only in te perfoance of .thr offidil dute lb m s my st othrwise be dladoi wid_t Wedd Bank audz.tioa.  CURRENCY EQUIVALENTS Currency Unit Somali Shilling (So_ Sh) = 100 cents Up to June 30, 1981: US$1.00 = So. Sh. 6.295 July 1, 1981 - June 30, 1982: US$1.00 = So. Sh. 6.295 (for essential imports) US$1.00 - So. Sh. 12.590 (for all other foreigu* transac-tons) July 1, 1982: US$1.00 = So. Sh. 15.227 Fiscal Year SDB: January 1 - December 31  FOR OMCLAL USE ONLY PR:OJECr COMPLETION REPORT SOMALIA: SOMALI DEVELOPMENT BANK (SDB) (CREDIT b98-SO) Table of Contents Page No PRFACE . . . . . . BASIC DATA SHEZT . .......i. . . . . . . - KIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 1 ILI. MACROECONOMIC, INDUSTRIAL AND FINANCIAL OBJECTIVES . . - 2 III. THE INSTITUTION. . . . . . . . . . . . . . . . . 5 IV. ALLOCATION OF THE LOAN . . . . . . . . . . . . . . . . . . . . . . 12 V. OPERATIONAL AND FINANCIAL PERFORMANCE . . . . . . . . . 14 VI. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1. Somalia: Structure of Iterest Rates 21 2. List of Subprojects Fiuanced under Credit 698-S0 22 3. Characteristics of Subprojects Finauced Under Credit 698-SO 23 4. Analysis of Loan Approvals as of December 31, 1982 24 5. Comparison of Actual and Forecast Operations (1977-1982) 25 6. Equity-Investments as of June 30, 1913 26 7. Performance of Subsidiary Companies 27 8. Summary Description and Present Status of Selected Subprojects 28 Financed Under Credit 698-SO 9. Comparison of Projected and Actual Income Statements (1977-1982) 31 10. Comparison of Projected and Actual Balance Sheets (1977-1982) 32 11. Projected and Actual Financial Ratios (1977-1982) 33 12. Comments Received from Borrower 34 This document has a resticted distribution and may be used by reipicats only in the perfonnance of their offica dutis Its contents may not otherwise be disckled without Wodd Bank authoriadon.  PROJECT COMPLETION REPOMT SOMALIA: SOMALI DEVE.WPMENT BANK (C3EDIT 698-SO) PRkFAcE This report preseuts an evaluatiou of Credit 698-SO to Somali Development Bank (SDB). The credit was approved in April 1977, and was declared effective ia February 1976. Disbursements were closed in August 19U3. The Associatiou's Eastern and Southeru Africa Reglonal Office has prepared this report on the basis of informacion gathered durring a mission to Somalia in October 1983. The report reviews SDB's use of the credit proceeds and its i;astitutional development over the past six years- Comments received from the Borrower have been taken into account in finalizing the report and are reproduced as Annex 12. This project has not been audited by the Operations Evaluation Department.  - ii - Ph OJECT COMPLETION REPORT SOMALIA - SALI DEVELOPMENT BANK (SDB) (CREDIT 698-SO) J5ASIC DATA SHEET (Amounts na USu mxLioa) As of April 30, 1985 Original Disbursed Caucelled Repaid Outstanding Credit No. 698-S0 5.0 4.52 .48 - 4.52 Cumlative Disbursements Fiscal Year 1978 1979 1980 1981 1982 1983 (i) Estimated 1.5 4.3 - 5.0 - - - (ii) Actual 0.01 0.13 0.54 3.6 4.3 4.52 (iii3 (ii) as Z of (i) 0.7 3 11 72 86 90 PROJECT DATA Original Credit Dates Actual/Revised Board Approval 4/19/77 4/19/77 Credit Agreement 6/01/77 b/O1/77 Effectiveness 2/27/78 2/27/78 Completion of Commitments 6/3U/79 6/30/81 Credit Closing 6/30/81 6/30/82 _ISSION DATA No. of No. of Month/Year weeks Persous Staff Weeks Dates of Report Identification 1/76 2 2 4.0 3/03/76 Appraisal 8/76 1.1 2 2.2 3/31/77 Supervision 1 11/77 1.5 2 3.0 1/26/78 Supervision 2 9/78 1.0 2 2.0 11/13/78 Supervision 3 3/79 1.0 1 1.0 4/03/79 Supervision 4 4/80 2.5 2 5.0 6113/80 Supervisiou 5 1/81 1.4 3 4.2 2/13J81 Supervision 6 3/82 1.0 2 2.0 5/10/82 Completion 10/83 2.0 1 2.0 b/30/84  - iii - PROJECT COMPLETION REPORT SOMALIA - SOMALI DEVELOPMENT BANK (SDB) (CREDIT b9d-SU) HTGULIGHTS The Somali Development Bank (SDB) was appra-sed for the first IDA credit in 1976. SDB played a major role in the Somali economy; apart from being the only institution providing medium and long term financing for industrial, agricultural and livestock activities, it took the initiative in promoting projects in the industrial and agro-i adustrial sectors and provided management where necessary. SDA's effectiveness in carrying out these respousibilities was handicapped by several iusticutional weaknesses. One of the main objectives of credit 698-SO was to help strengthen SDB's institutional capabilities in order to enhance its role in Somalia's development, especially i'i the industrial sector. The IDA credit (USW5 million) i-cluded a technical assistance component of US$260,000 for financing the contracts of key expatriate persounel and for training Somali staff. At the time of appraisal, SDB had several shortccmiugs. It had an unsuitable organizational structure, iuadequate and weak staffiug, and lacked appropriate procedures for accounting, financial coutrol, project promotion, appraisal and follow-up. During the period of credit implementatLon, SDB made an effort to address some of these weaknesses. With the assistance of its expatriate staff and cousultants, some of whom were financed under the credit, It established Drocedures for project appraisal, supervision, account4ng and financial control (para. 3.1e). SDB also made progress in providing external tra-in'ig to Somali professional staff. However, further progress towards dealing with these shortcomings was hampered by two major factors: SDB did not make full use of the services of its expatriate staff, especially in utilizing them to provide on-the-job traiaing to Somali professional staff; and was slow in implement.ing some of the procedures which had been established (paras. 3.08, 3.09). As a resuLt SDB still has a number of weaknesses to overcome especially regarding on-the-job staff training, project appraisal, implementation and supervision, and portfolio management. The growth in SDB's volume of operations over the past six years was lower than anticipated at appraisal partly due to a difficult economic environment in Somalia especially in the industrial sector and due to several iistitutional problems (para. 5.03). SDB's financial performance was below appraisal expectation; its financial condition on the other hand has remained sound due to regular increases in its pa-id-in share capital (paras. 5.08, 5.09). Other points of interest are: - A more positive Guvernment attitude towards the role of the private seccor (para. 2.05); - Delays in commitment and disbursement of the credit (para. 3.11); - Cost overruns experienced by IDA financed projects (para. 4.03); and - Performance of projects financed under the credit (Annex 8).  PROJECT COMPLETION REPORT SOMALIA - SMALT DEVELOPMENT SANK (SDB) (CREDIT 698-SO) I. INTRODUCTION 1.01 The Somali Development Bank (SDB) was established in 19b8 as a Government owned institutiou to take over the loug-term loan portfolio of Credito Somalol1, a Government-owned bauk which was bei;g wound up. SDB's original objective was to assist productive enterprises in various sectors and to take any other initiative aimed at the economic development of the country, with particular reference to encouraging the development of the private sector and within the framework of development programs and priorities set by the Government. Following the establishmnt of a revolutionary Government in 1969 however, development policies and priorities were revised and SDB became the primary institution providing ass_stance to public enterprises although it continued to assist the development of small farmers and small private industrial activities. 1.02 The World Bank Group's involvement with SDB began in 1969 when, at the request of the Somali Government, a Bank mission visited Mogadishu to review SDB's organization, potential role, and financial requirements. Before the baiik could start any substantive dialogue witir the Somali authorities on this matter, major political changes took place in Somalia inhibiting further action from the Sank. Contacts with SUB were renewed at the 1975 Annual Meeting and a reconnaissance mission visited Somalia in January 1976. The mission found SDB to be a suitable iustitution for channelling assistance to productive enterprises in Somalia and recommended its appraisal for au IDA credit. 1.03 An IDA mission appraised SDB in August 1976 (Appraisal Report No. 1341a-SO) and an IDA credit of US$5 million including technical assistance of US$260,000 to finance the training of SDB staff and the contracts of key experts was approved on April 19, 1977; it was signed on June 1, 1977 and became effective on February 2, 1978. -Commitments and disbursements under the credit were slower than anticipated at appraisal. As of June 30, 1979 - the original terminal date for submission of subloan applications - only 25% of the credit had been committed. The Subproject Submission date was extended twice to June 30, 1980 aud to June 30, 1981. The original closiug date was June 30, 1981 but had to be extended to June 30, 1982. Disbursements under the credit were closed on August 30, 1983 resulting in cancellation of unutilized amount of US$483,000. 