Sudan - Third Agricultural Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4684-SU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 64.4 MILLION TO THE REPUBLIC OF SUDAN FOR THE AGRICULTURAL REHABILITATION PROJECT III December 1, 1987 This document has a restricted distribution aad may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Sudanese Pounds (LSd) = 100 Piastre LSd 4.51 = US$1.00 WEIGHTS AND MEASURES 1 metric ton (mt) = 1000 kg (2,205 lb) 1 feddan (fd) = 1.04 acres 1 kantar (seed cotton) = 143 kg GOVERNMENT FISCAL YEAR July 1 - June 30 GLOSSARY AND ABBREVIATIONS AC - Agricultural Corporation ARP - Agricultural Rehabilitation Program AUAC - Advisory Unit for Agricultural Corporations BOS - Bank of Sudan DPEA - Department of Planning and Economic Administration EAP - Export Action Program 1PM - Integrated Pest Management MOANR - Ministry of Agriculture and Natural Resources MOFEP - Ministry of Finance and Economic Planning MOI - Ministry of Irrigation PPC - Program Procurement Committee RP'TJ - Rehabilitation Project Management Unit SCC - Sudan Cotton Company SGB - Sudan Gezira Board  FOR OMCIAL USE ONLY TABLE OF CONTENTS Page Credit and Project Summary ........................................... i-ii PART I - THE ECONOMY Background .................................................. 1 Recent Political and : giomic Developments .........I . ........... 2 Assessment of the Government's Program ......... . .............. 4 Medium-Term Adjustment and Long-Term Growth ..................... 5 PART II - BANK GROUP OPEKATIONS Assistance Strategy .................... .fi 5 Experience with Past Lending .................................... 7 Relationships to Other Aid Flows ................................ 7 PART III - THE AGRICULTURAL SECTOR Overview ................................................. 8 Irrigated Subsector ............................................. 8 Strategy for Revival of Agricultural Exports .................... 9 The Agricultural Rehabilitation Program Credits ................ 10 Agenda for Action .......................... ................... 11 PART IV - THE PROJECT Project Rationale .................. 12 Rational for Bank Involvement .................. 12 Project Objectives .................. 12 Project Components ............................................. 13 Procurement and Disbursements .................. 16 Project Coordination and Monitoring .................. 18 PART V - CREDIT CONDITIONALITIES General ..... 19 Producer Incentives .19 Efficiency Improvements .20 Demand Management .22 Long-Term Issues .23 Other Conditions .24 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.  PART VI - ENVIRONMENTAL IMPACT PART VII - BENEFITS AND RISKS PART VIII - RECOMWENDATIONS SCHEDULES A Project Cost Estimates and Financing Plan B Disbursements C Supplementary Data D Status of Bank Group Operations in Sudan  SUDAN AGRICULTURAL REHABILITATION PROJECT III CREDIT AND PROJECT SUMMARY Borrower: The Republic of Sudan Beneficiaries: Sudan Gezira Board; Rahad, New Halfa, and Sukl Agricultural Corporations; and the Ministries of Agriculture and Natural Resources and of Irrigation Amount: SDR 64.4 million (US$85.0 million) Project: Objectives. The project would (i) provide financial and technical support to Government's economic recovery "Program of Action" announced in October 1987; (ii) strengthen and supplement ongoing efforts to address key policy and institutional issues in the irrigated subsector; (iii) sustain irrigated crop production during the 1988/89 season; and (iv) expedite resolution of long-term growth issues such as reforming production relations on irrigated schemes, removing obstacles to the expansion of irrigated areas, and avoiding environmental contamination through using chemical pesticides. Components. The project would finance (i) pesticides, jute sacks, fuel and lubrir sits, and spare parts; (ii) pesticide storage anu handling facilities; (iii) technical assistance and support services for strengthening the Ministries of Agriculture and Irrigation and the Agricultural Corporations; and (iv) studies on (a) privatization of management of irrigation schemes on the Nile; (b) preparation of a national irrigation rehabilitation program; (c) development of the edible oil subsector, and (d) rehabilitation of gum arabic plantations. Benefits. The project would (i) in the short term, sustain production in the irrigated subsector, support Government's stabilization program and pave the way for a more comprehensive economic recovery program; (ii) in the medium term, improve the financial and accounting performance of agricultural parastatals and the operating efficiency of the Ministries of Agriculture and Irrigation; and (iii) in the long term, protect the environment from contamination from chemical pesticides, and assist with resolution of issues that prevent full exploitation of Sudan's irrigation potential.  - ii - Risks. The major risk is failure of Government to sustain the implementation of the economic recovery program. This project and the planned IDA Economic Recovery Credit would lend support to Government's short- and medium-term recovery programs and, in the process, minimize this risk. Estimated Costst ------US$ Million-------- Local Foreign Total Agricultural inputs - 97.0 97.0 Fuel and lubricants - 6.0 6.0 Spare parts - 6.5 6.5 Pesticide storage and handling 1.0 1.3 2.3 Institutional strengthening & studies 0.9 2.9 3.8 Contingencies 0.1 4.3 4.4 TOTAL 2.0 118.0 120.0 Financinr Plan IDA Cr. 1118-SU 0.1 0.3 0.4 Cr. 1119-SU - 0.1 0.1 Proposed Credit 1.6 83.4 85.0 Other Donors - 34.2 34.2 GOS 0.3 - 0.3 2.0 118.0 120.0 Economic Rate of Return: Not applicable Staff Appraisal Report: None Map: IBRD No. 20693  REPORT AND RECOMMENDATION OF THE rRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSES CREDIT TO THE REPUBLIC OF SUDAN FOR AN AGRICULTURAL REHABILITATION PROJECT III Froms The President 1 The following report on a proposed development credit to Sudan for SDR 64.4 million (US$85.0 million equivalent) is submitted for approval. The proposed credit will be on standard IDA terms with 40 years -turity and help finance an Agricultural Rehabilitation Project III. PART I - THE ECONOMY Background 2. Sudan, with an area of 2.5 million square kilometers, is the largest country in Africa. It has a population of about 22 million and a per capita GNP of US$346. Much of the country is sparsely populated. 4lthough about one-third of the land is desert or semi-desert, Sudan has considerable untapped potential for agricultural development. About two- thirds of the land are% is suitable for crop or pastoral production. The economy is heavily dependent on exports of cotton, livestock, groundnuts, sesame and gum arabic. The manufacturing sector is relatively small, and the country's infrastructure is weak. A potentially significant development in Sudan's prospects was the discovery of oil reserves in the southwestern part of the country. However, in 1983, differences between the semi-autonomous southern region tnd the central Government led to re- emergence of civil unrest in the South, which caused oil exploration .ctivities to shut down. Peace negotiations and military efforts by successive governments have so far been unsuccessful, and the unrest has hampered economic development, particularly in the South. 3. Sudan's poor economic performance is largely the consequence of inadequate economic management. The authorities have routinely tried to substitute administrative regulations and controls for markets while ignoring the deteriorating administrative capacity of the Government. Factors outside the authorities' economic policy decisions -- such as the oil price hike in the 1970s, resumed fighting in the South, three consecutive years of drought in the 1980s, and reduced foreign capital inflows -- have nonetheless exacerbated the poor economic performance and further contributed to Sudan's already sizable external debt.  -2- 4. Many of the current economic problems have their origin in the Government's attempt during the 1970s to boost the economy with a wave of nationalizations and substantial public investments financed by foreign capital inflows. The investments were partly misconceived and partly mismanaged. As a result, the projected production of exports and import substitutes and domestic resource mobilization did not materialize. Although public revenues dwindled, public expenditures remained high. Public sector demand on the domestic banking *;ystem rose sharply and pushed monetary expansion up to 36 percent per annum in the 1980s. This expansion, in turn, boosted inflation to about 34 percent. The investment drive also contributed to growing deficits in the current account balance of payments, deficits enlarged by oil price increases and a serious decline in cotton production. Although the current account deficit was reduced somewhat after 1982183 by efforts to increase exports and reduce imports, domestic productien was severely curtailed due to lack of imported inputs. Gross official reserves fell to only a few days' worth of imports, and annual debt rescheduling on favorable terms was required to close