1.04 The proceeds of the credit were oulent by the Government to SDB at 5% per annum for 15 years, including a five-year grace period. The importaut features of the credit included an individual subproject free 1/ Credito Somalo, a Governmeut-owued bank established in 1959, had obtained from USAID a loan of US$2 million for investment in development projects. Most loans turned out to be bad and unrecoverable. Subsequently, the Government dissolved Credito Somalo in 1968 and trausferred its long-term loau portfolio to SDB.  - 2.- limit of $5O,O0O with an aggregate free limit of $1.5 million. SDB agreed to charge minimum interest rates of 5-1/2X per annum on medium-term (up to 6 years) and 6Z per annum on loug-term (over 6 years) subloans to agricultural and handicraft euterprises and a minimum of 7-1/2Z per annum on subloans to industrial and other enterprises. These interest rates were considered to be m-aginally positive in real terms, as at that time, inflation was not expected to exceed 5 to 6% p.a. SDS would maintain a debt/equity ratio not exceeding 4:1. The foreigm exchange risk on Loans made by SDB would be borne by the Government. The appointment by SDJs of five Somali University graduates (para. 3.01 (ii)) amd its adoption of an appropriate policy statement were set as conditions of effectiveness of the credit. 1.05 The main objectives of the credit were to: (i) provide SDB with foreign resources to enable it to provide medium and loug-term financing to productive enterprises in the industrial and agricultural sectors within the framework of Somalia's development programs and priorities; (ii) build up SDB into a strong institution with adequate capability to promote, appraise and supervise projects and to pursue sound investment policies and, (iii) provide an opportunity for the Association to engage in a dialogue with the Government on its industrial policies, particularly iuterest rates. *I. MACROECONOMIC, INDUSTRIAL AND FINANCIAL OBJECTIVES 2.01 Somalia, a large, sparsely populated country, is one of the world's poorest and most handicapped nations In terms of potential for ecouojric development. Its population of about 4.5 million people is unevealy distributed over a land area most of which is semi-arid. Only 13% of the land area is potentially cultivable. About 60X of the populatiou are nomads and semi-nomads who depend ou livestock for their livelihood. Livestock production accounts for about 35% of GDP and provides over 80Z of export earnings. During the past 10 years, Somalia has experienced a number of serious events which led to a deterioration in the economic situation. Apart from the severe drought of 1973-1975 which caused great human suffering, loss of livestock and led to a large influx of people into towus, Somalia has been affected by external events-the severing of relations with the Soviet Union in 1977 and the conflict with Ethiopia between 1977 aud 1980. After the 1977 severing of relations with the Soviet Union and departure of Soviet experts, some important industries which were built and ran by them virtually stopped production while other on-going iuvestmeuts were disrupted. Economic planniug and management were also disrupted. During the time of close ties with the Soviet Union, little attention was paid to the function of market, price and incentive mechanisms. Emphasis was placed on state interventiou and coutrols system which required extensive management in the Government and in state-owned enterprises. Consequently, the departure of Soviet technical experts left a void which has not been filled because of an acute shortage of skilled maupower at all levels. This problem has been exacerbated by an outflow of Somali workers including skilled and professional people to nearby  -3- oil-producing countries where they obtain higher renumeration than in Somalia. The conflict with Ethiopia had an adverse effect on the Sonali economy. It led to an influx of refugees estimated at over one million people, equivalent to about one quarter of Somalia's owa population. The cost of meetiug the essential needs of these refugees in 1980 alone was estimated at $120 million, which Somalia could hardly afford. 2.02 Growth of the Somali economy, especially in the productive sectors was slow in the 1970s. GDP in real terms is estimated to have increased by about 2.8% per year between 1972 and 197t5, at about the same rate as population growth. The productive sectors have grown at au average rate of only about 1X p.a., while the service sector grew at nearly 7% per aunum reflectiug to a large extent increased Government employment. Tne conditions that prevailed in the 1970s resulted in an economic and financial crises in 1978 and 1979. Apart from stagnation in production and exports, the economy faced rapidly rising deficits which were met through increased borrowings from the banking system, a steeply rising rate of inflation and a worsening balance of payments position. As the financial crisis deepened through 1978 aud 1979, the Goverument became couvinced of the need to take remedial action. In 1980 the Government adopted a stabilization program supported by a one-year stand-by arrangement from the IMF. In 1981 and 1982 it embarked ou two successive stabilizatiou programs which were both supported by IMF scandby arrangerents. The core of these measures comprised adjustment of the exchange rate, fiscal and monetary restraints, and increases in producer prices. As' part of stabilization under the first standby program, a dual exchauge rate was introduced wuich meant a substantial devaluation of the Somali Shilling. These measures have had some positive impact. The budgetary deficit and rate of credit expansion have been substau_ially reduced, the rate of inflation which had risea to 59% in 1980 dropped to 44Z in 1983, aud the Government was able to pay off some arrears ou its external borrowings and increase slightly its foreigu exchange reserves. These improvements were, however, achieved partly at the expense of a drastic cut in development expenditure, a decline in imports of iuvestment goods and of inputs needed to utilize capacity. 2.03 Somalia's development objectives, stated in development plans published since the Revolutiou (October 1969) largely reflect the Government's socialist political philosophy. As such, emphasis has been placed on the promotion of social sectors and equitable distribution of natioual output. The Goverument has sought to attain these objectives primarily through public sector investments, coupled with Goverament coutrols. In industry, the primary objective is to meet as fully as possibly, from local production, the needs of the domestic market tor manufactured goods and to make maximum use of the couutry's resources especially in agro-iadustries and building material industries. 2.04 Somalia's manufacturing sector is still relatively small, accounting for only 8% of GDP, and is dominated by some 15 state-owned enterprises employing nearly 11,000 workers. Agro-processing industries  -4- mainl-y for import-substitution, account for about half of total value added and employment in the sector. The large import-substitution industries, include i textile mill, two sugar refineries, a urea plant and a petroleum refinery. Other important import substituting industries, some of which are privately owned, include grain processing and the manufacture of edible cils, cigarettes, packaging materials, leather and footwear. The performance of public-sector manufacturing/processlig industry as a whole has been poor. Some evideuce suggests that the relatively smaller private manufacturing sector has performed much better than public sector enterprises. It is estimated that in the past 10 years, real value added per employee in private industry grew at a rate of 10% per annum while that in public manufacturing enterprises declined at an average rate of 11% per annum. A large number of public-sector enterprises are producing at far below capacity (as low as 25Z or_less in some cases) and most are consistently making financial losses. The poor performance of Somalia's industry, (especially in the public-sector) is to a large extent attributable to shortcomings in the policy framework which both directly and indirectly result in some of the major constraints facing the sector. These include excessive goverument control, scarcities of agricultural raw materials, essential imported inputs including spares, workiug capital, complementary iufrastructure, and qualified managerial and technical personnel. 2.05 - Measures such as rationalization of pricing policies, giving autonomy to mauagmeut of public sector enterprises, overhauling the present system of employment and iucentives, and mobilization of private iuitiatives and resources are needed in order to raise productivity and improve efficiency in the industrial sector. In the past two years, the Government has become more responsive to the idea of encouraging private iuitiative and investment in the sector. However, no explicit policy pronouncements or specific measures have been made to back-up signals of liberalization. Prospective entrepreneurs appear to remain uncertain of the policies and intentions of Government especially in light of occasional pronouncements asserting the coutinued predominance of the public sector. A clear statement of policy in regard to eacouragement of private economic activity would help to clarify the current confusion and to allay fears that the receut trend towards liberalization is only transitory. 2.06 Somalia's financial sector consists of four financial institutions, all publicly owned: the Ceutral Bank (CBS), the National Commercial Bauk of Somalia (NCBS), Somali Development Bank (SDI) and an insurance company (SICOS). The commercil bauk has a national network of branches and has played an important role in mobilization of savings. Its total deposits of which 45% represent small individual savings accounts, increased from So. Sh 510 milliou (US$81.0 million) in 1975 to about So. Sh 2.6 billion (US$170.7 million) in 19ff2, represeuting a nominal average growth rate of 302 per annum. The financial institutions have, in the past decade, operated under pressure to meet the finaucial needs of public and private enterprises. Public enterprises in particular have relied very heavily on commercial credit because of chronic problems cadsed by  -5- inadequate capitalizatiou, mounting losses and failure of governmeut agencies to settle their debts. Between 1970 and 1980, credit expansion to public enterprise aloue grew from So. Sbh 160 milliou to So. Sh 1,300 million, and as a result domestic commercial credit from the financial system is estimated to have grown at an average rate of 29% per annum in current prices over this period. Without the Franco-valuta system2l through which a significant part of foreign trade especially in consumer goods was financed, growth of domestic commercial credit would have been much higher. 2.07 Despite upward revisions in 1975 and 1979 and more recently in 1981 aud 1982, interest rates in Somalia have remained negative in real terms throughout the credit implementation period. Until 1981, rates paid on savings were subject to a maxi:mum of 7% per annum. The Commercial Bank and SDB charged a maximum rate of 7-1/2% on their loaus. They could only charge higher interest rates on loans to private sector and foreign owned enterprises. In 1981 the Central Bank revised upwards both deposit and lending rates and increased these further in 1982. Deposit rates currently range from 8% per annum on ordinary savings to 11 per annum ou time savings of over 24 months. Lending rates range from 1IX per aunum on medium term (2-6 years) loans to agricultural and handicraft enterprises to a maximu of 14% oa long-term loaus for activities such as trausport, construction and retail trade (see Annex 1). In order to mobilize the savings-of Somali workers in the oil producing countries in the diddle East, the Central Bauk has since 1982 authorized non-resident Somalis to operate savings accounts denominated in foreign currencies (external accounts). Interest rates paid on these savings rauge from 8% on demand deposits to 10.5% per aunum on deposits for 24 months. III. THk INSTITUTION 3.01 During the course of appraisal, negotiations and credit implementation, the following issues were discussed with SDB and the Somali authorities. Issues relating to the utilizatiou of technical assistance and procedures are discussed in paras. 3.08 and 3.10 respectively. (i) Interest Rates and Exchange Risk. At the time of appraisal, Somalia followed a low interest rate regime. Although commercial banks' interest rates on deposits aud on short-term loans to the private sector had been revised upwards, interest rates oa short-term loans to parastatals and medium and long-term development loans had remained low 2/ A parallel free market for foreigu exchange through which the earnings of Somali workers in the oil producing Arab countries financed a large proportion of imports by private traders in Somalia. Tnis market grew extensively, leading to large disparities between the parallel market and official market rates and was banned in 1981.  6- and unchanged for a long time. The appraisal mission recommended rhat the differential in SDB's lending rates to various sectors be abolished and that SD0S charge a uniform 9Z across the board. During negotiations the Somali authorities argued that abolishing the differertial interest rates and allowing SDB to charge rates beyond 7- 1/2Z would represeut a major departure from the existing level and structure of interest rates In the country, and would require careful study. The Government assured the Association that it would undertake such a study which would form the basis i-or continuing the dialogue on interest rates between Somalia and the Assoclatiou during implementation of the credit. It was agreed that peuding the review of interest rates, SDB would charge a miuimum of 5-1/2% per annum ou its medium term loans (2-6 years) and 6X per annum ona long-term loans to agricultural and handicraft enterprises, and 7-112% per annum, on its loans to industrial and other enterprises regardless of loan maturities. For three years following effectiveuess of the credLt, the Association urged the Somali authorities to carry out the study and to revise the interest rate structure. The study was subsequently carried out and the Somali Government announced a general increase in deposit and lending interest rates in July 1981. -As a result, SDB increased its interest rates; these uow -ange from 10% on medium term loans to agricultural and handicraft enterprises, 12% per aunum on loans to industrial and mining enterprises to the maximum rate of 14% per aunum on loans for all other activities such as retail trade, transport aud construction. Despite the increase, SOB interest rates remain negative in real terms. (ii) Staffing and Technical Assistance. At the time of appraisal, the general level ot SDB's professional staff was found to be in need of upgrading as a matter of priority. On the appraisal mission's recommendation, SOB agreed to undertake an extensive staff development program which would include: (i) the recruitment of five Somali graduates-two graduates in ecoaomics, an engineer, a legal advisor and an agricultural economist; (ii) four expatriates-a Financial Advisor, an Industrial Engineer, au Iuvestmeat Advisor and an Agricultural Advisor; aud (iii) the trainnLg of Somali professional staff in accounting, finaucial management and in project appraisal. The Association agreed to include in the credit a training and tachnical assistance component of US$260,000 to finance the coutracts of the Iavestment aud Agricultural Advisors and the training of Somali staff. The coutracts of the Finaucial Advisor and Iudustrial Engineer would be financed under a technical assistance grant (US$340,000) from the  7 Arab Fund for Ecouomic and Social Development. The effectiveness of this grant aud the appointment by SDB of au Agricultural Economist, an Engineer, a Legal Advisor and two graduates in Ecouomics were set as a condition of effectiveness of the IDA credit. (iii) Investmeut Policies. As the main institution financing development projects, SDB assumed the role of an entrepreneur, a promoter and a financier. In the process it exceeded exposure limits stipulated in its by-laws. Violation of its exposure limits arose in particular from SDS I's equity holdings in subsidiary companies. During negotiations, the Somali authorities clarified that SDB would not carry out a holding company function on a permanent basis and that SDB proposed to divest itself of its equity investments in subsidiaries by December 31, 1977. The Somali authorities indicated that in the absence of any alternative institutional ar-rangements for settiug up and managing public sector industrial enterprises, SUB would be called upon in certain cases to undertake these functions as a temporary measure. To enable SDB to do so without violating its by-laws, the latter had been ameuded to authorize SDB to exceed its exposure limits iu the case of Government-sponsored projects. An understanding was reached at negotiations that SDB would selectively undertake such projects provided: (a) such projects were first approved by its board and, (b) the credit risk in such cases was assumed by Government. (iv) Legal Status of SDB Projects. During negotiations, the IDA representatives expressed concern that SDB made loans and/or equity investments in enterprises which were not incorporated as legal entities. Three projects, which had been promoted by the Miuistry of Industries and subsequently taken over by SUB, were cited as examples. SUB representatives indicated that although it was SUB's policy not to make loans to unuicorporated enterprises, exceptions had been made in case of Government-sponsored projects upon the understanding that such enterprises would be incorporated expeditiously. SDB assured the Association that with the services of an in-house legal advisor who would be engaged shortly, the time taken for the preparation of relevant legislative instruments would be shortened and that all s';uch enterprises would be incorporated. Subsequeutly however, Government agreed to the treatment of SDB subsidiaries as one entity in order to reduce their combined tax liability by setting off the losses