balance- of-payments gaps. After the last rescheduling in 1984, the country started to accumulate substantial arrears. In addition, the replacement of the conventional taxes on incomes and profits with the Islamic Zakat tax and the Social Equity tax in 1984 aggravated the declining trend in revenues. By 1985186 revenues had fallen to less than _ percent of GDP. 5. During the early 1980s, the Government tried on several occassions to establish financial equilibrium, restore export growth, improve the performance of the public corporations, and install an adequate system for management of the nation's external debt. However, these efforts were 4pW" ad hoc, incomplete and unsustained and results were disappointing. A Bank economic mission visited Sudan in February 1986, and its findings are contained in its report distributed to the Executive Directors. l Recent Political and Economic Developments 6. Following the general election in April 1986, a coalition government was formed that set out to deal with the difficult economic situation facing the country. The Government committed itself to prepare a medium-term comprehensive program of economic measures immediately after it took office. IDA supported this endeavor with a contribution from the Special Project Preparation Facility (SPPF). This program is expected to be ready for review by the Bank and the Fund at the end of 1987. 7. Up to June 1987, the Government's efforts to improve economic policies were partial and tentative. The deterioration in the economy therefore continued. Arrears on external obligations amounted to US$3.6 billion (730 percent of the country's commodity exports), and Central Government deficits continued to be more than 10 percent of GDP in 1986/87, although the Government's current expenditures were within the budgeted amount. Inflationary pressures mounted as budgetary recourse to bank l/"Problems of Economic Adjustment%, No. 6491-SU of June 19, 1987.  -3- credit for financing cotton production and marketing and for price &ipport related purchases of oil seeds and sorghum amounted to about 10 percent of GDP in 1986|87. Also, improvement in operational efficiency of parastatal enterprises was inadequate. Remittances through offlcial channels from Sudanese working abroad practically dried up, and imports were reduced to a record low, further depressing capacity utilization in various sectors. Private sector activities in tradeable production have plummeted, as controls and resulting distortions substantially lowered their returns relative to those of parallel market activities. Hesitancy by the Government to undertake a comprehensive reform may have been partly due to the need to achieve public consensus for a broader policy program. Furthermore, conflicts between the governing coalition parties caused a sudden cabinet reshuffle in May 1987 and withdrawal of one of the parties from the coalition. 8. Undaunted by the difficult situation, the Government launched in October 1987 "A Program of Action of the Government of Sudan" to lay the basis for comprehensive adjustments. The key objectives of the program art. (i) to ensure sustained growth in output sufficient to permit an increase in per capita income and consumption levels and increase the availability of essential commodities; (ii) to moderate the rate of monetary expansion, which, together with improved supplies, is intended to lower the rate of inflation; and (iii) to improve the country's balance of payments position with a view to reducing, over time, the dependence on foreign aid. A brief discussion of these measures follows. 9. Exchange and Trade Policy: A unified exchange rate has been established at an initial rate of LSd 4.51 - US$1.00 with effect from October 3, 1987, representing a depreciation of 44 percent against the official rate and 29 percent aisinst a trade-weighted average rate. The authorities are committed to pursuing a flexible exchange rate policy. With the exception of five sensitive commodities (bread, pharmaceuticals, gas and fuel oil, kerosene and LPG), representing some 25 percent of projected imports during the current fiscal year there has been a full pass-through of the exchange rate action into prices. "Own-resources" financing has been re-introduced by permitting a wide range of agricultural and industrial inputs and essential commodities (some 40 odd items) to be imported. 