of unprofitable subsidiaries against the profits of the others. As a result some of SDB's subsidiaries remain unincorporated; their technical legal status in terms of  "*- incorporation and ultimate ownership disposition has not been determined. {v) Provisions. While SDB had maintained a reasonable provisioos policy with respect to its loan portfolio, it did uot make any provisious for its equity investmeuts. During negotiatious, SDB's representatives assured the Association that adequate provisions would be made for all doubtful loans and equity investments on a regular basis starting from 1977. SDB has complied with this understanding; provisions have averaged 2.6% of average portfolio over the past five years. (vi) Operational Policy Statement. A draft SDB operational statemeut was reviewed by the Associatiou at negotiations and it was agreed that such statement would be adopted by the SDB Board before effectiveness of the credit. The policy statement was implemented as agreed and SDB has complied with its key guidelines. (vii) Financial Covenants. The Project Agreement between the Association and SUB included three principaL financial covenants under which SDB agreed to: (i) furnish to the Association-its audited financial statements and those -of its subsidiaries not later than four mouths after the end of each fiscal year, (ii) maintain a consolidated debt/equity ratio not exceeding 4:1 and, (iii) not to carry exchange risk on foreign currencies used in its operations. SDB has complied with the debt-equity ratio limitatiou. However, it has violated the exchange risk covenaut and experienced delays in meeting the reporting requirements. Although the Somali Government agreed at negotiations to protect SDB from foreign exchange risk, a formal written agreement to this effect only exists for the IDA credit. Despite repeated recommendations by IDA through the credit implementation period, Goverument has not given a formal written undertaking to bear (through the Central Bauk) the foreign exchange risk on SD1i's other foreign borrowings. The level of SDB's foreign exchauge borrowings has increased significautly in the past one year and there is uow greater need for protectiou from potential exchange loss risks. With respect to reporting requirements, SDB was, on average six mouths late in submitting its audited financial statements and those of its subsidiaries to the Associatiou. These delays were mainly due to weaknesses in SDB's finance department and due .to the dependence on auditors from outside Somalia as there are no resident auditing and accounting firms in the country.  -9- Developments During Credit Implementatiou and Present Status 3.02 Management. Until 1978 SDB's President was a dynamic ex-civil servant who had occupied high positious in the Governmeut. In part because of his decisive leadership, IDA staff felt reassured about the project's chances for success. In 1978, he was appointed to a senior position in the Government (Governor of the Ceutral Bauk) and SDB's management in subsequent years has required cousiderable strengthening. For example, the appointment of a managemeut advisor with a stroug background in fiuance and project appraisal would now be desirable. 3.03 Organization: At the time of appraisal, Sub was organized into five departments and a separate internal audit unit. In view of the small number of professional staff and the need to use it productively, the appraisal mission and subsequent IDA supervisiou missions suggested to SDB to cousider reduciug the number of departments. SDB management was slow in implementing the suggested organization structure due primarily to management discontinuities. In 1982, however, SDI adopted a more appropriate orgauizatiou structure. Uader this structure, SOB is divided into three distinct departments, namely Operations, Finance and Administratiou. The three departments are headed by Somali nationals. 3.04 Staffing: SDB professional staff has increased from 16 in 1977 to 29 in 1983, incluaig seven who are seconded to SUB subsidiaries and two expatriates-a Chief Accountant ou secoudment from The Pakistan Industrial Credit and Investment Corporation (PICIC) and an Economist funded by the German Government. One half of the Somali professional staff are graduates of the National University of Somalia. Five of tne staff have degrees in economics, four in agricultural science, four in engineering and one in law. Although the level of training of Somali professional staff has improved significantly over the past five years, and most of the professional staff have been with SDh for a considerable time-seven years on average-the general quality and productivity of the staff still requires improvement, partly due to inadequate on-the-job training. To-date, only about four Somali professioual staff have the capability to carry out detailed-project appraisals. Until two years ago, most medium aud large scale projects financed by SDB were essentially appraised by the expatriate staff with modest participation of Somali protessional staff. SDB has faced two key constraints in building up a cadre of well trained and experienced professional staff. Partly due to a shortage of trained manpower, the Goverumeat, until recently allocated college graduates to public institutions, including SDB. Somali high school and college graduates were allocated often without regard to the particular needs of recipient institutions. As a result, staff allocated to SDB generally lacked the uecessary background. Secondly, due to Government coutrol over salaries for the public sector, SDB could not offer adequate renumeratiou  - 10 - to retain its trained staff. As a result, SDi- has had a problem of a high rate of professional staff turnover. Duriug the period of credit implementation, SDB lost eight professional staff who resigned and took up employment elsewhere especially iu countries in the Middle East where salaries are much higher. 3.05 During the course of supervisiou of the credit, it became evident that SDB was not making satisfactory progress in building up an adequate professional staff capability. Upon IDA recommendations, SDB hired a cousultant in 1980 who prepared a medium-term staff development plac for strengthening the capabilities of existing professioual staff and for meetiug SD]'s future professional staffing recruitment in view of anticipated growth in operations. The Association assisted in preparing terms of reference and fiuanced the consultant under the technical assistance component of the credit. The consultants' recommendations focussed ou measures for strengthening both external and in-house trainiug of Somali professional staff. Although SDB management agreed with most of the consultant's recommendations, it has not implemented any of the major recommendations and inadequate professional staff capabilities remains one of SDB's key iustitutional weaknesses. 3.06 Training. SDB made a major effort to arrange external training for its staff in the past seven years. Since 1976, 13 SDB professional staff have attended various external EDI-type, short-term courses mostly in project appraisal, accouuting and general development banking. Six additional professional staff have attended six months to one year courses in general banking, elementary accounting and project management at the Somali Institute of Development, Admanistration and Management (SIDAM). SDB's staff training effort has, however, been frustrated by resignations of staff who have been trained. Six of the staff who participated in these training courses have left SDB; and two staff who were sponsored by SDB on higher degree programs overseas did not return to SDB on completion of their studies. 3.07 Although SDB has been active in providing external training to its staff, it has not been able to develop an adequate ia-house staff training capability. The cousultant who reviewed SDB's manpower development needs had recommended on-the-job traini-g as the most effective means of strengthening SDB's professional and technical staff capabilities. The Association agreed with this view and urged SDB management to designate staff training as the principal role of the expatriate staff. The Association recommended that in addition to providing on-job training to their Somali counterparts, che expacriate staff should regularly conduct in-house courses in accounting and project appraisal. The three key expatriates (the Technical Advisor, Financial Advisor and Investment Advisor) left SDB without having played a major role in the training of staff (para. 3.08) 3/. In the past year, however, SDO 3;, SDB management asserts that the institutiou was not successful in developiug iu-house staff training capabilities mainly due to difficulties in recrutiug capable expatriates to provide ou-the-job training to Somali professional staff (see page 38 of Annex 12).  - 11 - has become more responsive to the need for in-house and on-the-job staff trainuig. In July 1983, SDB's expatriate Chief Accountant started conducting classes in bookkeeping and elementary accounting for junior staff. SDJ plans to conduct similar classes in basic financial management and project anpraisal. 3.08 Utilization of Techuical Assistance. in line with the iustitutiou building objective of the ADA credit, SDB recruited expatriate advisors who would provide assistance 1i strengthening SDB's institutional cappbilities through establishing appropriate procedures and training Somali staff. IDA supervisions found that SDB was not fully utilizing the services of the expatriate staff in the way originally envisaged. Instead, the advisors were assigned day-to-day operational responsibilities especially for project appraisals and spent little time on traiunig Somali staff. The use of expatriate advisors in this manuer was, in part, to compensate for the weaknesses of SDB's line persounel but also reflected lack of appreciation on the part of SDB management of the advisors' other responsibilities. The Somali staff who had been informally designated as counterparts to the advisors were either too inexperienced or lacked the necessary professional background to derive benefit from the Advisors' presence. 3.09 IDA made various recommendations to SDB's managemeut for improving the effective utilization of the expatriates including improvement and implementation of operational procedures, assigunig to them suitable Somali counterparts and designating training of Somali professional staff as the principal role of the expatriate staff as originally set out in their terns of reference. SDB was slow in carrying out the necessary measures and the expatriate advisors left SDB at the end of their contracts before the problems regarding their role were resolved. 3.10 Procedures. During the course of supervision of the credit, IDA missions noted major weaknesses in SDB's procedures and recommended measures for alleviating these weaknesses. (i) Project Appraisal. At the time of appraisal, the quality of SDB's project appra-sals tended to be erratic especially for medium and large scale industrial projects. In line with IDA recommendations and with the assistance of its Investment Advisor, SDS prepared a manual establIshlng standard procedures for project appraisal. During the J:mplementation of the project, however, SDS relied to a large extent on the expatriate technical staff for the appraisal of medium and large size projects, with Somali professional staff providing mainly translation support 4/. Over the last two years, however, Somali professional staff have assumed the principal responsibility for project appraisals. Despite some improvements over the years, the quality of SDB's appraisals remains generally poor. Major project features such as the management capability of the promotor, adequacy of the market and financial viability of proposed 4/ SDB management disagree with this statement (see page 38 of Anuex 12).  - 12 - iuvestments are treated in superficial manuer in most cases. SDB does not always scrutinize the information provided by project spousors and as a result, Droblems which could have beeu detected aud possibly rectified during appraisal, emerge after projects have been approved. Delays in tiLe implemeutatiou of three IDA financed projects due to promotors' subsequent failure to acquire suitable premises are examples of this weakness. The Association has urged SDB to carry out detailed indepeudent appraisals of projects before they are submitted to its Board for approval. (ii) Supervision. To improve project supervision, the Association recommended that SDB prepare and implement guidelines for project supervision. A manual was prepared with the assistance of the Investment Advisor and was translated into Somali to facilitate its use by Somali professional staff. The Association also recommended the establishment of a unit to follow-up on the portfolio particularly in the case of projects experiencing operational problems. Although the unit was set-up, it comprised of only one project officer and was under staffed in view of more than 700 loans in SDB's portfolio that required regular follow-up. As a result, the supervision function remains weak. Two professional staff and an expatriate advisor were recently assigned to the unit and the supervisiou function is expected to improve considerably. 3.11 Project Implementation. SDB's levels of operations during the period of project implementation were lower than projected at appraisal due to slow growth in the Somali economy during this period and a lack of adequate project promotion capability in SDB (para. 5.U3). The IDA credit was committed and disbursed at a slower pace thau anticipated. by June 30, 1979-the original terminal date for subproject submission, only US$1.25 million or 25% of the credit amount had been committed. As a result, the subproject submissioa date was extended twice to June 30, 1980 and to June 30, 1981. Giveu delays in the commitment of the credit, the closing date was extended from June 30, - to June 30, 1982. Disbursements were closed on August 30, 1983 rt iting in a cancellatiou of an unutilized amount of US$480,000. Summary data on the schedule of disbursements estimated at appaisal and actual disbursements are presented i-n the Basic Data. The cancelled amount included undisbursed balances of subloans to four projects which were implemented in full at less cost than previously estimated and three projects experiencing serious implementation problem. Rather than request an extension of the closing dare to enable completion of disbursements of subloans to the three subprojects, SDB plauned to arrange alternative financing. The cancelled amount also included a balance of US$140,000 under the Technical Assistance component which was not fully utilized because: (i) a training grant obtained from the Arab Fund for Economic and Social Development was available to finance part of SDB's staff training resource needs, and (ii) due to problems of SDB's management perception of the role of expatriate advisors, the contract of the IDA financed Investment Advisor was not renewed and the funds previously earmarked for this purpose remained unutilized. IV. ALLOCATION OF TtlE CILEDIT 4.01 The proceeds of the subloan component (US$4.74 million) of the credit were utilized to finance a total of thirty two subprojects including  - 13 - (i) seven medium and large subprojects, all above the free limit, mainly in the manufacturiug sector, (ii) twenty-four small subloans to Somali farmers for the purchase of tractors and other farm implements, and (Mii) ooe small ice making plant (Annex 2). The total cost of the 32 subprojects amounted to US$11.7 million of which $6.3 million (including $4.3 million in IDA funds) was finauced by SDB. The Associatiou reviewed in detail the seven larger subprojects and approved the 25 small subloans ou the basis of summary project profiles submitted by SDB. The size of the seven above free limit subloaus rauged from US$131,746 for a medium size plastic uteusils manufacturing plant to US$1.9 million (38Z of the credit amount) for a wheat flour milling and pasta processing factory. The twenty five small subloans ranged in size from US$5,000 to US$49,000 and averaged US$13,305 per subloan. All the seven above free limit subloans carried an interest rate of 7-1/2% per annum and were for terms ranging from b to 11 years including grace periods of two years. The smaller subloans were made at interest rate of 5-1/2% per aunum for periods of up to five year; a few subloans were grauted for four years. 4.02 Characteristics of the above free limit IDA financed projects are summarized in Aunex 3. The seven projects include a thermo electricity generating plant, a wheat flour milling and pasta processing factory, a molasses storage facility, and four projects for the manufacture of school paper stationery, plastic utensils, roof tiles and aluminum utensils. Five of these projects are located in the capital, Mogadishu. Five of the large subloans were approved for new projects and two were for the expansion of existing projects. Four of the seven projects depend entirely on imported raw materials. With the exception of the molasses storage project, which consisted of construction of port facilities for storing molasses before shipment to export markets, all IDA financed projects cater exclusively for the local market. 