10. Banking Policy. In November 1987, a Compensatory Rate system was introduced within the Islamic banking system in existence sin e September 1984. A rate, which represents a m'd-point between the lending and deposit rates, will be set each quarter at three percentage points above the annualized quarterly rate of inflation (currently based on the cost-of- living index). The initial starting rate was 25 percent, yielding a lending rate of 27 percent and a twelve-month deposit rate of 24 percent. The cost-of-living index understates the actual rate of inflation, so it will be reviewed in order to improve coverage and timelines.  -4- 11. Agricultural Producer Prices and Price Controls. It is the Government's policy to ensure that procurement prices for key agricultural commodities provide adequate incentives for growers. Since 1984, cotton and wheat prices are announced each year, after consultation with IMF and the Bank, and studies have confirmed that growers have been adequately remunerated. Consultations on wheat and cotton prices for 1987188 have just been completed and price announcements are expected shortly. The methodology for working out cotton and wheat prices is sound, but the bases for groundnut, sorghum, sesame and gum arabic prices are not as vigorously derived. Besides, Government has not maintained a stable price regime for these products, with the nature of price controls changing frequently. The Government recently announced support prices of LSd 55 per kantar for groundnuts, LSd65 and LSd61 per kantar respectively for white and mixed sesame ad LSd 400 per kantar for gum arabic. The price for gum arabic is substantially higher than last year's, and the introduction of a ptemium price for white sesame is expected to strengthen producer incentives. Nevertheless, considerable work still needs to be carried out to establish appropriate domestic price regimes for these products and for sorghum, the 1987/88 support price for which has not yet been announced. 12. Fiscal and Monetary Policies. The supply-side measures will be supported by measures to limit the overall growth in domestic liquidity in 1987/88 to about 23 percent, compared with 34 percent in 1986/87 or from about 8 percent of 1986/87 GDP to 5 percent of 1987/88 GDP. The main adjustment will come from the fiscal side, where a combination of exesnditure restraint and revenue measures will yield some 3 percent of GDP and cause a decline in budgetary bank borrowing to 2 percent of GDP. The measures include increases in the prices of benzene products and sugar, higher collections from import duties, and excise taxes on cement and a number of other products. The benefits to the budiet would have been higher but for the decision to retain and maye explicit subsidies on five sensitive items affected by the exchange rate change (para 9) and by the need to protect low-income workers through an increase in the minimum wage and transri-rtation allowances. To supplement the fiscal measures, credit to the pa .statal sector will be contained, while ensuring that the private sector's needs for credit for productive purposes are fully met. In particular, the Government intends to ensure that the large credit financing for sorghum and oilseeds in 1986187 will not be repeated in 1987/88 as carry-over stocks are sold and the private sector plays a larger role in the marketing of these crops. Further, monetary policy will continue to ensure more realistic returns on savings and charges on loans. Assessment of the Government's Program 13. The measures in the Government's program provide a good beginning to a recovery pi;gram and represent a welcome departure from the ad hoc and partial approaches of the recent past. But, more needs to be done. The wide apparatus of quantitative and price controls is essentially in place and implementation of the promised liberalization of trade and prices has not yet started. In addition, public finance and the parastatal sector need  more serious reforms. But if the Government is able to implement the measures in the program faithfully, it would substantially improve Sudan's credtbility among donors and other financiers, including Sudanese nationals working abroad. This is imperative if Sudan is to regularize its serious foreign debt problem and to obtain the foreign exchange required for a comprehensive progra1. of economic recovery. The Bank will provide assistance as long as the Government's commitment and timely implementation of the program continue. Medium-Term Adjustment and Long-Term Growth 14. Building on the foundation laid by the October 1987 launching of "A Program of Action of the Government of Sudan" (para 8), the Government is preparing a medium-term plan for comprenensive economic reform (para 6). Bank missions visited