4.03 ODly three of the seven projects were implemented on schedule; the implementatiou of three projects was on average 1-1/2 years behind schedule and one project is yet to be completed. The implementation of three projects was completed at much higher costs than estimated at appraisal. ln two cases, cost overruns represeuted as much as 120&.of original cost estimates. Cost overruns were mainly due to project implemeatation delays resulting from late arrival and iustallation of machinery aud the devaluation of the Somali shilling in 1981. - 4.04 The six projects which have been implemented geuerated 244 new permanent jobs. The investment cost per job varied from $11,300 for the alulminum manufacturing project to US$74,400 for the Wheat Flour and Pasta factory; the average investment cost per job for the six projects is US$34,000. The roof tiles manufacturing project, which is yet to be completed, is expected to generate 39 jobs at an investment cost per job of $22,000. Data on the employment impact of the small agricultural subprojects financed by IDA is not available. SDJi calculated ex-aate economic rates of return for five of the seven above free limit subprojects and these ranged from 17% for the aluminum utensils manufacturing project to 50% for the roof tiles manufacturing project. Each of the other above  - 14 - free limit subprojects had an ex-aute financial rate of return of over 20%. SOB has not calculated ex-post economic and financial rates of return for the subprojects. Summary descriptions of the seven above free limit projects financed under the credit, their historical performance and present status are provided in Annex B. V. OPERATIONAL AND FINANCIAL PERFORMANCE 5.01 Operations. From the date of its establishment in 1968 up to 1976, SDB approved 576 loans totalling Shs 182.8 million and made equity investments amounting to Shs 38.5 million in five companies. in the six years following approval of the IDA credit in 1977, SDB approved an additional Shs 278.2 million for 780 projects and ^hs 12.0 million in equity investments. An analysis of loan approvals during the period 1977-1982 5/ is given in Annex 4. The majority (86%) of the number of loans approved were less than So. Shs 200,000 each and accounted for 17% of the amount approved. While large loans of over So. Shs 5 million accounted for ouly 1% of the number of loans approved, they represented 41Z of the amount of approvals. The average size of loaus approved was about So. Shs 353,500. 5.U2 Agriculture and livestock are the principdl economic activities for which loans were approved; 55% and 47% of tthe number of loans and amounts approved respectively were for these activities followed by manufacturing which account for 27% and 35% of the number of loans and amounts approved respectively. The majority of the loans were for terms of four to seveu years. Eighty-three percent of the number of loans were made at an interest of 5-1/2% per annum; ouly 5% of the loans carried interest rates higher than 102 per annum. The majority of loans (73Z by number and 81% by amount) were for new projects; and 99Z of the loans were made to privately owued projects which accounted for 7bZ of the amount of loans approved. Public sector projects, mainly parastatal enterprises, received only IZ of the number of loans but these accounted for 24% of the amount approved. 5.03 Annex 5 provides a summary of SUB's actual operatious in the period 1977-1982, and comparative data as forecast at the time of appraisal for 1977-1981. During the credit implementation period, SDB's total approvals grew from So. Shs 29.3 million in 1977 to So. Shs 62.5 in 1982 and were ou average 30% lower than the annual volume of approvals forecast at appraisal. This was mainly due to slow growth in the Somali economy during this period and a lack of adequate project promotion capability in SDB. 5.04 At appraisal it was anticipated that loan and equity investments approved by SDB would be fully committed in the year of approval. However, due to delays in finalizing loan documentation and in some cases collateral 5/ As there are no detailed data on approvals prior 1977, the analysis relates to SDB's approvals from 1977 to 1982.  - 15 - arraugemeuts with borrowers, commitments during the period averaged about 57Z of aunual approval. Due to project implemencation weaknesses, the rate of disbursements was lower than anticipated at appraisal; duriug the six year period, annual disbursements represented about 752 of commitments as compared to a rate of 9O0 estimated at appraisal. Implementation of the IDA credit is discussed _n para. 3.11. Portfolio 5.05 Loans. As of June 30, 1963, SDB's total portfolio amounted to So. Shs 250.8 milliou, consisting of So. Shs 230.3 million in loans and So. Shs 50.5 million in equity investments. Industrial activities account for 49Z of the loan portfolio, agriculture, livestock and fisheries for 37% with the remaining 14% outstanding in various other activities notably transport, metal/wood working and retail trade. Due to project monitoring weaknesses (para. 3.10) SDB does not maintain accurate data on the performauce aud status of most of the projects it has financed. SDB does not, for example, have information on which projects in its portfolio are operating profitably aud which are not. It is thus not possible to accurately assess the quality of its portfolio. On the basis of arrears data available, however, the portfolio appears to be weak. Arrears of over three months amounted to So. Sh 4U.6 million or 18Z of total outstanding loan portfolio. The portfolio affected by these arrears was So. Sh 81 million,-that--is 35% of total portfolio. While this level of arrears is worrisome, it should be noted that many development banks in developing countries are encountering portfolio problems. About b8X of SDB arrears originate mainly from niue projects. Two of these, ITOP and the Brick Factory are SDR subsidiaries and are discussed in detail in para. 5.06 below. The other projects with serious arrears include four public projects-an asbestos factory which though completed, has not gone into production due to technical problems, three grain mills which operate well below capacity due to inadequate grain supplies, and a shoe factory which has had severe implementation problems. The loans to the public enterprises, except the shoe factory, are guaranteed by Governmeat. Although Government has recently paid So. Sh 20 million to SDB to reduce tiie loa- amount owed by public enterprises, it has not as yet, due to budgetary constraints, specified the time frame by which it would pay off the public enterprises' arrears. SDB made provisions representing 4.9% and 2% of tdtal portfolio in 1981 and 82 respectively. The level of provisions is considered adequate. In general, S1jis's private sector loan portfolio is in better condition than its portfolio outstanding in public enterprises largely due to overall better project design and managemeut of private sector enterprises. SDB has recently strengthened its supervision unit (para. 3.10) and expects improvements in the arrears situation as a result of the planned increase in follow-up on projects experiencing operational problems. Equity Investments. 5.06 SDO's equity investments as of June 30, 1983 amounted to So. Sh 50.5 million (in eight companies) of which So. Shs 48.3 milliou (9b%)  - 16 - represented investments iu four wholly-owned subsidiaries. The performance of the eight compauies is mixed. Four of them make losses while the other four are profitable. Overall, SDB6 earns an adequate return of about 2WX p.a. ou its investment in the eight companies. Details on the equity iuvestments are summarized in Annex 6. Seven of the eight companies are locally owned. The financial performance of the four subsidiaries is summarized iu Annex 7. SDB's iuvestment in these enterprises varies from So. Shs 2,000 in INCAS, a plastic containers manufacturing company to So. Shs 4 milliou iu the Wheat Flour and Pasta Factory. All the eight companies are located in Mogadishu. The Wheat Flour and Pasta Factory, a wholly-owned subsidiary is SDB's most profitable investment (Annex 8 para. 4). ITOP, the fruit aud vegetable processing factory, set up in 1973 continues to make losses largely due to under utilization of capacity resulting from inadequate supplies of tomatoes and vegetables for processing. Due to accumulated losses, SDB's initial capital investment of So. Shs 5 million was wiped out and in 1982 SDB iuvested an additioual So. Shs 6 million. ITOP's prospects appear bleak since SDB's earlier plans for starting tomato and mango plantatious to produce the necessary inputs have uot been implemeated. FIMA which is eigaged in the sale of automobile spares is profitable. Return on equity has averaged 16X in the past few years aud the company has regularly paid dividends, averaging So. Shs 3 million a year, to SDB. The company potentially faces difficulties because of coustraining effects of foregn exchange shortages on i-ts ability to import. The Brick aud Tiles Factory has faced various operational and technical difficulties for a long time. As a result of construction of a new kilu in 1981 however, both technical efficiency and capacity utilization have improved considerably. In 1982 the company was financially restructured to improve its prospects. SDB converted a So. Shs 5 million loan into share capital and wrote off loans totalling another So. Shs 5 milliou. As a result of the physical rehabilitation and financial restructuring the company made for the first time a profit in 1982. The Aluminum Utensils Factory, owned b2.5Z by SDB, coutinues to face ope.ational problems resulting mainly from its dependence on imported raw materials (Annex 8, para. 2). The company makes losses and SDB has not earned a retura ou its investments. The Somali Molasses Company, established in 1980 to set up ?acilities for the storage and handling of - molasses for export, is operating profitably and declared a 15% dividend to its shareholders in 1982 (Annex 8, para. 5). INCAS, a manufacturer of cardboard containers, is a profitable operation but its performance is somewhat erratic because demand for its product depends on the level of banana production and exports. SDB has not yet received dividends from its investment in INCAS. The textile mill, Somaltex, operates at about 60Z of capacity partly due to frequent machinery breakdowas and is marginally profitable. Rehabilitation of the plant could significantly improve the company's prospects. 5.07 Because of a shortage of qualified maupower in Somalia, SDB provides management to its subsidiary companies. At the time of appraisal in 1976, five SDB senior professional staff were on secondment to its subsidiary compauies. The appraisal mission noted that by carrying out the  - 17 - role of a holding company SDB was diverting its scarce resources away from its primary functiou as a development bauk. The appraisal mission recommended that in order for SDB to focus its attention and resources on its development banking activities, it should divest itself of its equity holdings. Although au uaderstanding was reached at negotiations that SDB would divest itself of its equity iuvestments in subsidiary companies by December 31, 1977, it has not been able to do so primarily because of Government's decision that SDB could only divest itself of a-l the subsidiary companies and not only the unprofitable ones. As a result SDB has been in a dilemma: getting rid of the loss making subsidiaries would mean divesting itself of the Wheat Flour and Pasta Factory and FIHA, the two profitable subsidiaries that are a major source of its revenue. On the other haud, hanging on to these two profitable investments means a continued drain of resources to the unprofitable companies which are not attractive to private investors and which require regular infusion of funds in order to remain operational. SDB has invested cousiderable resources in the rehabilitation of the loss making companies wrlh a view to improving their performance. These efforts have paid off in the case of the Brick and Tiles project. Prospects for ITOP ou the other hand remain bleak. Financial Performance and Conditiou 5.08 Annexes 9, 10, and 11 show SDB's forecasted and actual income statements, balauce sheets and financial ratios in the pefrod 1977-1981 as well as actual results for 1982. SDB's financial performance has been below IDA's expectatious at the time the credit was appraised. During each of the five years 1977-1981, net profit was about 85% lower than forecast at appraisal. After tax profits averaged a low 0.2% of average total assets compared to a 1.2X return forecast at appraisal. The return on equity averaged 0.2% p.a. compared to 1.7% p.a. estimated at appraisal. Poor financial performance was largely due to two causes: first, due to a number of factors-internal operational inefficiencies, lack of appropriate procedures, low staff productivity and the high cost of administering a large number of small loans-SDM's administrative expenses were significantly higher than forecasted at appraisal. These averaged 3.4% of average total assets as compared to the appraisal estimate- of 1.8%. Secoud, a large proportion (about 60Z) of SDB's approvals during this period comprised mostly of small agricultural and livestock loans at low interest rate of 5% per annum. Only about 18% of the amount approved during the period carried interest over 10% per annum. As a result loan income represented only 4.5Z of average loan portfolio as compared to about 7% projected at appraisal. Dividend income received by SDB from its profitable subsidiary companies-the Wheat Flour Pasta Factory and FIKA--was much higher than estimated at appraisal; it accounted for 31Z of total income in 1977 and as much as 85% in 1981. Tnus without dividends from its subsidiary companies, SDB would have made losses throughout the five year period. 5.09 Despite low profitability, SDB's financial condition has remained relatively sound since 1977 due to regular increases iu SDB paid-iu share  - 18 - capital which grew from Sc. Shs 140 million in 1977 to So. Shs 200 milliou in 1982. With a lower volume of operations than forecast at appraisal, SDB's borrowings grew at a slower rate than previously anticipated. Loug term borrowings amounted to So. Shs 52.2 million as of December 31, 1981 compared to So. Shs 136 milliou estimated at appraisal. As a result, SD51's debt equity ratio has not exceeded 0.4:1 over the period, remaining well below the 3:1 limit agreed with the association. With a curreut ratio and debt service coverage ratio averaging 2.2 and 3.6 respectively over the period SDB has maintained a sound liquidity position and the ability to meet its debt obligatious. Overall its fiuancial couditiou remains sound. Resource Mobilization 5.10 SUB has been relatively successful in mobilizing resources to meet its needs. It has received several loans in local currency from the CentraI Baak of Somalia and So. Shs 50 millio-a local curreucy loan from the United States Agency for International Development. In additiou to the IDA credit, SDB has raised foreign exchange resources from the Algerian Government, the European Investment Bauk (EIB), the Islamic Developmeut iiauk aud the African Development Bank. Followiug the Somali Government's decision to allow the participation of foreign institutions in SDB as minority shareholders, SDB is seeking foreign shareholders. The German Development Company (DEG), has receutly carried out an appraisal and is likely to invest in SDB. VI. CONCLUSIONS 6.01 Progress made during project implementation towards achieving the objectives of the credit (para. 1.05) has been mixed. Om the one haud, IDA's objective of providing SDB with resources to finauce productive enterprises in the industrial and agricultural sectors has substantially been met. On the other hand, the outcome of the iustitution building objective is disappointing. Although one of the Association's objectives was to use the credit as a medium for a dialogue with the Somali Goverument ou 4its industrial policies, no specific policies that would be addressed during the credit implementation were identified at the outset. No substantive policy dialogue evolved in the context of the credit except with regard to interest rates. Even then progress in this respect was unsatisfactory since interest rates in Somalia are negative in real terms.. With the benefit of hindsight, it is clear that this small credit did not prove to be an effective vehicle for couvincing Government to allow SDB to set its oulending rates at positive levels in real terms. Even if SDB's rates had been raised to satisfactory levels, however, it is questionable how useful this would have been if the country-wide regime of interest rates had remained negative iu real terms-as, in fact, has been the case. 6.02 Thirty two subloans were approved under the credit of which twenty four went to small farmers for the purchase of tractors and other farm implements. Of the seven above free limit projects financed under the credit, six have been implemented and three of them are performing well. The other projects are gradually resolving their management, techuical and  - 19 - operational problems although shortages of foreign exchauge for the importatiou of their raw material requiremeuts will coutinue to depress their performance. The relatively small number of medium-size projects financed under the credit reflects to a large exteut a difficult economic environment in which SDB operated during the period of project implementation. The effects of the drought in the mid-seventies, the conflicts with Ethiopia and shortcomings in the Goverument's economic policies resulted in economic and financial couditions in the late 1970s which inhibited the growth of productive investments. Due to these conditions aud partly due to inadequate project promotion and appraisal capabilities, SDB's volume of operations was about 302 below appraisal forecasts. b.03 The progress made in achieviug the institution building objective of the credit was disappointing despite significant technical assistance input in the project and intensive supervisiou by the Association. Although SDB made some progress in addressing some of its principal institutional shortcomings, it remains a weak institution in many respects. Its management and professional capabilities still need strengthening. Despite the availability of procedural mauuals prepared by its expatriate advisors, project promotiou, appraisal, and follow up functions remain inadequate partly due to staffing weaknesses and failure to fully implement the procedures and guidelines set out in the manuals. -With, once again, the benefit of tiidsight, the Association underestimated the difficulties which efforts to improve SDB would face. While the first SUB operation can best be viewed as a pilot -probe- to help a key Somali financial institution to improve, Government, SDB and IDA should agree on a comprehensive program to tackle SIJB's outstanding iustitutlonal shortcomings before proceeding to a possible follow-up project. Moreover, it would be advisable for Goverument and SDB to take initial steps -up frout- to strengthen SDB's management before IDA considers a second credit so as to minimize the risks that a second operation might also yield mixed results. 6.04 SDB made creditable efforts in providing overseas training to its staff and hired a consultant to review its manpower situation and recommend appropriate measures for improving its professional staff capabilities and for meeting its future manpower aeeds. However, SDB focused its efforts on providing external training to the staff and has made little progress in providing in-house and on-the-job training to its staff. One of the main causes for SDB's slow progress in developing the professional and technical capabilities of its staff was its failure to fully utilize the services of its expatriate personnel (para. 3.08). The expatriate advisors who were assigned routine day-to-day operational respousibilities, made little progress in accomplishing what should have been their most important task of in-house and on-the-job training of Somali professional staff. Apart from SDB's own internal weaknesses, however, enviroumental ceuditious beyond SDB's control contributed to SDB's slow progress in improving the quality of its staff during the project implementatiou period. Due to centralized allocati-oa of trained manpower in Somalia (para.3.U4), SDB had  - 20 - little freedom in the selection of its staff. As a result, some of the staff allocated to SDB lacked the necessary background. Also, due to Government coutroJ over salaries iu the public sector, salaries paid by SDB were very low a-ad led to the loss of a number of professional staff who took up higher saying jobs in the oil producing countries in the Middle East. Although SZ' could not have been able to pay salaries comparable to those in the Middle East, periodic increases in its salaries coupled with other fringe benefits could have mitigated the high rate of professional- staff turnover. In retrospect, g-ven the importance of developing an adequate professional staff cadre in the institutiou building objective of the credit, the Association should have sought agreement from the Government and SDB at the time of project preparation on appropriate measures for facilitating SDB's recruitment and retention of adequate professional staff. Measures, such as allowing SDB to play a major role in the selection of its staff, granting it freedom to determine its own salary structure and to offer incentives such as hous-ng to its staff, would have been beneficial. 6.05 SDB has an important role to play ia the development of the Somali economy. Its ability to carry-out this role has however been curtailed by institutional weaknesses and various constraints prevailing in a difficult economic environment. Prospects for enhancing SDB's role and its effectiveness In the promotion and development of productive economic activities are unlikely to improve until: (i) SDB's management, professional staff and overall institutional capabilities have been strengthened; (ii) policy -ssues which affect the growth of economic activity especially ia the agricultural and industrial secturs are resolved. Of particular importance is the ownership/coutrol of manufacturing/processing activities: public sector investments which Government has used as the principal means of attaiaing some of its development objectives especially in the industrial sector, are plagued with problems, and perform poorly, largely due to excessive Government control, poor management and lack of technical skills. Private sector enterprises, on the other hand, perform relatively better in terms of their contribution to the total manufacturing/processing sector output. In order to raise prodiuctivity aud improve efficiency in the productive sectors therefore, private entrepreneurship and resources should be encouraged aud mobilized. In the past few years, the Government appears to have become more responsive to the idea of encouragiug private initiatives and investments, although uo policy measures or pronouncements have been made to support these intentions. A clear statement of policy and appropriate inceutives are essential for the mobilization of private sector initiatiYes and resources.  : -~~~~~~. 21 X~~ ANNE 1 .., - zy* :~~~~~~~~~~~~~~~~M I SOMi.&a S7lDCIIE OLF MEREST RA7E - _- > ~~~~~~~~~~(Z Per Annm up toI/ From rom Ira. From 1l1301Y9 12101179 06/30,81 06/30182 01101/83 - Csst- - A. DEPOSIT RA7ES Cantral Bank Hffscll Discount Rate 3.5 4.0 6.0 8.0 -- .iedt Sector --Ohrdinary savlanp 2.0 4.0 6.0 8.0 -Use savIngs 3 months 4.0 4.5 6.5 8.5 -11e savings 6 months 4.5 5.0 7.0 9.0 Usee savlngs 12 ancha 5.0 5.5 7.5 9.5 im savlngs 24 months 6.0 6.5 8.5 10.5 71m savnpgs over 24 months 6.5. 7.0 9.0 11.0 Public sector 2, Oinaty savings 1.0 flue savIngs 3 moths 2.5 ?la* avlngs 6 mouths 3.0 Tlu savings 12 fant;w 4.0 fLue avlngs 24 morbs 4.5 Le- savlnp over 24 mcths 5.0 1xtenal Accouts Ord.Inay sving 7.0 - lUe savlngs 3 months 8.0 Ue savilgS 6 mochs 8.5 TUe savings 12 uonths 9.0 Tlue savings 24 months or longer I0.5 S. LNDN RATES Comercial Ra,nr Credi to cooperatives sad small-scale farmers 5.0 6.0) ) CrediLt to Public Enterprises 7.0 7.5) ) ciudit to Ezport 7.0 7.0) 10.0 )12.0 - creaim to National private ) nterprises 9.0 9.5) Credit to Foreign Enterprise. 12.0 12.5 12.S 14.5 Soali Devlopment * Iediur-tera (2-6 year) loans to agricultur and handicraft 5.5 5.5 10.0 10.0 Nad1r-cera (2-6 year) loams to Industry and mniLg 6.0 6.0 11.0 11.0 Nadluw-term (2-6 year) loans to others 6.5 6.5 12.0 12.0 loeg-car (7-20 year) loans to agricultue and handlcraft 6.0 6.0 11.0 11.0 Loag-term (7-20 years) loans to industry mnd mining 6.5 6.5 12.0 12.0 long-cern (7-20 years) lan. to others 7.5 7.5 14.0 14.0 1/ Netwen January 1975 - November 1979 the Interest rate. were kept unchged. Private sector and Public sector deposit cates were standardized dith effect from December 1979. RAPID NW 1984  -22- Al 2 94U.TA S EESEa U E Us ESpmesMF m r6Oni 9- CM0 Dam Amunt 1. }4 nSL ft 4FCK. A-1 V79 S06,744 494.649 2. S=1 &Idw urlfdl ME. Tnur-7 A-2 I"7 6M,IMD 533,412 3. DeaEvmI=Book Lic A-3 10 4181,33 295,498 4. 2 F - fa1C7A4 0 1,925,000 1,925,443 5. S=Ni Mlas CA. LtS- liat 2%6,00 286,OOD 6. PL ntl cLU Itt A 4/81 131,746 127,7795 7, Bat 'Nt Et. b. A-7 7/81 393,2M 378,129 8. Iixlr 1mc MIM 1sIW8 5,682 5,738 9. Sbef om B- 2 iwB 7.974 8,0%5 la. El#Mv,fbm B-3 lQ6 8.B46D 81.536 IL%4, h AbCCWNo B4 10/78 B,546 8,so M BL<s am= %# D4 I78 8,682 8,769 13, . oU Dat r Dd mm 6,W 6,935 14 Abdn >mIaC=B7 lt m 7,M 7 8,055 15 AlAM~dMwq B-6 10V7B 5,M13 5,053 16. desm Am >ltB9 lam 8B,446 8.530 17. -h4xn B erab 1B78 - .46 8,S30 19. H7wCb. *-12 7/79 l 0,615 IC,615 -x EWJ ANL& Imat B-3 7/79 13,45D 13,450 -2t,1 1NM-A LiGoe -4 7/79 11,420} U,420 23 N*mdMm Alam 31-16 7/7A 13,4SD 12,4S0 2S. lUlx Mm Aff B-17 7/79 lO0CW 1.0,697 2 S..i B*m o d=D18 7/7 11,42D ll.UI) 2Ih AU 1om Qr _J -19 7/79 12,727 1Z,727 27. M;~ Aza Bo B-2D 7/79 lB,313 18.313 29. ft~ AmZZ IH 19 11,113 1 1,113 30. b~ o3E -1 B-23 12/79 13,590 l 5s,fO 31. Udclv= Mwloe Gacp. B-25, 6/80 49 950 S0,245 32. Bllem rkc B-25 :/tI 44,516 ZB,611 33 ,c of uvstm Ad-s a E - 61 0 8 9,1L. 34.6f T-- Bmd a ILl 6,178 19.2: 1 119,815 35. 2SI P Daprc., O_rtL Ik2 3/81 27,ax 36. AconU '~w CsmauyM3 Y 82 6 0,000 39,300 L ~~~~~~~~~~~~~~4,8B,ZJ1 6,SlS,56S FSPM May 1984  * r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ mtu bwvlnpt N*d O.tucu,htiin ci Mao.'. F~Us aujoedsirm OMhr Cuift 6-9D kw%&" fzdur of Wi lb NW Ur p v xt S?Il rPln Vala f I Cqdty I mU* I Of ftcsk nzn dal . c hrnmnt of ak"id aT lcU t b r ula jt 1A1tV :ta1 Ftntlon tU tl 1' Hatertals hb.r c b tewr d 1 . . hbt a !/ & k t 1. lrC J.0Atrtdity lrq EIctrkl kRan Cb ItiM NM bhlem 2.15 32.2 So7 4.8 4,8 n.& 00 100 - 2 - 21 2, ilmsi Akunma Vt*aMU I'auIsata of Ahniau Unill tmUha NW 2.4 3.3 S.7 3.6 .1 4.1 5.4 41 - - 21 17 95 3, 1o.g Unted InLH* tce at circes 110*11 114Wla5u 1a 5.4 4.2 9.6 2.7 - 2.1 9.3 83 - - 24 15 U4 4. hua/Vlaout actury $"At lour HMi IrW HohpdIstu 3 um1 s 5.3 51.8 21.1 10.3 - 19.3 79.0 70 - - 24 1U 9. j S. Sauli wwC1m1 ny Swrip of i4 saa dAinY, HLy 2.0 6.9 S.S 1.0 .S 2.) 11.2 100 100 100 4 46 - 6. Plastic U5wleul Nmand- Snlactu of l PlUc ctulrgr Cawl ty Uaaab II 5lsau hwv l.9 4.1 6.6 1.0 - 1.0 2.4 81 - _4 50 IS 1 7. c Tni!. lmudacatcuz b Tile. SVipiau 5w 3.4 9.5 12.9 3.0 - 20 _ 7_j_ 90 90 29 - _ V5W. 22.9 7.6 70,S Y.t 1,0 31.1 24' LWD SHy 194 I!  - 24 - ANNEX 4 - SlOMALIA Somali Development Bank Analysis Loan Approvals 1977-1982 (Amnouts Sh. million) A. SIZE NUMBER z AMOUNT Z Up to 200,000 677 86 48.0 17 200,001 - 500,000 44 6 17.5 6 500,001 - 1,000,000 23 3 15.4 5 1,000,001 - 2,000,000 14 2 21.9 8 2,000,001 - 5,000,000 18 2 60.9 23- Over 5,000,000 11 1 114.5 41 - 787 100 278.2 100 B. MAJOR ECONOMIC ACTIVITY Agriculture & Livestock 437 55 131.7 47 Building Materials 18 2 17.3 6 Retail Trade 36 5 5.1 2 Metal/Wood Working 31 4 11.1 4 Transport 29 4 6.3 3 M"n facturing 213 27 99.5 35 Kiscellaneous Services 23 3 7.2 3 TOTAL 787 100 278.2 100 C. T OF LOANS Up to four years 360 46 39.4 14 Four to seven years 382 48 175.1 63 Over seven years 45 6 63.7 23 TOTAL 7WU 100 278.2 100 D. INTEREST RATE 5 to 6Z 652 83 166.9 60 6 to 8Z 57 8 34.0 12 8 to lOZ 36 4 23.8 8 Over 1OZ 42 5 53.5 20 MTAL 787 100 --- 278.2 100 E. TYPE OF PROJECTS